4 Steps To Cut Costs, Not Revenue, During China's Manufacturing Slowdown

Christian Cuske

Our customers in manufacturing and high-tech industries are currently experiencing the effects of the 2015 China manufacturing slowdown. As cyclic downtimes are common in these industries, most companies have developed a toolkit to balance these fluctuations to a certain degree.

The biggest challenge for CEOs and CFOs during economically unstable times is to cut costs, not revenue, and ideally prepare for the next phase of recovery. In this post, I will talk about this toolkit and which chances arise to optimize the sales process during the contraction phase for companies in manufacturing and high tech.

How does the China manufacturing slowdown affect Singapore companies?

Singapore’s manufacturing output down for 12th straight month in January, posted Channel News Asia on 26 February 2016. It stated that the manufacturing output fell 0.5 percent year-on-year last month, according to data released by the Economic Development Board (EDB). The precision engineering cluster especially suffered, seeing its output fall 8.4 percent compared to the same month last year. An earlier article from December 2015 stated that manufacturing and high-tech companies in Singapore in general observe a decline in new orders from domestic and overseas markets. Production output and inventory are affected as well.

A CEO/CFO’s first aid options to maintain profit

These economic downtimes force companies to take every opportunity to cut costs and arrest declining revenues and margins to maintain the company’s profit. So what is the common toolkit being used to cut costs during the sales process?

  1. Reduce back-office sales employees or functions

  2. Downscale the front sales team

  3. Delay or cut investments

The consequences of cutting costs in revenue-generating areas

Whilst all three options of cutting costs in the sales process are understandable, they are likely to deliver disappointing results. So what happens when companies experiment with their sales force – their engine to drive revenue?

  1. Cutting back office employees often is the first move companies make in economically unstable times.
    At first costs will fall, but unfortunately, front-line sales reps must take over all manual back-office tasks to get their daily business done and keep customers happy. Hence, they are kept busy checking stock before selling, communicating with suppliers, logging and tracking sales orders, and creating reports. These additional duties reduce the amount of time that reps can spend with customers! Additionally the work overload increases their error rate, and their productivity sinks. Revenues are weakened instead of stabilized by this measure.
  1. Some manufacturing business owners might argue that the economy situation requires downscaling of the front sales team as there are not enough Requests For Quotations (RFQ) by their key accounts to maintain a sales force of the previous size. CEOs assume that an equal reduction of front- and back-office resources will simply result in an increase of the work burden on the remaining employees.
    But what also happens is a significant loss of valuable account and sales history knowledge. Once the manufacturing industry recovers from the downtime, the company will be left with no resources of expert knowledge to capitalize new opportunities.
  1. During economically unstable times, investments in technology and innovation are often seen as “discretionary expenses.” CFOs will initiate to squeeze the last possible drops of life from existing hardware while freezing budgets on big upfront software investments and innovation as far as possible. The financial options to make investments in this area are hard to source.

But there is still work to be done. Especially during contraction periods, manufacturing companies cannot afford to compromise on customer satisfaction for profitable accounts or lost deals due to inefficient sales processes.

It seems that companies in businesses with slim margins are left with dwindling small options.

The 4 steps to cut costs, not revenue, during economic downtimes

From our experience with customers in manufacturing and high-tech industries, we have identified these 4 steps to cut costs, not revenue, by optimizing the sales process:

4-steps-to-cut-costs-not-revenue1. Challenge the sales process

When trying to cut costs in the sales process, companies must walk a fine line between reducing costs and maintaining resources sufficient to protect current revenue, and ideally, enable future growth. The key to this is to be systematic: CEOs must analyze the efficiency of existing sales structures, hence eliminating revenue-jeopardizing structures and activities.

In manufacturing companies a common pitfall of a stable revenue lies in the nature of their decentralized sales structures. These entail manual, ad-hoc, and error-prone Request for Quotation (RFQ) or Request for Proposal (RFP) procedures which are based on Excel or other home-grown solutions. The sales process suffers from long cycle times. Furthermore, generated quotes often are not accurate, which trims slim margins once more and decreases customer satisfaction.

