MGPS: Automotive and Manufacturing Sectors Hit Hard

TORONTO--Oil hit a record high yesterday, closing at over $100 a barrel. Consumers and businesses are all feeling the impact and combined with a slowing of the economy, consumers are struggling with higher gas prices and heating bills while businesses are feeling the impact on already thin margins. In many cases, such as the manufacturing and automotive sectors, companies are already in the red.

Increasing competition abroad, the subprime mortgage crisis and less buying power for American consumers has had a negative impact on auto manufacturers, with Detroit’s big 3 being hit particularly hard. The effects are wide-spread with suppliers from Tier I to Tier III all struggling. For example, auto parts supplier Martinrea International Inc. plans to close its Kitchener, Ontario plant in 2009. 1,200 jobs will be eliminated.

Meanwhile, Canada’s manufacturing sector is struggling with declining sales as the U.S. downturn moves north. As the likelihood of a recession in the U.S. increases, so does the chance that Canada will also face a recession. The drop in sales in the manufacturing sector is expected to continue.

While layoffs are inevitable, they are ideally the last resort, but are too often the first cuts to be made. In addition, companies tend to make cuts in other areas that will have the biggest impact to overall expenses, but unfortunately also negatively impact revenue. Cutting product lines, shelving new product developments or simply withdrawing from certain markets has the initial desired impact of reducing expenses but also has the unintended effect of either reducing existing sales or reducing the capacity for future sales.

Of course, when an organization is hemorrhaging money, drastic measures must be taken. However, should an organization survive this stage, recovery will be slow and painful. For those companies in this predicament and for those that haven’t yet reached the crisis stage, a clear, focused approach to cost management is the remedy. There is little organizations can do about the dollar, the high price of oil and fierce competition, but what can be done, besides looking for ways to increase sales, or at the least, prop up declining sales, is to look for ways to reduce expenses that don’t negatively impact revenue.

Across an organization, non-core expenses, which are indirect expenses, can range from a few percent of total expenses to as much as 30% of total expenses. These expenses can yield surprisingly high results if strategic cost reduction is undertaken. In some cases, savings of over 20% can be reached, without negatively impacting quality, labour or revenue. As an example, an organization that has $1 billion in total expenses may have $50 million in non-core expenses. Reducing these expenses across the board by 20% will result in $10 million in total savings.

Clearly, not all organizations can expect similar results, but large organizations often overlook non-core areas, thinking them ‘too small’ to matter. However, accumulated, they are surprisingly high and even modest savings can yield, in large organizations, over $1 million in savings.

Instead of waiting for the economy to improve, organizations should be examining their non-core expenses in detail. The potential savings may be the difference between being in the red and having positive results to share with your shareholders.

About MGPS

MGPS specializes in reducing non-core expenses. These expenses tend to be indirect, hidden and scattered throughout the organization. MGPS identifies hidden costs and develops and implement efficient processes to drive out unnecessary expenses. The result is increased cash flow and greater profitability.