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