Dressing Down The Business Model
The apparel industry has been hard hit during the recession, and the industry's cost-cutting measures may be out of fashion
By Carla Zilka and Paula Zilka Colbert
April 17, 2009
Every day there are news reports of corporations across the nation facing the challenges of surviving in today's challenging economy, with consumer goods and the apparel industry being among the hardest hit. As companies experience increased pressure on their bottom lines, they react by employing short-term cost cutting measures.
From layoffs to site closures, the country has seen well-known companies struggle to manage expenses and costs, with reactive cost-slashing becoming the norm. These initiatives will yield an immediate impact in savings, but is this enough to keep companies afloat until the economy stabilizes?
The answer is "no."
So how can companies truly understand their organization's "health," especially when visible symptoms may or may not be obvious? The evident financial symptoms include a negative or declining cash flow and reduction in operating margin percentage. Another very telling financial indicator is selling, general and administrative expenses.
When evaluating SG&A as a percentage of revenue and comparing it to the total number of employees, typically, the smaller the percentage SG&A is of revenue, the better. This is an area that several industries should focus on immediately to reduce costs. By comparing an individual company to related industries and the broader sector, a firm can quickly determine if its SG&A is within reason.
The apparel industry has been hard hit during the recession, and the industry's cost-cutting measures may be out of fashion
By Carla Zilka and Paula Zilka Colbert
April 17, 2009
Every day there are news reports of corporations across the nation facing the challenges of surviving in today's challenging economy, with consumer goods and the apparel industry being among the hardest hit. As companies experience increased pressure on their bottom lines, they react by employing short-term cost cutting measures.
From layoffs to site closures, the country has seen well-known companies struggle to manage expenses and costs, with reactive cost-slashing becoming the norm. These initiatives will yield an immediate impact in savings, but is this enough to keep companies afloat until the economy stabilizes?
The answer is "no."
So how can companies truly understand their organization's "health," especially when visible symptoms may or may not be obvious? The evident financial symptoms include a negative or declining cash flow and reduction in operating margin percentage. Another very telling financial indicator is selling, general and administrative expenses.
When evaluating SG&A as a percentage of revenue and comparing it to the total number of employees, typically, the smaller the percentage SG&A is of revenue, the better. This is an area that several industries should focus on immediately to reduce costs. By comparing an individual company to related industries and the broader sector, a firm can quickly determine if its SG&A is within reason.
Source: SG&A and employee information from finance.google.com
NexGen Advisors LLC makes no representations or warranties with respect to the information contained herein and takes no responsibility for supplementing, updating, or correcting any such information. Information shown on the graph above is not necessarily indicative of future performance.
NexGen Advisors LLC makes no representations or warranties with respect to the information contained herein and takes no responsibility for supplementing, updating, or correcting any such information. Information shown on the graph above is not necessarily indicative of future performance.
Click here to view graphs for other industries
The average SG&A as a percentage of revenue for a best-in-class company is between 9% and 12%. The average among Fortune 100 companies is between 14% and 16%. Meanwhile, in the consumer goods sector the average is in the 19% range. For the apparel industry, within the consumer goods sector, the average SG&A as a percentage of revenue is 39%. So the SG&A is considerably higher than best-in-class, Fortune 100 and the consumer-goods sector average, while the number of employees is much lower.
Each individual company must determine for itself whether or not the high cost of SG&A is justified. In the case of the apparel industry, much funding is invested in marketing and advertising, as retailers are continuously selling new styles at least four times a year.
Another factor could be that a majority of retailers source their goods internationally from local suppliers, resulting in high shipping costs, import fees, and considerable logistics management. But even within the apparel industry, some companies have much higher SG&A costs than their competitors.
Why? Is it just advertising or is their overhead and structure not optimal? Are there "middleman or non-value added" activities that can be eliminated with newly re-engineered, robust processes and systems? Can they outsource non-core transactional activities? All of this presents the opportunity to take cost out by redesigning the organizational structure, re-engineering, or outsourcing the supporting processes.
