Managing in a “Down Economy”

Joseph Palazzolo, President of Palazzolo and Associates, explains how companies, particularly marine terminal operators, can manage costs during challenging times.

Question: What should transportation managers do to manage the effects of a recession?

Palazzolo: Two decades of trade expansion have dimmed the memory of prior recessions. The last time the U.S. economy contracted at comparable rates was nearly 25 years ago. However, experience from other industries and the application of planning tools, can provide up-to-date guidance on what you should do to best manage the effects of the arriving recession.

There are key attributes for good management during a recession. A recessionary economy demands that you:

• Know your company’s strengths and weaknesses.
  
• Have a deep understanding of your cost structure.
  
• Use emulation tools to prepare for multiple scenarios.
  
• Work as a team.

Question: Is there a “wrong way” to cut costs?

Palazzolo: While cost cutting is the first thing that many companies utilize in response to an economic slow down, successful companies know what elements of their business are critical to their reputation and, as a result, they avoid cuts which will be detrimental to these functions.

For example, some marine terminals view their gate turn-time as the means to successfully differentiate themselves from their competition. These companies should refrain from any cost savings activities that might have a negative impact on gate turn-time, until no other options are available to them.

Knowing what your customers think of your business strengths, as well as the features that differentiate you from your competition, is an important step in dealing with sudden cargo contractions.

Question: What is the first step to successfully cut costs?

Palazzolo: You can’t successfully cut your costs before you know your costs.
You would be surprised how many companies have only the most meager understanding of their major costs, especially labor costs.

For many companies, years of accounting adaptations have produced bookkeeping
allocations, corporate cross-charges, and otherwise well-intentioned adjustments, which serve to confuse management on the true cost of operations. Moreover, some companies stir major costs, such as operating labor, into one large pot without understanding the ingredients of this stew.

Smart cost cutting requires detailed knowledge of costs by department, by function, and by activity, without allocations. There are no shortcuts; this is a tedious, but necessary, exercise to avoid overreacting or reducing costs in the wrong activities.

Question: Why should managers look to planning tools?

Palazzolo: Managers often wait too long to respond to declining volume and revenue, and then they “over-correct.” Their cost cutting activities can be compared to a beginning skier cutting wide swaths across the slope instead of the precise movements of the expert. These managers do not have a plan for reversals of fortune, so they tend to: (a) wait too long before cutting costs; and (b) when they do reduce costs, it’s too severe, with negative consequences for customer service levels.

Having a plan for volume and revenue drops, and executing the plan as these negative milestones are reached, are key to overcoming this tendency.

Planning tools, such as labor emulation tools, allow management to plan for volume changes (up or down) with a specific labor plan of action. These tools provide for precise and well-planned reactions to cargo volume changes, in contrast to unplanned reactions, as depicted in the following graphs:

Question: What role does teamwork play in all of this?

Palazzolo: Teamwork plays into this in a number of ways.
First, from the very beginning of planning for a recessionary economy, teamwork is required to communicate up and down the organization about the company’s strengths and its plans to respond without compromising those sustainable business advantages.
Second, understanding the cost structure requires teamwork between accounting and operations departments with full access to data and a willingness within operations to answer tough questions about costs.

Third, establishing a plan of action and the organizational will to execute that plan require strong communication up and down the organization as well as the “buy in,” by management and staff, to that plan of action.

Question: What key message would you give a company that is dealing with recession planning?

Palazzolo: Managing in an economic crisis requires a substantial amount of introspection about your company business, its sustainable business advantages, and cost structure.

A strong management team, armed with this information and the tools to analyze the underlying data, has a distinct advantage over its competition and is more likely to weather the economic storm.