With an economic downturn here, your supply chain will be under extreme pressure over the next 3 to 6 months. How you act right now makes all the difference. But bad choices matter just as much.
Our latest VATQ BULLETIN: “4 Business Mistakes to Absolutely Avoid During a 180° Economic Shift” details exactly what not to do today.
Are you making the tough choices on cost cutting? Rapidly sourcing? Renegotiating contract terms? What’s your available cash? Don’t make things worse for your mid- and long-term business outlook. Set your company up to recover from the slowdown faster — and in a sustainable way.
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4 BUSINESS MISTAKES TO ABSOLUTELY AVOID DURING A 180° ECONOMIC SHIFT
Boom or bust, steady is the name of the proverbial game in business, right? It’s incredibly tough to portray steadiness to stockholders right now in the short term. But that doesn’t mean you want to make things worse for your mid and long-term business outlook just to improve short-term confidence.
The catalyst for this intense, time-compressed and strangely surreal business and social distancing state of affairs has been the legitimately scary outbreak of Covid-19.
China is losing its status as a ‘never-ending’ growth engine and might slow to zero in 2020. Brexit continues to distract and consume political focus. Trade wars have led to tariffs with China and others. Producer power price battles between Saudi Arabia and Russia over crude oil are escalating. Most macro trends now are pointing to an economic slowdown or a pending recession.
The ten-plus years of market growth had to have the largest companies planning for the eventual cyclical change, right? Yes and no.
Despite the unpredictable environment, companies can adjust to the economic impact of major business disruptions even when they affect the people who work for you and buy from you. There is room for cost optimization and contingency supply strategies. But it goes beyond a quick and easy pivot.
Hard decisions will need to be made.
The moves made right now are the most crucial ones. And it all rides on having a few well-researched, thoughtful plans in your playbook and avoiding reactions that risk a meaningful economic recovery.
So what should a companies do? We’ve addressed some of those concerns in a series of posts about falling oil prices and guidance on the most critical things to do right now.
But there are some very important things companies should not be doing right now. Here are four mistakes to avoid in an emerging recessionary climate:
#1: NOT SECURING ENOUGH CASH.
Right now, with earnings on the line and many product and services seeing decline in activity, you need all the help and flexibility you can muster. Time and cash flow that can be leveraged with the right suppliers is key to giving you more to work with over the next 18 to 24 months.
Access to enough working capital is the most pressing area that needs your attention. And this is the same for the converse situation too: Those companies with products seeing demand uptick because of the outbreak, such as cleaning products, masks and hand sanitizer, need cash too.
From a procurement and supply chain point of view, there are a few things that can be done to help put more working cash back in your favor:
- Lengthen your payment terms, unilaterally if needed, on all non-essential items
- Evaluate timing of payment runs. Lengthening activities by a few days can make a big impact
- Avoid provoking essential suppliers –this is not a time to increase supply risk– perhaps accelerating with them
In the capital expenditure area, we have the experience to help companies negotiate cancellation or postponement of purchases from suppliers. VATQ also has the experience to help you set up “pay to play” supplier agreements that can improve your company’s cash flow.
For suppliers that are facing dramatic demand reductions across multiple customers and who have a leveraged balance sheet, we have the experience to help you optimize supplier cost reductions versus cash flow improvements. Given some of your supplier situations, this can provide a large negotiating lever.
#2: NOT ENACTING A RAPID SOURCING PROGRAM.
Purchased costs and supply chain costs are typically 50-80% of the cost structure of the companies that we support. Lowering these costs is an essential strategy in a recessionary environment. If you’ve done your due diligence on contingency and scenario planning, then you know a rapid sourcing program can have a big role in your playbook. The reality is that most companies haven’t gone deep enough in detailing what rapid sourcing really means, often because the timing of downturns are never precisely known.
Indirect costs, in particular, can be benchmarked and the contribution to SG&A improvements is reasonably clear. The competitive forces of the market, plus professional strategic sourcing practices can yield fast and sustainable resorts.
Direct costs are equally important. Many of these costs are driven by changes in commodity costs – such as oil. Speed of action is essential to make sure you costs are falling as least as fast as market conditions.
