CEO Voices: Watching Costs, Despite the Boom

This article is the fourth of a series sponsored by PNC Bank engaging with CEOs from around the U.S. on some of the most important topics facing business leaders today. Part one focused on tax reform and global competitiveness, part two looked at mastering technology and part three examined strategies for growth.  

When the economy and most companies are clicking on all cylinders, talk about cost-cutting is almost like an unwanted guest at a dinner party. But many CEOs who currently are happy to be maximizing revenues also are actively trimming and trying to keep a rein on expenses, both to benefit the bottom line—and to keep their companies fit for the inevitable next downturn.

Fully 62 percent of U.S. CEOs were planning cost-reduction activities this year as a way to drive corporate growth and profitability, according to PwC’s 2018 CEO Survey. Cost reduction topped the list of five CEO priorities in healthcare, according to Healthcare Finance.

As a result of such forward-looking leadership, about 45 percent of executives believe their organization is properly prepared or has the proper plans in place to adapt if a recession were to hit in the next 12 months, according to a new survey by West Monroe Partners, a business and tech-consulting firm based in Chicago.

Here’s how three CEOs are approaching the crucial strategic arena of cost reduction:

Andrew Taitz, CEO, Autocar: The Hagerstown, Indiana-based manufacturer of trucks for trash collection, construction, port logistics and other heavy-duty purposes is doing so well that it recently opened a new plant in Birmingham, Alabama. An expected major federal investment in infrastructure improvement should fuel further growth for Autocar on top of gains from the economy.

But Taitz, also Autocar’s majority owner, keeps pursuing incremental improvements in margins anyway. One method is to maintain a merit-based compensation structure that resists fruitless fattening. Another way is to get a more helpful view of costs, so beginning with the first quarter, Autocar moved to a rolling quarterly budget process instead of an annual one.

“Setting up the budget for next first quarter is a lot more efficient for next year’s budget because you can address issues that you’ve just dealt with,” Taitz says. “You can be more accurate and manage costs better because now you’re looking for improvement every quarter.”

Taitz also emphasizes designing work processes in manufacturing to be efficient from the get-go, which Autocar has done at the new plant. “When you start something from scratch you can do it the right way the first time,” he says. “So we don’t incur those costs. That was a big opportunity in setting up the new operation.”

Dan Minor, CEO, Cadillac Casting:  The owner of the iron foundry in Cadillac, Michigan, believes in leaving no low-hanging fruit when it comes to cost reduction. Having brought the facility back from the brink during the Great Recession to enjoy supplying Detroit with components for hot-selling pickups and SUVs, Minor has been determined not to go back to the bad days.

“I’m fearless; we have no debt; and we have levers to pull to make sure we stay EBITDA positive,” Minor says. “That’s the position you want to be in.” He continues, “Cost-cutting in big companies is often easy because they cut waste and high-five each other. I don’t allow waste to get into my facility in the first place.”

Minor says he doesn’t believe “in cost-cutting for profitability. I believe that if I price my products correctly, my focus can be on operational excellence. If I control all processes within a narrow range and hit on all cylinders, I will hit my financial forecast.”

So, for instance, Cadillac Casting maintains a “huge wish list” in capital projects that “we prioritize and pick off continually” for efficiency gains as well as improvements in safety, air quality and so on. Installing LED lighting, and using automation to eliminate difficult jobs in a place where molten iron can reach 2,700 degrees Fahrenheit, are two such methods.

Indeed, Minor maintains vigilance while supplying an auto industry that has been defying its historical cyclicality for several years now. And while it’s “the last lever we’d ever want to pull,” Cadillac’s buttoned-up, fiscally fit condition means the company could cull hours and jobs, stay vital and plow through the next downturn in good shape, he says.

Vicki Holt, CEO, Protolabs: The whole point of the Maple Plain, Minnesota-based company is to provide clients with rapid manufacturing of low-volume, 3D-printed, CNC-machined sheet-metal and injection-molded custom parts for prototyping and short-run production.

“If we’re not constantly watching our own costs, we can’t deliver the kind of value that customers expect from us,” Holt says. “It’s absolutely core.”

So while spreading the modern gospel of quick, inexpensive prototyping supplies the top line during this dynamic era of American manufacturing growth, Holt also continues to implement a “continuously lean model that we call ‘Protoexcellence,’” she explains. “Everyone in the company takes a look at how they can continuously improve the work that they do, to take times and costs out of the process.”

Holt personally gauges the success of the process with quarterly “achievement walks” at Protolabs’ eight manufacturing facilities in the U.S., Europe and Japan. Employees and teams who’ve accomplished major productivity improvements show them off to their bosses.

Recently at the Protolabs plant in Nashua, New Hampshire, for instance, employees demonstrated to Holt how they’d been able to use “kitting” of supplies for custom parts production to cut set-up time for a run by about 50 percent. Now, an employee manages a kitting operation at the plant and stages runs for machine operators so those skilled workers can maximize the time they spend on actual production.

Protolabs also has begun offering a service to improve the traceability of high-quality, low-volume parts that go into performance-critical applications such as aerospace components – but Holt didn’t want the extra benefit to clients to cost her company significantly more.

“We had to reinvent the flow through our work cell so we could move the product through and maintain traceability but also maintain ‘tact time’ – how many minutes it takes us to move through the process,” Holt explains. “It took scanners, a new documentation process – and lots of creativity.”

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About PNC

For more than 160 years, PNC has navigated a steady course while growing in size, sophistication and service. Today, we’re one of the largest, most highly-regarded and well-capitalized financial services companies in the country. We’ve added thousands of corporate clients in the last few years and are expanding our geographic franchise with offices in 36 states, and in select regions around the globe. 

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The opinions expressed in this article are not necessarily the opinions of PNC or any of its affiliates, directors, officers or employees. This article was prepared for general information purposes only and is not intended as legal, tax or accounting advice.