Lucy and the football.
The end of last year the economy was uncertain then it was going to be OK for the first half of ’19 and then ’19 was predicted to be OK for the whole year, but just not as good as ’18.
How long will this last and how on earth does one plan? For many enterprises, demand is still stretching resources but trust in the upside isn’t quite what it used to be. Fortunately, there are options to build elasticity and the ability to recoil with nominal impact in the event of a slowdown. Some may work for you, others may not. The purpose in even considering them is to protect your core competencies in the event market conditions force you to contract.
Fire a customer: Did I say that? Think of it, if you’re operations people or staff are working overtime to accommodate demand that exceeds capacity, they are doing so to support your lowest margin customer! If you’re contemplating investing in additional capacity, whether people, equipment or both, you’re doing so to support the same customer. Make room for that new customer that has demonstrated a willingness to pay fair value and optimize the return on the resources you already have in place…perhaps the time has come for a competitor to ‘enjoy’ that marginal customer.
Add retractable resources: If margins are not an issue and demand exceeds capacity, there are several options that may accommodate the surge yet allow you to recoil if market conditions soften. Overtime is the first but, if it becomes habitual it can have its own unique downside. Capacity can be dialed up 10 to 15% as necessary and dialed back when no longer needed; everyone still has a job! Temporary/contract/part time support is also a possibility, but all carry more risk. In a ‘full employment’ economy it is likely that ‘supply’ will be limited notwithstanding the issue of training.
Outsource: This is easier to do if you’re a product-based enterprise vs. one offering services. The former likely makes and buys parts and components and then assembles them into finished products. In those cases, there may be potential to temporarily outsource additional parts or components, even at a modest premium, while using internal resources to retain control of the most critical functions—assembly and downstream operations. When demand softens, outsourced parts and components can be brought back in, ensuring that your core work force continues to be fully utilized.
Outsourcing is far more difficult strategy to implement in the service sector, though not impossible. Generally it implies ‘subcontracting’ work either by customer or function to an enterprise with similar capabilities. The risks are several, first preserving the customer as your own and not having it tempted to ‘go direct,’ and second, losing the customer because the subcontractor’s performance did not meet your standards or theirs (the customer’s.) Protecting against the first can be done through non-compete clauses but protecting against the second requires intense oversight.
From my own personal experience while those willing to listen tired of the word ‘elasticity,’ the approach served them well. Through managed overtime, temporary help and some outsourcing, when the downturn came…and it did, we were able to recoil by close to 15% without impacting our regular full time employees.
It all sounds so obvious, ‘I knew that; nothing new here’ except perhaps the consideration given to firing marginal customers. Few like to verbalize that strategy and even less want to think about implementing it but…to pay premium costs and/or invest in additional equipment with little or no return is in direct conflict with the best interests of your enterprise!