Where To Pump The Brakes During A Downturn

Tuesday, June 2, 2020

#Functional Safety    #Automotive SPICE    #Quality    #Management Consulting    #Automotive Agile

Over 30 million jobless claims have been filed in the U.S. in the past six weeks alone. The U.S. unemployment rate for April will be announced next Friday and is anticipated to be near 6.5% after being at 4.4% in March. To put this in perspective, the U.S Bureau of Labor and Statistics has charted unemployment by month since 1948, and the previous high was 10.8% in December of 1982. One would think April’s statistic would be an all-time high but, as pointed out by Dan Kopf, it only factors in the unemployed-and-seeking-work, not those hoping to return to their furloughed jobs in June or who cannot job seek during sheltering-in-place. And as one would guess, there’s a strong negative correlation (-0.801) between U.S. Light Vehicle sales in a given year and the associated unemployment rate, i.e. cars sales go down when the unemployment rate goes up. Granted, April is one month’s worth of data, but this in combination with Wednesday’s announcement that the U.S. Gross National Product contracted 4.8% in the first quarter appears as an obvious flag to executives that margins are in jeopardy since revenue will drop.  How much? Good question. CNN is reporting that vehicle sales are projected to drop by 50% in the second quarter. Statistica shows the pre-crisis prognostication as 16.9 million vehicles with two possible COVID-19 scenarios: a “quick-recovery” scenario of 16.4 million vehicles sold versus a “longer-term scenario” with only 14.5 million vehicles sold. The good news: 2009 sales were 10.4 million vehicles. The bad news: commitments to investors this year were not set based upon 2009 revenues.

So now the automotive executives must decide where and how to reduce spending within the organization. Here are three suggestions on where to pump the brakes, two on where to idle, and one on (believe it or not) where to accelerate spending:  

Pump the Brakes #1: Manufacturing Shift Lengths

Let’s start with the obvious one: fewer orders means manufacturing costs need to reduce proportionally. If possible, though, rather than layoff an entire shift, try to reduce the length of each given shift, thereby allowing for lesser re-hiring costs, lower onboarding costs, etc. on the backend of this downturn. In addition, as it turns out, shortening the work week has been shown in a few studies to increase employee productivity and increase morale. Yes, there will be some headwinds from the union, but finding an equitable solution is essentially the definition of negotiation.

Pump the Brakes #2: Facilities

The Brave New World of distributed, online white-collar work forces has taught many companies how to deal with professionals working out of their homes. In fact, a benefit to the company for enabling this long-term is that remote workers report working 1.4 more days per year on-average than their office-dwelling counterparts, and a 13% increase in productivity per working day due, in no small part, to a quieter work environment. Yes, having an occasional face-to-face meeting is valuable, but maybe a smaller building could accommodate a few studios, conference rooms and/or garage bays. Look for opportunities to consolidate buildings. A 2017 study showed this can save as much as $2,000 per employee depending upon the location of the office.

Pump the Brakes #3: Non-sales Business Travel

Yes, face-to-face (3D) communications have several well-documented values (e.g. better participation, stronger connections, better non-verbal communications), but the loss of productivity during the travel days combined with the plane, hotel, rental car, gas, food, etc. costs a lot more than online meetings. Those intangibles can be restored during a new fiscal year. Survive this one.

Some travel must be prioritized, though. Business-to-Business (B2B) sales require a relationship, which is more difficult to build online. 84% of Buyers describe a “very good” or “good” relationship with their vendors and want to lunch off the subject matter expertise of the supplier to help with the buying decision. These relationships and associated influencing is difficult to do from afar.

Idle #1: Way of Working Improvements

As Helmut Schmidt once said, “The biggest room in the world is the room for improvement.” Trying to game when to improve processes is like trying to game the market. Efficiencies or rigid controls can take years to implement across global teams and trying to start and stop based upon economic factors essentially dooms a company to bad behaviors. As said best by Michael Porter, a Harvard Business School professor, “The thing is, continuity of strategic direction and continuous improvement in how you do things are absolutely consistent with each other. In fact, they’re mutually reinforcing.” The first word of “continuous improvement” is continuous.

Not to mention, a company should have identified upfront a significant Return on Investment (ROI) for any targeted improvement, which should be desirable within any economy.

“How we do the work,” says Peter Abowd, CEO of Kugler Maag Cie North America, “is as important as the work we do.”

Idle #2: Innovation

Innovations are the seeds of the future and are the paver stones for the only stable road to differentiation. This year’s margins might be saved by slashing Research & Development’s budget, but future years’ margins will be undercut by commoditization sans innovation. Not to mention as Steve Jobs famously pointed out, “Innovation has nothing to do with how many R&D dollars you have. When Apple    AAPL  came up with the Mac, IBM    IBM  was spending at least 100 times more on R&D. It’s not about the money. It’s about the people you have, how you’re led, and how much you get it.”

If played correctly, this can be a low investment with big returns.

Accelerate: Project Management

The underlying goals of Project Management are to control your costs and delivery timing. Studies have shown that for every billion dollars of spending on projects in the U.S., there are $122 million dollars of waste (i.e. 12%) based upon poor project management. Having transparency to progress on deliveries, understanding the resources required, and avoiding last second Herculean efforts is the only way to manage financial reports. Not to mention, there are all sorts of hidden Opportunity Costs with poor project management including loss of employee/customer confidence, finger pointing, quality issues, etc. If your organization does not already have near-perfect vision months in advance of product delivery, you need to quickly learn better techniques for leading teams and associated projects. 

Otherwise, it won’t matter how hard you hit the brakes elsewhere.

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