The price of paper has begun to fall, and millions of tons of capacity are scheduled to come online domestically and in all our major export markets. Employee costs are at an all-time high, plant labor is still somewhat scarce, and it is doubtful our representatives in Washington, D.C., will agree to open the books on bringing in foreign workers to help alleviate the situation. The cost of capital has suddenly increased and is likely to continue increasing until the Federal Reserve sees the rate of inflation start to recede. Demand for packaging has slowed down. Inflation is still at its highest level since the late 1970s, and many economists think some kind of a recession will occur within the next year. A pretty bleak picture, right?
The answer is every cloud has its silver lining, and this may be an opportunity for you to consider “rightsizing” your business. For the past few years, most converters have operated at very high levels, in many cases straining their productive resources. Profit levels were generally at historically high levels, and many of you made significant investments in new equipment to help you keep up with this increased demand for your products. This equipment is now being installed, and many of you now have increased capacity—just in time for a possible business downturn. The conventional wisdom in the manufacturing world is to fill up your equipment with as many orders as you can find because once you get past your break-even point, all of the incremental contributions will fall to the bottom line. Although I can’t directly refute that logic, I think the key principle in business is to find ways to maximize the long-term value of the enterprise. Increased profits generally increase enterprise value, but maximizing long-term value requires a little more thought and planning.
In my opinion, this should be a time for introspective reflection. For the past two years, many of you were just trying to keep up with an ever-increasing demand for your products and services, and while this problem is a generally good one to have, what I see in my travels is a loss in focus about what you are truly good at. Instead of focusing on your niche business, a lot of your productive resources have been utilized for business that is probably not going to be good long term for your company. In many cases, the business is outsourced from your larger competitors that didn’t have the resources to take care of it, or it came from customers who were content to pay higher prices in the short run, due to the overall lack of productive resources in the marketplace. Good business in the short run, but probably not sustainable in the long run.
Your productive resources have been overtaxed over the past few years. Your employees have been working way too much overtime, you are wearing your machines out too quickly, you are likely running out of space, and you need more employees at almost every functional area and are having trouble finding them. If you proceed down the path of continuing to fill up your machines with business under the theory that the incremental dollars will drop to the bottom line, then you will likely be part of a race to the bottom with no end in sight. The recent past has been one of almost unbounded price increases. The immediate future is likely to be one of higher competition and falling prices. You need to decide how you are going to play in this arena.
So here is your mission, should you decide to accept it. Take a hard look at your customer list with an eye toward trade business, broker business, low-margin business, short-run business, customers with difficult orders to run, business outside of what you feel is your core competence, and customers that are just generally difficult. Model your business without these accounts and orders. See if you can cut out a shift on certain machines and if you can reduce headcounts in other areas, such as customer service, design, maintenance, etc. Try to create a slightly smaller operation and focus on keeping your key employees happier. Profit dollars may go down, but profit margins should go up.
It may be time to prune the garden a little bit—pull out the weeds, let some of the fields stay fallow, and prepare yourself for profitable and sustainable growth. Focus on your core competencies and the types of business where you have an advantage over the competition. Keep your productive resources available for the good business, and set yourself up for a better future. The adage that sometimes less is more may be the right approach for 2023. If the goal is maximizing long-term enterprise value, then there will be periods of time when cutting back is the better strategy, and this may be one of them for you.