Structures that do not allow management to have sufficient transparency into the sales process and control over the revenue-generating engine of the company need to undergo revisions following appropriate steps of change management.

2. Reduce the workforce – but upgrade its performance capabilities as well

As mentioned before, for some companies it is unavoidable to reduce headcount to maintain profit and adapt to low Request-for-Quotation levels. Prioritizing roles and operating units is key thereby.

During contraction times, manufacturing companies are intensely engaged in capacity utilization calculations in order to balance fixed costs and operating costs. For sales managers to decide if RFQ with less-attractive margins should be accepted, sales simulations with exact pricing calculations using variable and fixed cost need to be performed. With the reduction of back-office staff, front sales employees are able to take over this task with support of a suitable sales simulation tool.

When considering the reduction of front sales resources, these should be ranked based on their revenue contribution. Headcount should be allocated to account profitability of each customer and the opportunity in size and growth it represents.

After having determined which areas of the organization have the biggest impact on driving company revenue, the capabilities of these employees to actually support these critical elements of the business should be reviewed. The key sales force needs to be supported in the best possible way to create an efficient sales process with a high-performance output.

Having allocated a pricing calculation and quoting system, sales quotas on the sales reps can be increased to make sure freed-up time will be used for selling.

To minimize the negative effects of a workforce reduction, ensure that the threatened-to-be-lost expert knowledge will be transferred either into a system or to designated employees who will take over these accounts.

3. Outsource business processes to increase profit

Outsourcing, or delegating a business process to an external provider, can serve a company with lowered labor costs, better quality, and improved flexibility. Prerequisite to this has to stand a qualification process which areas of a business can be outsourced safely.

In manufacturing and high-tech companies with slim margins, one of the most critical parts in the sales process is costing and pricing calculations. The development of cost models for solutions comprising of hundreds of line items and its application in the daily quoting process is highly complex and prone to errors. The good news is that nowadays costing and pricing can be performed efficiently in Configure-Price-Quote (CPQ) systems, which reduce error rates significantly. The actual building of cost models can also be outsourced. Choosing a provider with a high level of expertise in this area creates further cost-saving potential.

Accurate costing will protect the naturally slim margins which are typical in manufacturing and engineering-to-order businesses. A smart pricing solution may even increase the profit rate as it helps sales reps to find the optimal price between the customer´s restrictions and the profitability targets.

4. Prepare your sales process for the economic upswing

The manufacturing industry is known to undergo cyclical dynamics. Experts state that business owners who simply try to survive during these times – for example, by only following the above-mentioned first aid options – will not be prepared for the next economic upswing.

Especially in manufacturing and high-tech industries, product life cycles are short and dependent on constant innovations. This fact not only requests the respective product R&D capabilities but extends to the whole sales process as well. Hitting the market in a timely manner supports pricing, profit margin, and market share goals. Hence, the entire sales process needs to be supported to bring new products to the market quickly.

Another challenge of the economic expansion is to identify business growth opportunities early in the sales process. This requires revenue predicting analytics that allow the management to prepare for upcoming growth prospects.

The good news is that during the last years the Software-as-a-Service (SaaS) sector has developed rapidly. Subscription-based solutions and services give SME companies new options to support and therewith optimize their sales process by “leasing” software on demand. This model reduces the big amount of fixed capital investment and at the same time creates ultimate flexibility as SMEs can upscale or downscale their subscriptions according to the number of heads in their sales force.

During economically unstable times, cutting costs to stay profitable is on the agenda of every CFO. The same circumstances make it essential for CEOs to invest in changes. Optimizing the sales process carefully and cutting costs sustainably will minimize the risks of jeopardizing future growth. At the same time, a manufacturing company’s sales force can become more efficient and profitable by subscribing to a specialized cloud solution. Addressing these challenges present the chance of transforming the 2015 China manufacturing slowdown into an opportunity.

Read about China’s startup scene: Digital Startups Hotspot: Pudong, Shanghai.

This article originally appeared on the In Mind Cloud Blog.

About Christian Cuske

Christian is a co-founder of In Mind. As a CEO his heart is close to topics that concern the leadership of our customers in manufacturing and high-tech industries.