LESSONS SHOW PAINFUL NECESSITY OF DOWNSIZING.

Byline: Bruce Ballenger Guest Column

Why does one company survive a near-death experience while another, in virtually the same circumstances, fails? The case histories of two Los Angeles companies provide revealing reasons.

The success story involves an apparel manufacturer that once grossed a half-billion dollars annually. But with the recession, volume dropped by half and then slowly fell even further.

At first, management did nothing. After all, the company was well capitalized and had an excellent reputation and strong management. But sales fell month after month. Suddenly, it become clear that the waiting game was turning into a death watch, which is when we got involved.

Senior management and our consultants insisted on detailed sales projections that were rock-bottom conservative. We then cut back those projections by 10 percent to wring out overoptimism, and proposed to reduce costs and capacity accordingly. Some managers objected, saying that the company would be unable to meet demand once the recession ended.

We saw it differently. If capacity - and thus cost - weren't scaled back significantly, the company wouldn't be around when recession ended. Senior management agreed and ignored the siren call of better times just around the corner. The payroll was scaled back sharply, with reduction among both hourly employees and executive (which is also why many of them might have argued against cutbacks).

Big cuts in other expenses were accomplished by renegotiating insurance coverage, long-distance phone service, and showroom leases. Fees for legal, auditing and tax consulting were also renegotiated downward.

In addition, the company invested money to save money. A video teleconferencing system was installed to link headquarters with offices across the U.S. and in Asia, which substantially reduced travel costs. A new electronic ``pick ticket'' system that generates shipping documents and sales invoices was also installed, which reduced operating costs and improved inventory turnover.

When the economy turned around, the apparel industry didn't immediately recover. Had the company stayed the course and bravely resisted layoffs, plant consolidations and overhead reductions, however, it would have failed.

A sweet irony: The long-delayed uptick in consumer demand did not catch the company flat-footed. Improvements in purchasing, manufacturing and shipping operations, all necessitated by the need to reduce costs, enabled the company to exceed its most recent sales projection by 20 percent.

The other company was an industrial distributor that was long-established, well capitalized and highly regarded. It had a long list of loyal, blue chip customers that generated $80 million a year in sales. When the recession hit, sales plummeted among every category of customers except low-margined government accounts.

When hard times came, the company decided to ride it out. Management believed that, because a high level of services had built the company, a high level would save it. Profits soon turned to losses. When the losses grew large, management asked for our advice. We projected a continuing drop in sales, and called for a commensurate reduction in expenses. But management insisted on projecting sales at a level that would cover existing overhead, and rejected many of our key recommendations.

No, we could not lay off employees; they had been loyal to the company, and now the company would be loyal to them. No, we could not close outlying locations that were losing money; when the economy bounces back, the company will need those facilities. No, we could not drop nearly profitless ``prestige'' customers, even though that would free up working capital to serve more profitable accounts. Bragging rights were more important.

Every payday became a crisis. Payments to vendors slowed, and ``past due'' became the norm. Vendors had extended more and more credit, but one day they stopped shipping product. Without product, the company was out of business. The loyal employees, both those who were redundant and those who weren't, were out of a job. The company's locations, the profitable ones and the unprofitable ones, were shut down. The customers, both those that were prestigious and those that were profitable, had to find another supplier.

The lesson that these two companies provide is clear. Wishful thinking will destroy even a long-established, well-capitalized company. When the economy sours and revenues plummet, expenses must be cut accordingly - and quickly. It isn't pleasant laying off talented and loyal employees, but it's better to lay off some and save the company than wait and lay off everyone after the company fails.