Pare your costs, don't slash them

Cost-cutting is inevitable. But freezing all your investments may not be a wise answer to the crisis.

Instead, Kosit Panpiemras, a former deputy prime minister and now executive chairman of Bangkok Bank, suggests that companies look into projects that can help them better control their costs. He cited the case of Pan Asia Industrial, an acrylic-sheet maker, which divided its 15-metre-long oven into three small sections to allow it to work with smaller orders while burning less energy.

"Many SMEs, when it's time for belt-tightening, will tend to over-tighten ... which is damaging. You must look carefully at where to spend and where not to spend," he said.

Small and medium-sized enterprises must look into the root causes of problems and find the right strategy to deal with them. During the 1997 crisis, it was not difficult to find the appropriate strategy, which was to shift to exports, since the cause of the problem was easily defined as the falling exchange rates.

But besides a strategy, execution is essential to accomplishing the mission. And creating "immunity" is the "biggest job" of any SME, which will assist it to withstand volatility during a crisis, he said.

"Good practices will help create 'immunity'. Practices can be different among companies but broadly they involve things such as reorganisation, streamlining, building trust with your customers, quality improvement, capability to control cost, and research and development," he said.

Prapoth Pholpipattanapong, executive chairman of Advance Packaging, said that unlike the 1997 crisis, the current crisis was affecting every industry - including the export sector - and was expected to be more severe and prolonged than the previous one.

One indicator is that Japanese firms, which usually have a no-lay-off policy, have made their workers redundant, as they don't foresee any recovery in the near term.

Nevertheless, Advance Packaging's adjustments over the past decade have made the company better prepared for the present crisis.

From being a producer of ordinary plastic bags with 2,000 competitors, the firm has turned to manufacturing advanced packaging products by forming joint ventures and developing its

own technical expertise, as well as establishing its brands and relationships with customers, while enhancing efficiency and motivating and building loyalty among its workers.

"Most SMEs will face the problem of having a big body but small head. They have to use more workers. We have to rethink how to work with fewer people. This takes time, though," he said.

Prapoth said that unlike big companies, which are already efficiently managed, many SMEs should be able to find many places to reduce their costs.

They should also implement measures to boost liquidity through such steps as reducing unnecessary inventory, reviewing their production process to eliminate unnecessary procedures, taking this opportunity to overhaul or dump old machines, and finding new products, markets and business direction.

"Next year, the company still set the target to grow by 12 per cent. Don't be disheartened, or motivation will go away. Staff are already demotivating and feel less certain about their future," he said.

Companies should adopt a positive view and keep looking for new products and opportunities. But financial discipline is also very important for SMEs, as quite often their owners take the companies' money to spend on something else such as stocks and real estate.

Besides Advance Packaging, Prapoth owns many other companies including Specialty Tech Corp and Single Point Parts (Thailand), a listed manufacturer of parts for hard-disk drives.

Sorat Vanichvarakij, managing director of Pan Asia Industrial, said the company nearly went under as its debt doubled during the 1997 crisis. But it does not fear the current crisis because it is much better prepared.

"The biggest difference is that in 1997 I knew nothing and it [the crisis] came so suddenly that we were hardly prepared. It was new for everyone," he said.

After learning a painful lesson, Pan Asia took nine years to become a debt-free company in 2006. The firm also has restructured its workforce to become more flexible by outsourcing 30 per cent of its personnel.

To cope with the current crisis, companies should apply activity-based cost analysis to find out where they can appropriately convert fixed costs into variable costs, he said.

SMEs must think hard on how to take advantage of the situation. In Pan Asia's case, the company has reversed its procurement of raw materials from buying before receiving orders to buying only after it receives orders. Although this causes much more complexity for operations, it totally gets rid of loss problems, which it had incurred in the past due to fluctuating raw material costs.

Second, as everyone is vying for cash flow, Pan Asia could exploit its strong cash position to bargain for discounts from its suppliers.

Third, the company has initiated a "Get Money Back" project to encourage staff to collect defective goods and waste for sale at the Chatuchak market.

To avoid more bad debt, the company has fixed a credit limit for each client.

Kosit said the "recipe for SMEs" includes taking care of cash flow, exercising risk management, spending wisely and maintaining quality.

"SMEs should not feel disheartened since there's time to prepare and we know the causes, which are falling orders and fluctuating prices," he said.

Kosit, Prapoth, and Sorat were speaking at the annual SME seminar on "SMEs weathering the world's economic crisis", held by Bangkok Bank last month.

pichaya@nationgroup.com