Newton, Mass.— Distributors continued to deal with the country's economic slump in September, reducing headcounts and taking other drastic measures to cut costs.

The steps came amid news about rising joblessness and a continued slowdown in the manufacturing sector. The nation's unemployment rate rose to 4.9 percent in August, from 4.5 percent the previous month.

Also in September, the National Assn. of Purchasing Management announced that the manufacturing sector had declined for the 13th consecutive month — though the rate of decline decelerated significantly. Manufacturing employment continued to decline in August, as well — for the 11th consecutive month, according to NAPM.

The situation is affecting distributors of all sizes.

For instance, in August, publicly traded Industrial Distribution Group implemented a company-wide furlough program, under which employees must take three weeks off without pay between the end of August 2001 and March 31, 2002. The program will affect about 75 percent of IDG's employees across all business units, according to Jack Healey, senior vice president and CFO.

IDG expects the measure to help return the company to profitability in the fourth quarter, Healey said.

The furlough announcement was made in an August 24 memorandum to employees from new president and CEO Andrew Shearer. Shearer was chosen to replace Patrick O'Keefe, who resigned in August after less than two years with IDG. Shearer is a founding member of IDG and has been on the board of directors since the company's inception in 1997. He is also IDG's largest stockholder.

Healey says the furlough program will save money and ensure that IDG's workforce is intact and ready to "hit the ground running" when the economy turns around. The furlough follows a number of other cost-cutting measures. IDG has laid off about 100 employees since January and Healey said some executives have taken pay cuts this year. This is in addition to an ongoing strategy to consolidate facilities nationwide into a "hub and spoke" model.

"The economy is not working for us," Healey said in early September, noting that the alternative to the furlough was more layoffs, which may have hit up to 10 percent of IDG's workforce. "We think the group we have together here — all 1,400 of them — is the group we want together when the economy comes back."

Healey said many of IDG's manufacturing customers have taken similar steps this year. He also said employees' time off will be arranged so that customer service is not disrupted.

"It's going to be tough, but it's not going to reduce customer service levels," Healey said.

Holden Lewis, an analyst with CIBC World Markets, said he's seen several companies implement furloughs in the last few months, though IDG is the first at the distributor level. While Wall Street views the move as a valid cost-cutting approach, he says there is some concern over the long-term effect on employee morale.

"Obviously it saves you money, because you're not paying your employees," Lewis said. "And there are always some employees that are more than happy to take [the time off]. But it's hard to say what it does to employee morale."

Another firm restructuring operations is The McGraw Group, Inc., a distributor in Virginia and the Carolinas. The 135-year-old company recently consolidated branches, sold its S&K Air Power unit in Mattoon, Ill., to reduce debt, and took other measures to weather the storm.

President and COO Clarence Yahn said the company, which reported $87 million in sales last year, is focused on controlling costs. Despite cutting its workforce from 170 to 150 employees, McGraw Group hired four additional product specialists in fluid power and power transmission over the past 16 months to meet demands for engineering services.

"It's intensely tough," Yahn said. "We're ahead on fluid power and holding our own on power transmission. The MRO side of the business has suffered, as has abrasives, with the general downturn ... We're off probably 10 percent from a year ago and project to be 10 percent off by year-end, based principally on the recession."

Earlier this summer McGraw Group sold S&K Air Power, which had revenues of about $30 million. "We reduced debt significantly by that sale to raise cash and working capital to help us through a very difficult time," Yahn said.

Other measures McGraw Group has taken include converting 12 branches to scaled-down sales offices served by three regional "super branches."

Smaller firms are taking similar steps. For Omaha, Neb.-based Midwest Industrial Tools, Inc., the hard times have resulted in two rounds of layoffs for the 60-employee distributor. The first layoff, in July, resulted in the loss of five employees.

The second added five more to that list in early September.

"It is unfortunate that these layoffs were necessary," said president Allan W. Chartier. "We have implemented all of the cost-cutting measures we could."

That included examining internal processes to reduce costs and rolling back some employees' hours to avoid further layoffs, he said.

Chartier stressed that these were layoffs and not terminations, and that Midwest Industrial Tools hopes to recall the employees once the economy recovers.

"Now it is more critical than ever to better service our customers and to increase our efforts to represent our suppliers," said Chartier. "We are all working harder to achieve these goals."

Chartier credits the company's strength in a diverse MRO line with helping to ease the blow it's taken in cutting tools sales.

To avoid the drastic measure of layoffs at a time when good employees are such a commodity, another Midwest cutting tools distributor has reduced employees to a four-day work week. All staff members, from warehouse to upper management, at T&A Industrial Distributors are taking this 20 percent cut in pay.

"We value our employees and don't want to lose any of them," said president James E. Ketter. "It is a lot to ask, but we are all tightening our belts and working together to get through this. We are taking every measure to keep everyone on board."