As the oil price is increasing without ceiling like today, companies have to adapt themselves to deal with higher cost pressure. As oil price is part of cost component for many products and services. The impact can be felt by businesses directly or indirectly. The management has to review the current business plan and make necessary changes to address and respond to this issue.
The big question is: What can be done to stay competitive?
Things to be done include short-term and long-term measures. However the following are some actions that can be helpful in self-checking the company’s readiness for the forthcoming pressures.
• Review of Cost Structure – The company total cost should be analyzed in deep details to identify areas that can be improved. For a manufacturing company, the product cost consists of major cost components such as raw materials, labor, factory overhead, and administrative expenses. It is necessary to understand the true cost flow and how it builds up into a single finished product. Surprisingly, there might be room for cost improvement through the cost analysis process. The process should start by looking at the itemized cost and check for reasonableness by questioning about improvement opportunity to concerned people. This has to be done by a group of crossed functional team that may consist of production, purchasing, quality control, sales, logistics, engineering and accounting.
• Cash Flow Confirmation – It is important for the company to have a warning sign as early as possible regarding the foreseen cash flow problem. Once the future forecast of 3 month has been laid out, the management can see the potential problems. This will be followed by the preventive actions such as stopping certain kind of expenses such as business travels, delaying some investment, reducing number of shifts, and so on. Additional funding facilities should be sought as well. This certainly may take some time unless the company is in good credit position. Accounts receivable aging report should be used to review any long overdue that needs follow-up.
• Operational Plan Revision – The number of working hours may be adjusted to avoid unnecessary over time working. Some companies with seasonality may consider production line shutdown to avoid overhead and fixed cost paid. Some operations may need drastic change such as stopping the production of low margin products or cancellation of unused resources or assets. Purchasing transactions should be consolidated at either companywide level or group of companies to gain more bargaining power.
• Re-organization – Under unusual situation, some re-organization may be needed. Several related companies may be merged together to gain synergy. Some functions may be combined to have additional headcounts. Early retirement may be reconsidered but it should be carefully handled. Otherwise this may cause the company to be weak when good people leave the company leaving a lot of non-productive ones. Outsourcing can be considered as much as in-house work. The company needs to choose the right option that can give benefits from the cost stand point.
• Finding New Opportunity – In the bad time, there might be new opportunity. Please look into the other side of the coin and try to grasp the opportunity to do new things or make drastic changes. It is important to identify the possibility of doing something that seems to be impossible. For example: the relocation of the production facility to the lower cost country, expanding export to new emerging countries, and so on.
In order to survive in the tough time, we need to find the optimum point where we can continue to stay in the business. Be alert and take necessary step towards situation change. There will always be a chance for everyone with fighting spirit. Good luck !!!
By: Mr. Yanyong Thammatucharee
email: yanyong.thammatucharee@gmail.com
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