Rightsizing Your Business

Dec. 9, 2009
Whether it's growing to meet demand or shrinking in the face of fading orders, adjusting your business presence requires making tough decisions.

In announcing its fourth-quarter and fiscal-year earnings in November, Energizer Holdings noted costs it incurred to "rightsize" manufacturing and sales operations. That same month, Wabash National Corp. announced the sale of subsidiary Transcraft Corp.'s Illinois production facility and the consolidation of operations into another plant. "These types of decisions are always difficult to make, especially when it affects associates, but due to the current economic climate we are faced with the need to further rightsize our operating footprint and reduce our cost structure," stated Transcraft general manager Terry Campbell at the time of the announcement And earlier in the same year, Dow Chemical chairman and CEO Andrew N. Liveris said of the company, "Consistent with Dow's practice of active portfolio management, we continue to take quick and aggressive action to rightsize our manufacturing footprint, particularly in our basics portfolio."

Rightsize. It is a term and a decision that wormed its way into many a manufacturer's strategy in 2009 as the economy dived precipitously in the past year and then stayed down. By Merriam-Webster's definition, it means to reduce to an optimal size, which is the primary meaning business has attached to the word recently. Rightsizing also can suggest growing a business, either to correct a previous downsizing effort or to accommodate growing business.

Indicators that it is time to ask whether you need to rightsize your business may or may not be subtle. Increasing costs as a percentage of revenue and a high fixed-cost structure that places a manufacturer at a disadvantage during slow demand are two indicators that it may be time to rightsize by downsizing, says James Robbins, a senior executive at consulting firm Accenture, overseeing its North American automotive and industrial engineering practices. So too are the results of competitive benchmarking if they show a high cost structure relative to industry peers.

Take a look at machine utilization and capacity utilization, suggests Mark Gottfredson, a senior partner with Bain & Co. "If it's not where you need it to be, you need to make adjustments," he says.

If the adjustments include a decision to downsize the business, Accenture's Robbins suggests the following moves as a possible start:

  • Initiate an approach, grounded in data and analytical evidence, to look critically at all areas of operational expenses, and target and prioritize areas for cost reduction.
  • Establish a short-, medium- and long-term plan for realizing immediate savings, while setting up sustainable structures to position the organization for longer-term success.

On the other hand, rightsizing may be about growth, if not immediately then as the economy recovers. Bain's Gottfredson, who is co-author of "The Breakthrough Imperative," describes rightsizing as simply building to the right scale and volume.

Gottfredson readily admits that his bias is toward producing at a capacity that is just slightly below demand, pointing to Nintendo's Wii as a good example of a product that has successfully produced at that rate. "Not a lot [below demand], though, or customers could take business away from you."

Companies operating at that level "tend to run a little hot, tend to be profitable and tend to reinvest" in future innovations, he notes.

Of course, such a strategy would seem to present a challenge were demand to grow more than expected. Does one simply build a new factory? Gottfredson's thinking suggests that may be an extreme initial reaction. The Bain senior partner said he believes many companies are conservative when it comes to capacity planning -- that it's likely they can produce at a higher capacity than they plan for. "It's amazing what you can do to expand the capacity of the plant" with some creativity, innovation and task teams on the floor removing bottlenecks, Gottfredson says.

A hot topic for the Bain consultant lately has been discussions about the complexity of product lines. High complexity tends to translate to lower utilization of assets. "If you are able to reduce complexity, you may be able to free up capacity without capital expenditures at all," he says.

Ultimately, companies are taking a close look at their business model to make sure it is right for the environment, adds Tim Hanley, vice chairman, U.S. process and industrial products sector leader for Deloitte & Touche. That means looking both within the organization and outside the organization along the supply chain.

Still, rightsizing the business is a constant challenge. "We live in a dynamic market. It's likely to be a fleeting second that you are right," Gottfredson says.

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