Re: 5 for the Price of 1

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By Goofyhoofy
April 19, 2005

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[This post is in response to yesterday's Post of the Day]

My question for the management team is what steps are being taken to avoid another steep decline in profitability as the company heads into a difficult consumer spending climate, similar to or worse than the 2000-2002 period."

If I were he, I would say something like:

"Nothing. We are a manufacturing business, and we have to place our orders for components x months in advance. If we ratchet them down now because we think the economy might be bad due to your reasons A, B, or C, and they don't come true, then we are caught with insufficient inventory in the channel and we get killed by stockholders, who expect us to sell as much as we can.

Now if we have too much inventory in the channel, then we also get killed, so for all time, manufacturing businesses are more susceptible to economic downdrafts than other kinds of businesses. If you are in a seasonal service business, you just don't hire your extra (tax preparation, Christmas shopping, whatever) help for the season. If you are in a non-seasonal service business, you lay some people off, and since "people" are the single largest cost you have, you control your costs that way.

But in the manufacturing business, you don't have that luxury because there is a sales channel, and there is a supply channel, they run from Asia to Europe and beyond, and no matter how well we improve the chain there is always some amount of product in the funnel. In the manufacturing business you have both people costs and sales costs, but you also have component costs and assembly costs, and those don't go away so easily.

Now some of you may remember when we were developing the iPod. We basically had to go out and buy every miniature hard drive we could get our hands on, both to fuel the demand we expected, and to freeze-out competitors who might want to copy-cat the product the first week. Well, we did. But suppose Mr. Rafter's prophecy of doom and gloom had come true just about then? Well, we would have been stuck with a world-class supply of miniature hard drives in $400 music players that nobody was buying, and we would have taken a hit for it. Should we not have done that? Show of hands? Anybody think we should have been more cautious then? How about now? Anybody think we should throttle back our production of computers? Of development of new iPods? Of a new operating system?

No hands? Big surprise.

Now, let me say there are some things; we call them "plugs" which we can pull if things get really rough. We don't like to do it, of course, but every business has some things that are more discretionary, and some which are less. Marketing, for instance. We could, almost overnight, stop buying those glossy ads in Business Week and Time and elsewhere. We could ditch our plans for a TV campaign later this year and save many millions of dollars. We could dump some of our independent contractors - you know, like the guy who thought up the iPod - temporarily to save some money. We could reduce our design teams from T to R, or maybe even to Q if things got really, really rough. And, of course, we could ramp down our production and sell the inventory that's in the channel, but those cost savings would take some time to materialize, particularly when you're watching revenues fall at the same time.

And I could take a pay cut.

But we can't run the company based on "things might fall apart" because even though it's true, nobody - and I mean nobody can predict when, or even if, so we have to plan for the economy as it exists, as our best predictions say it will be, and be mindful of the plugs we can pull to get over the rough spots, and how we can run our business when things get ugly so that we are in a superior competitive position when things get good again. And that makes us no different from any other well-run company in the world.

Next questioner?"

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