What Signals a Recession?

I believe we’re in a global manufacturing recession, it just hasn’t been fully reported yet.

If you look at the quarterly earnings reports of the U.S. stock exchange, we don’t see that many companies that are showing top-line revenue growth, or they’re only showing very minimal revenue growth, which could be part of a price increase, but not an increase in units sold.

One thing to remember is that 80 percent of companies that make up America’s GDP are not public companies. They’re mid-size and small companies, and they produce all things that make up our Gross Domestic Product.

Apple, Amazon, and Microsoft may dominate the news because of the stock exchange and their product news, but they’re not what drives the actual economy: It’s the other 80 percent of the economic engine that you don’t hear a thing about.

The other 80 percent is on the stock exchange, but they’re not the sexy stocks that business experts like to scream and shout about on cable news.

Instead, what’s happening is that many of the 80 percent are actually seeing sales or revenue below where it was last year. They will probably be looking at how to protect their profitability, and they’ll cut costs to do that.

One of the ways they do that is to cut workers. Unfortunately, that has been a tried-and-true methodology since the beginning of time, and it has never really managed to increase top-line revenue. Ever. It will increase their short-term profits, but they eventually drop again. That leads to a deepening spiral of cut and drop, cut and drop.

Instead, I believe that when you’re looking at shrinking revenues, redesigning your systems and processes to make them more productive is a more positive method of achieving the same results. When I was at Robroy, I never had a layoff in 20 years because we always looked for ways to improve and run in a streamlined, lean operation. We never had to lay off workers, because we never bloated our workforce to compensate for problems of our own making, such as hiring more workers to compensate for our inefficiencies.

When should you start redesigning systems and processes?

Measurement and improvement should be an ongoing process because then you can avoid to having to take those drastic steps just as a recession begins. Oftentimes, executives will just look at their top-line sales numbers to see if anything has changed. If there’s no significant change, they assume everything is alright. But if you’re already in the habit of measuring everything, you’ll notice that the number of units shipped have actually dropped. The only reason the top-line sales number stayed the same was because of a price increase.

And because you’re producing fewer pieces, even at the new price, you’ll make less money. Then, if you lay people off, you’ll have fewer people making fewer pieces, and your variable costs will go down. That will help for a little while, but it’s only a one-time savings.

People will often take the easy way out and whack away at the heads, but you should avoid hiring the heads in the first place. Look at your process and find areas of improvement. You probably don’t need all the people you hired, and you would have a far more sustainable business during the downturns if you were already running lean.

But don’t make the mistake of going too far the other way. Some companies have made the mistake over automating and cutting their department to the bare bones, and put all those savings somewhere else. As a result, they can’t survive a hiccup, like a sudden rush on orders, because they over-clocked their department and now they can’t fulfill their orders. You can cost-cut yourself out of business too, so be careful not to take things too far.

I’ve been a manufacturing executive, as well as a sales and marketing professional, for a few decades. Now I help companies turn around their own business. If you would like more information, please visit my website and connect with me on Twitter, Facebook, or LinkedIn.

Photo credit: Mediamodifier (Pixabaycom, Creative Commons 0)