The more interesting financial symptoms are those that are not so obvious. Most companies have made little or no technology investments toward standardized platforms to maximize efficiency. The existing "siloed" systems are disparate, stand-alone, self-built platforms that are difficult to integrate, resulting in an inefficient organization.
Lack of technology investment inhibits the ability to optimize processes and people. Indeed, the results of a survey by Keystone Strategy Inc. indicate a strong correlation between information-technology capability and business performance.
Firms that score higher in IT capability grow faster than firms that do not, and leading companies use robust technology to support their business processes. That gives them the ability to maintain global, consistent, real-time information and also streamlines processes with business partners and customers.
Perhaps the most important but least seen "need for restructuring" indicators are in the realm of strategy. The alignment of strategy and operational goals is crucial for a company to grow and sustain profitability. One of the biggest mistakes is cutting heads with no long-term strategic plan to address the reduction of resources and the work that's left behind.
This long-term strategic plan should incorporate a newly designed organizational structure supported by technology improvements and more streamlined processes. The expectation for a business to maintain or exceed current performance after a reduction in staffing, without first making changes to the organizational structure and business processes, is unrealistic.
A company's commitment to restructuring is its commitment to long-term success and profitability. Admittedly, it is not an easy task. It takes a well-thought-out plan, dedicated resources and investments to ensure sustained results. In addition, it requires courage and leadership from the top and having the right change agents on the leadership team with tenacity and a drive for excellence.
If companies are showing some of the symptoms previously described and are not considering restructuring now, it will be difficult for them to survive, let alone thrive, in trying economic times.
Each individual company must determine for itself whether or not the high cost of SG&A is justified. In the case of the apparel industry, much funding is invested in marketing and advertising, as retailers are continuously selling new styles at least four times a year.
Another factor could be that a majority of retailers source their goods internationally from local suppliers, resulting in high shipping costs, import fees, and considerable logistics management. But even within the apparel industry, some companies have much higher SG&A costs than their competitors.
Why? Is it just advertising or is their overhead and structure not optimal? Are there "middleman or non-value added" activities that can be eliminated with newly re-engineered, robust processes and systems? Can they outsource non-core transactional activities? All of this presents the opportunity to take cost out by redesigning the organizational structure, re-engineering, or outsourcing the supporting processes.
The more interesting financial symptoms are those that are not so obvious. Most companies have made little or no technology investments toward standardized platforms to maximize efficiency. The existing "siloed" systems are disparate, stand-alone, self-built platforms that are difficult to integrate, resulting in an inefficient organization.
Lack of technology investment inhibits the ability to optimize processes and people. Indeed, the results of a survey by Keystone Strategy Inc. indicate a strong correlation between information-technology capability and business performance.
Firms that score higher in IT capability grow faster than firms that do not, and leading companies use robust technology to support their business processes. That gives them the ability to maintain global, consistent, real-time information and also streamlines processes with business partners and customers.
Perhaps the most important but least seen "need for restructuring" indicators are in the realm of strategy. The alignment of strategy and operational goals is crucial for a company to grow and sustain profitability. One of the biggest mistakes is cutting heads with no long-term strategic plan to address the reduction of resources and the work that's left behind.
This long-term strategic plan should incorporate a newly designed organizational structure supported by technology improvements and more streamlined processes. The expectation for a business to maintain or exceed current performance after a reduction in staffing, without first making changes to the organizational structure and business processes, is unrealistic.
A company's commitment to restructuring is its commitment to long-term success and profitability. Admittedly, it is not an easy task. It takes a well-thought-out plan, dedicated resources and investments to ensure sustained results. In addition, it requires courage and leadership from the top and having the right change agents on the leadership team with tenacity and a drive for excellence.
If companies are showing some of the symptoms previously described and are not considering restructuring now, it will be difficult for them to survive, let alone thrive, in trying economic times.