Move the Jobs to Save the Jobs?

For reasons that will be obvious, I’ll be masking a lot of details in this post :

I recently met with a friend whose family business is manufacturing (let’s just call it) “Product Line X”. Through the generations, they’ve grown their company to be one of the Top (3) in their industry; In fact, they thrived while others languished and closed down. Growth has been driven by exports, with more than 95% of their business coming from large retail chains in the US and Europe.

But they’re now in a quandary.

Just imagine the facts of the scenario they’ve been dealt with :

1. One of their largest customers is asking them to bring their price down by 40%.
2. This price point is already below their cost of production. Even if they cut out all the fat in their cost structure, they’re still essentially being asked to sell at a loss.
3. They can actually meet this price point, but this means producing in a neighboring country.
4. If they do sub-contract it outside the Philippines – amazing as it may sound – they’ll still end up making a profit.

Now, this seems like your run-of-the-mill no-brainer business case. Let’s close the factory and source from somewhere cheaper.

But the reason it becomes very tricky is this : my friend’s family has an uncompromising mission — to keep the jobs here in the Philippines.

My thinking on the matter is this –  they have to face the brutal truth. What their business is experiencing is a trend that will just continue, maybe even on an exponential curve. I don’t think their customers will one day wake up and say, “Please increase your selling price.” It’s just not going to happen.

On the supplier side, other countries will only get better, and cheaper. So expect that competition and cost-cutting will continue to be a major source of headaches.

So if I were in their shoes, what would I do?

I’d face reality and find my way towards the ideal — I’d create a bridging strategy that will pave the way for a long-term play.

In my view, the cost-pressure has put their demand on a nosedive. Losing sales in the next few months – at least of Product Line X – is an almost foregone conclusion; Which forces them to either throw in the towel or find a way to play a few more rounds.

So in this context, the first order of business -  is to survive. And if that means outsourcing to another country just to maintain relationships with their customers – and more importantly to generate cash flow – then so be it.

Generating this much-needed cash flow will then allow them to cross-subsidize and sustain the Philippine operations, at least for awhile. They can just chop up the sales orders across product lines and across countries, allowing themselves narrow or even negative profit margins for the locally-based production. This isn’t the most sound business decision, but given their mission, it’s something that they’ll be open to do.

This is a bridging strategy. It won’t play out in the long-term, but it at least allows them to stay in the game.

And then comes the exciting yet relatively scary part.

They have to use this borrowed time to figure out the next growth curve of the Philippine operations.

If my friend’s due diligence is to be believed, we won’t be able to match the cost of production of other countries. We don’t have the scale, nor the efficiency, nor the enabling environment. So a cost-competitive play is simply not an option.

So the only way to survive a situation when you’re creating something for Cost X – is to make sure that the product you’re creating is worth at least 2X. In other words, you have no choice but to make an upward bid for higher-value creation.

It’s no longer about making Product X, which can be made more efficiently somewhere else.

It’s now all about finding Product Y.

And Product Y must be something so unique that it can both command a higher price, and can only be made initially here.

Product Y is not necessarily an extension of Product X. In fact, it should be tangentially-related at the very least, but can be a radical departure at its most extreme. But it will have to build from core strengths that the company has built through the years. These strengths can be people’s skills and competencies, working with certain materials, a strong customer base, or design capabilities. But new strengths have to be built and layered on in order to reinvent themselves towards a company making Product Y.

This isn’t the cleanest nor surest of strategies. But given the chance to run their company, this is exactly what I would do.

I’d move the jobs, to save the jobs.

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This entry was posted on Wednesday, August 19th, 2009 at 6:00 am and is filed under Entrepreneurship, Innovation, Philippines 2020. You can follow any responses to this entry through the RSS 2.0 feed.