#3: WAVERING ON MAKING THE TOUGH CHOICES NOW.
The time for waiting out these interruptions is over. Contingency plans need to come alive now.
There are many decisions that can be made across the entire company. From HR to logistics to IT to marketing, MRO and real estate, there are immediate cost-containment choices that can be made across all vertical industries and conglomerates.
Here are a few, but there are many, many more ways to trim the fat:
Staff Augmentation
Deprioritize all non-priority projects and stop development, testing and contract resources in Q3 and Q4. Initiatives that seemed important in boom times need to be re-evaluated. Shut these optional efforts down now and re-assess later.
IT Hardware
Change your laptop refresh program from 3 years to 4 years and stop all remaining 2020 replacements. A significant amount of IT hardware can be thought of as discretionary. This is a good time to hold on new buys, delay non-essential upgrades, and generally be more forceful about what the business ‘needs’ vs. what the business ‘wants.’
SKU Rationalization
In a short horizon, such as three to six months, discontinue low running SKUs altogether and push suppliers to offer discounts on the remaining business due to the increased simplicity.
Inventory Management
Engage vendors to manage your inventory levels. This economic climate creates fears of losing business, and vendors are more likely to accept these additional integration points.
The goal is to reduce and revise accepted plans. Change is inevitable. Making moves now, even if they are only 90% effective, will help allow business get the flexibility needed right now.
#4: YOU HAVEN’T BUILT A REALISTIC PLAN THAT CREATES SUSTAINABLE AND STRUCTUR- AL COST ADVANTAGE.
Traditional approaches to cost reduction are predominantly reactive and focused on “top slicing” across the organization. While these initiatives deliver tactical short-term results, they are not sustainable for three key reasons:
- Focus on “big-ticket items” without understanding of cost, activity and output. It can seem easily to focus in on a key capex project, but the broader business may suffer while the cost cutters celebrate a temporary win.
- Fragmented and inconsistent implementation. Often these programs avoid politically sensitive areas or projects guarded by a senior executive
- Lack of visibility into results to measure effectiveness. It is imperative to link cost reduction programs to real, measurable EBITDA outcomes.
VATQ favors initiatives that create both sustainable outcomes and structural cost advantage. Most firms can benefit from:
Budget to Pay
We believe that the source-to-pay (S2P) process framework is ready to extend its reach to budget-to-pay (B2P). We also believe that B2P will help procurement and finance jointly develop cost-control measures as opposed to just collaborating on P&L cost reduction impact.
By checking every request/requisition for budget availability prior to committing spend to external suppliers (imagine this for hundreds of thousands of requests), CFOs and CPOs can drive financial discipline and more aggressively and surgically separate good costs from bad costs.
Real Supply Chain Agility
Legacy ERPs contain critical data and involve massive investments that an enterprise cannot just throw out. Digital technologies, however, have broken the traditional supply chain – some for the better, some that are incredibly hard to integrate.
With a transformed and decentralized supply chain, data integrity is paramount to be useful. For most companies, data is impossible to manage in real time across legacy systems and plugged-in point solutions. Choose those technologies that give the widest visibility of activity with clean, accurate and synchronized data at the ready.
User-First, Intelligent Technology Instead of 5-year IT Roadmaps
Once data integrity is verifiably intact, you’ll want to evaluate technology that is built for the long term yet deployable in a lot less time than a custom consulting integration project. It should also be intelligent and easy for business users to easily work in. Can your demand for supply be sensed and alert your team as inventory demand inevitably escalates? Can you see all your inventory as it moves across your entire supply chain easily? Look for those cutting-edge functions that put real-time data in context that can save your company days of analysis – and jumpstarts procurement activity that keeps your now tighter budgets in line.
While positioning your company for the most sustainable and successful business outcome is the aim here, it’s important to not lose sight of the experience many are feeling coping with the rapid pace of a pandemic and its impact on the daily lives of your employees.
Our most human of emotions, fear, can’t be overlooked in this moment. Fear of the unknown. Fear of losing control. Fear of the end for those we care about.
Confronting the coronavirus as a business leader will take great courage. Leaders will need to put aside any reluctance to grapple with unknown factors and focus on real, helpful and protective actions for everyone.