Volume 10, Issue 2 - February 2009

trend tracker

Ways to Cut Costs Until the Recovery Comes
by Michael Collins

In this third and final installment regarding steps to take to navigate the pre-recovery market successfully, we will review ways to decrease costs. If a company is stable enough not to need capital or to be acquired and is doing everything possible to increase revenue, an ongoing program of cost cutting is the final element needed to ensure survival. 

An obvious starting point for any cost-cutting program is the pricing being offered by current vendors. Door and window manufacturers benefit from operating in an industry that is competitively supplied by numerous vendors. We are not suggesting beating up vendors until it is impossible for them to make money on a company’s account. Rather, it is important to explore ways to gain pricing benefits from consolidating purchases or to ask vendors to participate in even temporary price promotions. Most vendors in this market would rather do their part in keeping companies competitive than learn that they have become an unsecured creditor to a bankrupt customer.

Layoffs are an obvious method of cutting costs and have been employed by large and small manufacturers throughout the past couple of years. Other companies, though, are reluctant to lay off workers who are thought of as family. A client of ours reported recently that, when they surveyed their employees to determine whether they preferred selective layoffs or a four-day week for everyone in the plant, the employees overwhelmingly chose a four-day week. By taking this type of poll, you allow your workers to be heard and afford them the opportunity to look out for one another. Many companies have implemented lean techniques in the past. If it has been more than a year since the implementation of lean principles, it would likely be a good idea to audit the manufacturing process again. If a manufacturer assumes at the outset of such an audit that there are remaining cost benefits to be gathered from additional lean techniques, it is likely they will be found. One important area where companies can become leaner is in glass consumption. Companies should review their production mix with competing glass optimizers to ensure they have the best optimizer for their mix of business. Also, companies that are not utilizing the largest type of glass available from their glass suppliers should check the results of using the largest available glass with their average business mixture. It is possible that a larger piece of glass would be even more efficient.

Companies seeking to reduce expenses should arm themselves with knowledge of the profitability of all of their products on an individual basis to determine those that may not be efficient to produce. Perhaps these product areas should be discontinued or sourced from overseas. Foreign suppliers have begun providing patio doors, sunrooms and other products as self-contained kits that arrive in the United States for final assembly, glazing and shipping. Decreasing the time and energy spent on product lines that are unprofitable for a given company allows a focus on the products that contribute the most to the bottom line.

Companies that are in need of new equipment may be able to strike favorable lease agreements with equipment manufacturers to reduce the outlay needed to upgrade machinery. This is particularly true in the case of equipment that utilizes a consumable, such as weatherstripping, adhesive or spacer. Suppliers of such components will often amortize the cost of the equipment at a few additional cents per foot of consumable used. This is very profitable for the component manufacturers and helps manufacturers conserve cash.

Another way of reducing expenses as a percentage of revenue is to acquire another company and produce its current volume through the buyer’s existing facility. In this way, the buyer’s plant utilization can increase, spreading its overhead over more units. In a soft market, it is difficult to add revenues more quickly than can be done in an acquisition. 

Whichever of these cost-cutting methods is employed, it is important that companies take aggressive steps in order to emerge from the current tough market with enough strength to enjoy and participate in the next upturn.

Michael Collins
is with Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. Mr. Collins’ opinions are solely his own and do not necessarily reflect the views of this magazine.

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