The Best Offense...

We're slashing costs before the recession arrives

By Kevin Kelly

Over the past several months, signs of recession have spread across our industry. Customers have chopped the order size of the plastic packaging they buy from us and shrunk lead times in an effort to keep inventories low and conserve cash. Falling demand for packaging in the industrial sector has sent companies we rarely compete with scurrying after our customers in the produce industry, where the downturn has been less pronounced. Even though our sales have continued to rise, margin pressure, thanks to hungry rivals, has hurt profits.

So like countless other companies nationwide, we've begun to recession-proof ourselves. After spending more than $5 million on new equipment in the past three years, we have no plans to lay out significant sums for the remainder of this year or next. We've cut three people from our 100-person operation--including one manager making $60,000 a year--and have plans to eliminate more. And just as our customers have put pressure on us to cut our prices, we've demanded the same from our suppliers. We recently bid out the $600,000 a year we spend on package design and printing plates and hacked almost 30% from our costs.

There's no room for fat anymore. Like many companies, we invested heavily during the long economic recovery to meet demand and take advantage of new technologies. We spent $2.5 million on a new computerized printing press that runs twice as fast as our older ones. We probably overspent in some cases--buying new machines when what we had might have sufficed--yet I reasoned that sales were rising, credit was cheap, and we needed the capacity. We also loosened the purse strings a bit to keep employees who might have left for more lucrative jobs. But the combination of higher depreciation and lower margins has ended the spending and forced us to cut, cut, cut.

This hasn't been easy to explain to the employees. They look at the money we spent, see an order book that still has a healthy backlog, and wonder why we're pulling back.

Even our more senior employees seem dumbfounded. We've angered some of our supervisors by asking them to go back to running machines, a move they saw as a step down but which allowed us to reduce spiraling overtime costs. We also realized an unexpected benefit: By getting our more experienced workers back on printing presses, quality and production have increased. Still, one supervisor, angered by his perceived demotion, has barely spoken to me for more than a month.

We've extracted our biggest cost cuts from our suppliers. Our target this year is to reduce our raw material costs by more than $250,000, or roughly 10%, employing the same bag of tricks used by our larger customers. We've promised more volume to qualified suppliers who lower prices, and we've cut back spending on raw materials and replacement parts, bringing in supplies only when we need them. Spending on parts, for example, has fallen 30% this year from last as we've moved toward just-in-time ordering.

The results of all this cost-cutting? Our cash position has improved and the gross margin increased during the most recent quarter compared with three months earlier. But we're not resting on our laurels. Our manufacturing team just completed plans to pare overtime and cut jobs, which will save an additional $100,000 annually. And my brother and I are out canvassing for new higher-margin accounts. Thanks to the money we've spent over the past several years, we have the kind of state-of-the-art capabilities such customers are looking for. Rising sales, though, aren't any reason to back off from cost cutting. During these times, you just can't beat lean and mean.

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Kelly is an officer of Emerald Packaging Inc. in Union City, Calif.

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