760 manufacturing companies

July 17, 2009
By: Tim Heston

That number bounced around the blogosphere this week as CIT teeters on the brink of bankruptcy. CEO Jeff Peek told news outlets that 760 manufacturing companies could shut down if CIT collapses. And then comes the ripple effect, which is even scarier.

CIT is a middle-market lender specializing in "factoring," in which suppliers sell receivables to the lending institution so they can receive payment immediately from CIT (which collects a fee) rather than wait the two to three months (or longer, especially these days) for payment from the customer. According to reports, the furniture industry likely will be affected, among others, so it's my guess that the contract shops up the supply chain may be wringing their hands. They may not rely on CIT directly, but their customers might, and a collapse of CIT may worsen an already critical cash crunch.

As Chris Kuehl, economist for the Fabricators & Manufacturers Association, International, put it in an e-newsletter today, "There is the distinct possibility that CIT's disappearance will result in the loss of over 1.5 million additional jobs and the bankruptcy of over 50,000 retail and manufacturing businesses."

The government is siding with some analysts (such as these reported in The Wall Street Journal) who say that CIT's failure may not cause a systemic failure to warrant yet another government bailout. Many others disagree, and I suppose we"ll soon find out who's right. Regardless, the situation adds to the general aggravation and helplessness many are feeling, particularly those in charge of collections, undeniably the hardest job there is today.

So what's a business owner to do? Logic would have it that a company's sales team do some market research and drum up more business, including stable companies that may give the folks in collections an easier time. But it's a quixotic errand to put salespeople on the phone and on the road without anything to sell or without a clear plan. It's true that many companies are looking for alternative suppliers to cut costs out of their supply chain. Trouble is, if a supplier can't differentiate from the competition—with better price, delivery, and quality—ramping up sales efforts won't turn a business around, especially now. It's brutal out there.

That's why it may be time to look at the business as if you're just getting into metal fabrication.

That's according to Anthony Burruano, joint managing director at BurruanoGroup, an Exton, Pa.-based business consultancy. Burruano works with various manufacturing firms and spoke to a group at last year's FABTECH International & AWS Welding Show. Things have changed drastically since then, when many shop owners walking the floor told me that business was down a bit, but the floor was still humming. Not anymore. This is why Burruano has pitched the idea of taking a new look at the business and doing things that wouldn"t have seemed plausible before the downturn.

As Burruano explained, one of his business owner clients had the talent he needed to compete, but his labor costs were just too high. So in recent months he presented an option to his employees: He would lay off everyone and rehire them at reduced pay and a new pay-for performance bonus package. If the company hit certain revenue goals, the employees would receive specified bonuses. The plan not only helped the company stay afloat, but it also gave employees a stake in the business.

"There's now something in it for them," Burruano explained. "It's a reason to come into work."

Is it pretty? No. But has it worked? So far, yes. Burruano said that the company likely will not lose money this year and perhaps even grow slightly.

The business consultant didn't sugarcoat the situation. This is an unprecedented economic downturn, he said, so nothing is for certain. But the recession does have one small silver lining in that it gives company owners the chance to reshape their businesses—a strategy that may pay off big-time once the economy recovers.

Tim Heston

Tim Heston

Senior Editor
FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-381-1314