Unprecedented times call for Rethinking & Redesigning the strategies to operate the businesses. Most of the organisations have embraced various best practices still, a couple of months of fall in the revenue can break most of these businesses. This is a bitter reality & our businesses have to be more resilient to overcome crisis situations in future.
The current Covid-19 crisis has a larger economic, social & political impact globally. The supply chains are struglling as the demand & supply cycle is thrown out of gear. Non-availability of even a single part can bring the entire supply chain to a grinding halt. Technological complexities & economies of scale drive the decision across supply chain.
Current Reality & Challenges:
- Significant drop in Revenue
- Profits, ROI and Cash Flow are under pressure
- Cash constraint
- Demand & Supply uncertainty & volatility
- Disrupted Supply Chains with long lead time
- Delivery failures
- Pressure on pricing & credit from customers & suppliers
- Resource variability
- Companies that grew sales every year for 8 years – 380
- Companies that grew profits every year for 8 years – 37
- Companies that have minimum ROCE of 25% for 8 years – 19
- Companies that fulfilled all of the above – ONLY 4 [Two software & Two FMCG companies]
What is so challenging for most of the companies to grow consistently year on year?
What to change?
Organizations have been operating on the classical Push mode of operation since decades and long supply chains amplify volume fluctuations. Besides the physical complexity, the way supply chains are structured makes it difficult for individual players to assess the level of demand. Minimum order quantity is a prevalent policy being followed throughout the ages across the supply chain without thinking, resulting in negative ramifications in most scenarios. Changes in consumer demand affect the companies in a supply chain to order more/less goods to meet the new demand. This causes bullwhip effect & usually flows up the supply chain, starting with the retailer, wholesaler, distributor, manufacturer and then the raw materials supplier causing a domino effect. The effect is alarming stocking & destocking across the supply chain, resulting in material shortages, surplus, productivity loss, sale loss & blockage of substantial Cash.
Organizations have always been operating with certain incorrect assumptions like producing only to minimum batch size. As a result of such batching, pulling ahead or pushing back of similar orders is done. This leads to the production of goods which are not immediately required while those in immediate demand are delayed. Changes are done on every process, assuming it will bring in improvement. Substantial time, money & efforts go into such changes however, the impact on the bottom line is not realized in most of these improvement initiatives. The entire supply chain & manufacturing is disrupted & creates conflicts.
The current pandemic has caught the whole world in a vicious cycle. This has aggravated the undesirable effects in the organizations.
Lockdown affected the whole world and businesses literally came to a halt. Recovering from this will be a major challenge. Consumer demand has gone down (except few businesses like Pharma, essential goods, some tech companies). Organizations are laying off people. There is no liquidity. Financial institutions are under pressure. The governments of the countries are trying to monetize the economy however, this may result into inflation.
We are heading to a perfect VUCA world & businesses need to Restart, Redesign, Regenerate & Flourish.
So, how can businesses be always prepared for such uncertainties & be recession-proof? Is there something powerful over & above Lean & other best practices?
What to change to?
The immediate action for the organizations is to start monitoring & controlling their Cash flow daily. Special emphasis must be given on the following actions to have a healthy cash flow.
- Reduce cash to cash cycle time
- Monitor & Control cash every week, every day
- Focus on your highly profitable business verticals/product segments/markets
- Explore possibilities to increase Throughput (Gross margin)
- Pay your employees, suppliers, service providers on time
- Reduce Investment, Inventories, & Receivables. Calculate the ROI before any Investment.
- Influence suppliers to supply only what is consumed. Operate on pure ‘Pull’
- The above action will reduce RM inventory/shrink cash to cash time
- Collect money stuck with government agencies: Excess taxes paid, incentives, etc.
- Settle disputed claims quickly
Redesign – A Paradigm Shift
Throughout the years, organizations have been operating on forecast based Push mode & have build expensive software to improve the forecast & we know the forecast is never accurate & this results in most of the organizations ending up with low Inventory turns, huge cash blocked in Inventory across supply chain, frequent delivery failures, loss of sales & even loss of business. These are the ones which are most vulnerable to such crisis.
Businesses comprise inter-dependent variables & even a minor change in one of the link can have a big impact on the entire chain. Similarly, even a big initiative will fail to have the anticipated impact. Businesses are highly dynamic & evolving at a rapid pace & leaders need to build the flexibility & quick response systems in their organizations to adapt to the change. Even the annual business plans need to be reviewed every week/month. It all depends on opportunity & innovative initiatives, it is likely that one of your moves may enable your business to achieve the annual business plan in only a single quarter. Contrary, an innovative move from competition can disrupt your entire business plan. Nokia struggled with its business as it was not prepared to react fast to the disruptive moves from other innovative brands.
“There are decades where nothing happens and there are weeks where decades happen”-Vladimir Lenin
There is an urgent need to move away from forecasting to consumption-based planning & execution. The entities upstream in the Supply Chain need to supply, produce & replenish only that quantum which is consumed by the subsequent downstream entities. The supply chains have to be scientifically designed to be flexible enough to adjust to the ever-changing demand without sale loss to any entity in the chain. This is a paradigm shift.
Leaders need to be opportunistic, communicate frequently with customers, employees, shareholders & other stakeholders. They need to build high-performance teams. Train, mentor & motivate them. They need to act beyond conventional wisdom. Quality & Speed of decision & actions will be key.
The solution lies in “Theory of Constraints” a Revolutionary business management approach which can help organizations to achieve breakthrough results at warp speed.
How to cause the change?
Regenerate & Flourish
Every entity in the supply chain aims to keep inventory levels low but maintain high availability, manage variety, low supply lead times and increase sales, profits, ROI. For this to occur, replenishment lead times must drop drastically across the supply chain. With higher inventory turns, 100% availability, lesser replenishment lead time, high ROI, the supply chain entities will flourish. Flow & Focus are key. The company can capitalize on this Decisive Competitive Edge & further increase their sales by increasing share of business & acquiring more customers/markets.
Following are the key processes:
- Define the Goal of your organization, identify the constraint, exploit the constraint, align your resources to this common goal & generate additional revenue, profits & cash without increasing expenses & without capital expenses.
- Categorize the products into fast & slow movers. Categorize the fast movers as products which need to be made for Availability (MTA) & slow movers under Made to Order (MTO). Establish a plant warehouse for finished goods buffers. Similarly, there will be defined buffers for raw materials. The demand variability is high at the OEM end or consumer end & thus plant warehouse will provide benefit of aggregation. Similarly, there have to be defined Inventory norms (MTA) at the upstream suppliers & they need to Replenish only that quantity which is being consumed by the downstream entity. Abolish MOQ. Order daily, replenish frequently.
- Production at OEMs & each of the upstream supply chains have to be as per the priority defined by the SKUs whose buffers are most penetrated. Generally categorized into Green, Yellow, Red which is dynamically adjusted based on change in consumption. This ensures there is no overproduction & supply/replenishment happens only to the tune of the consumption & there is a drastic reduction in lead time. There should be an IT system established to communicate the daily consumption at the various Tiers.
- Build SOPs.
- Digitize your bottleneck processes.
- Establish a daily/weekly/monthly review mechanism for key operational & financial process measures & take timely actions.
Organizations who have adopted the Theory of Constraints [TOC] have experienced hyper business growth rapidly. