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TriFactor Home > TriFactor Learning Center > White Papers > Recession Lessons, What We Would do Differently

Recession Lessons, What We Would do Differently if We Could Go Back to 2006

By John T. Phelan, Jr., P.E.   

If your business was like most back in 2006, you probably thought that growth and prosperity would never end.   That unemployment would continue to be so low, that finding and retaining good employees would be the toughest challenge in sustaining distribution operations.   Earnings were up and credit was easily extended to your business, your customers and your suppliers.   All of this created an atmosphere of complacency in maintaining sound business acumen.  The drastic change in our economy sent most businesses reeling and without a proper plan of action.  Now that we are probably through the low point of the recession and clawing our way back, we can’t count how many times over the past year or two that we have shaken our head and said to ourselves, “if I could only go back to 2006, I would ….”

Well fortunately, just like most environments, business and the economy behave in cycles.  Therefore, prosperity will happen again, hopefully sooner rather than later.  Knowing that good times lie ahead, we should do more than simply wish about what we should have done in the past. Instead, we can learn from our mistakes, recognize where we were complacent and take action for the future.  Here are some lessons from the recession and some ideas that might ring true to your distribution operation going forward:

Asset Management.   Since most businesses were prospering and the availability of cash or credit was relatively easy, many companies failed to recognize some weaknesses and opportunities in their financial plan.  As many companies have witnessed firsthand over the past year, lending institutions are requiring extremely strong balance sheets in order to even be considered for a new loan or line of credit. 

If we knew back in 2006 these tougher lending requirements and could also foresee the collapse and consolidation of so many financial institutions, it would have been smart to set up or make available working capital loans or line of credits with more than one lender.  For example, a distribution business with a fairly liquid inventory and steady accounts receivable could have made available a working capital loan secured by accounts receivable where 60% to 80% of A/R could be drawn upon to meet seasonal or fluctuating cash flow requirements.  At the same time, another working capital loan secured by inventory where 30% to 60% of the cost of inventory could also be drawn upon to pay for inventory.  Simply setting these loans up so that they are available and establishing good payment history during favorable economic conditions provides a solid form of insurance that would be much more difficult to acquire when the economy is slumping. 

An opportunity related to asset management that was missed by many businesses during the high times was capital equipment replacement.  At a time when getting product to the shipping docks and meeting demand was top priority, the thought of upgrading or replacing the equipment that is used to accomplish the mission was the last thing that many businesses wanted to consider, even if it was fully depreciated.  They simply did not want to deal with the added headache of reengineering a facility or performing wholesale replacement of items like conveyors, sorters, flow rack, etc. 

Unfortunately, the decision to delay equipment upgrades during prosperity magnified the negative impact on operations during the recession.  Companies that relied on older equipment over the past couple of years were exposed to breakdowns or high levels of maintenance which had a great impact on operating expenses at a time when operating expense reduction was top priority.  Additionally, as previously mentioned, financing options for capital equipment are limited and more stringent during a recession compared to times of prosperity so the possibility to upgrade was not available for many businesses.

Efficient Systems and Processes.   During the downturn, many companies had to reduce their operating staff and ask employees to perform duties that were previously accomplished by other people.  Employees had to wear multiple hats.  Unfortunately, when they were busy, they did not take the time to document the unique processes and systems required to do the tasks at hand.  Having systems and processes written down and not dependent on only a few key people that only holds the critical information in their heads allows for more efficiency, easier training and also more flexibility when personnel decisions need to be made.  Alternatively, be proactive by training workers that are well-prepared and able to move from one area of the warehouse or distribution center to another from day one.  Also, this helps in preventing complacency which affects productivity, accuracy and overall quality or work.      Since we have already established that it is best to purchase capital equipment during good times as opposed to bad, this is when companies should take advantage of technology in the distribution environment.  By using automation in areas that would reduce the skill level of personnel needed to accomplish the same task manually or would simply eliminate any manual need altogether, businesses are positioned better for both busy times and slow times.  For example, a certified forklift operator is probably one of the more expensive warehouse workers.  The task of moving a pallet of goods from the pallet building station to a stretchwrapper and then off to either shipping or storage can be done with pallet conveyor.  In this task, the forklift operator for the subtask of moving the pallet over long distances in the warehouse is completely replaced by the pallet conveyor.  Additionally, whether the final subtask is storing or shipping, a more efficient consolidation point for that final subtask would ensure that the forklift operator is reaching very high levels of productivity.  In total, the number of high skilled forklift operators to accomplish this task has been significantly reduced and has also increased the productivity of the remaining forklift operators.  In busy times, this automated system allows for high throughput. In slow times, this automation allows for reduced labor requirements needed to fulfill the tasks.       

Other forms of technology in the distribution center that offer benefits during all parts of the economic cycle are the use of software systems that allow for easy adjustments of daily operations.  In a pick module, pick zones can be adjustable in the software and control system (Pick to Light, Pick to Voice, Warehouse Control Systems, etc) so that if demand slows down, the personnel required to work in the pick module can be decreased to cover wider pick zones without extensive work needed to alter the software.

Similarly, having flexible sortation controls offers many benefits no matter what the supply and demand situation.  Being able to designate shipping lanes easily through a Human Machine Interface (HMI) touchscreen so that it does not take a PLC programmer offers wonderful flexibility.  This allows shipping or operations managers the ability to alter the number and locations of shipping docks.  When demand slows down, certain docks and their associated shipping lines would be inactivated.  When demand increases, then they could be reactivated easily.  When coordinated with the traffic manager, this could even offer efficiencies to be gained in the yard.

Utilizing dynamic storage of inventory in the inventory management software can help maximize floor space utilization and minimize picking or replenishment time.  Compared to dedicated storage, where SKUs are stored at specific locations in a warehouse and those locations do not change, dynamic storage allows for the flexibility to locate product in their optimal place in the warehouse as inventory levels change and as SKUs proliferate.  Since a majority of the labor cost in a warehouse is tied up in the picking and replenishment operations, to have the ability to shift storage locations of SKUs so that they are closer to the fulfillment operations such as a pick module or new product launch area is extremely beneficial, especially during the transition from prosperous to recessionary times when inventory levels can change dramatically.

Outsource non-core business tasks.   By shifting operations that are not core components of the business to a variable cost as opposed to a fixed cost, companies can save money, leverage expert suppliers and focus on running the mission critical aspects of the business. 

One area in a distribution center where outsourcing can be accomplished is by pushing planned maintenance and emergency service of plant equipment onto the experts of the equipment.  Unless the equipment is constantly breaking down, the result will almost always be less expensive and provide higher quality of service.  If you find that the equipment is always breaking down and the outsourced service was actually costing more than if using internal maintenance personnel, then the source of the issue is likely the age of the equipment and thus, wholesale replacement might be a worthy consideration.  You definitely don’t want to head into a downturn economy with plant equipment that takes a lot of maintenance to keep alive.  The biggest fear to overcome when transitioning to outsourced maintenance is the loss of the comfort of knowing that a body or many bodies are physically present just in case something happens.   Although for many businesses, there is justification in having this insurance policy, for many others, it is simply not cost effective.

Another area of opportunity for outsourcing for some distributors is industrial engineering and internal process improvement.   Having an industrial engineer or staff of engineers only justifies itself if the improvements that they provide save the company more than the fully burdened cost of the staff, every single year.  As an example, if the fully burdened cost of a staff industrial engineer is $100,000 per year, then over the course of 10 years, that industrial engineer should provide over $1MM in benefit to the company by way of process improvements and project management.   Using companies that specialize in maximizing efficiencies in the warehouse through internal process improvements, layout and design engineering and project management is not only less expensive, but also provides the perspective of engineers that have experience in a  multitude of industries so that these professional companies can leverage their knowledge to deliver the most effective solution.

Providing a full-spectrum list of all the lessons learned over the past couple of years is unrealistic, but hopefully this snapshot captured some lessons that might be applicable to your business.  The call to action is simple, while it is fresh in your head, document now what you would do if you could go back to 2006 and prepare for the highs and lows of future economic cycles. Because soon enough, the world’s largest economy in the world’s greatest country will come roaring back.  Business will be thriving and you will undoubtedly be in that position again to either be satisfied with the situation and become complacent again, or to learn from what history has taught us and take action. 

John T. Phelan, Jr., P.E. is Chief Operating Officer of TriFactor, LLC, a material handling systems integrator based in Lakeland, Fla. He can be contacted at 863-577-2243 or jjphelan@trifactor.com. For more information visit http://www.trifactor.com/