A recent and timely Wall Street Journal article. Recalculating the Cost of Big Layoffs, (subscription may be required) notes that some companies have learned some important competitive lessons from cutting too deep in previous economic downturns. It specifically cites Honeywell International, which in the last decade laid off one-fourth of its workforce (about 31,000 employees) and later suffered what its current CEO described as the effects of a “decimated industrial base”.  During this recent recession, Honeywell took a far different tack by limiting layoffs to 6000 people, about 5% of its workforce.  With the economy improving, Honeywell is better positioned. It has already introduced 600 new products and raised its forecasts for sales and profits for the remainder of the year.  The article goes on to cite business academics who point out that those companies that cut the deepest can suffer the after-effects long after the business recovery cycle improves, in some cases, eroding their competitive standing in their respective industries.

After reading many articles over the years that point out how certain companies become too zealous in the need to preserve profits in times of severe business conditions, I continue to believe that this same effect may well play itself out in crippled supply chains.  As many Supply Chain Matters readers know, the number one business goal for the past 18 or so months has been reducing overall supply chain costs across the board.  I would venture a guess that senior supply chain managers have spent more time interacting with their CFO’s, suppliers and airline employees  rather than their spouses and families. While most have done an extraordinary job of helping to reduce material, overhead and other costs, my gut tells me that there are some companies that may well have cut too deep.  Now, as the first signs of an upturn in business begin to present themselves in certain industries (review our Q1 snapshot series), corporate senior managers now speak of growing top-line revenues and seizing the momentum.  The problem is that many will have too few resources, capacity and inventory to be able to outwit the competition, or will not have a foundation of building in agility into their supply chain structures..

You may agree or disagree with my observation, but the real test will come in the months ahead.  For our part, Supply Chain Matters will be keeping a keen eye out for examples of companies like Honeywell who have done their homework well and limited cuts to surgical areas vs. wholesale cuts to insure the bottom line numbers look good or to preserve cash for that next acquisition.

Financial engineering has its benefits, but also has many critical tradeoffs.  Like an agile surfer on a Hawaiian beach, the test is about to unfold as companies try to catch the next “big wave”.

Bob Ferrari

A recent Businessweek Bloomberg article, How Vizio Beat Sony in High-Def TV, provides yet another evidence point that excellence in supply chain strategy does matter.  The article notes that after just seven years in business, Vizio just surpassed Sony to become the second-largest TV brand in the U.S., and is closing in on number one Samsung.  Vizio has accomplished this milestone but acutely understanding how to master its global supply chain to become the low-cost producer of choice by U.S. consumers.

Instead of a conflicting relationship with its suppliers, Vizio offered two of its contract manufacturer’s equity stakes in the company, ensuring an alignment of mutual goal fulfillment. The company also leverages rather large, volume-oriented retailers such as Wal-Mart and Costco to distribute its products to consumers. While the company is private, the Businessweek article notes that Vizio has operating margins of 4% on $2 billion in revenues.  That requires a volume focused and highly efficient collection of supply chain processes with little room for snafus or supply glitches. Interesting enough, the company is also planning to diversify its product offerings into Bluetooth headsets, portable TV’s and stereo speakers.

While rival Sony continues to compete on higher features and functions, it must also painfully re-align its supply chain structure. Vizio on the other hand, has demonstrated that competing on one’s supply chain capabilities can be a differentiator in a cost-conscious consumer market.

 Bob Ferrari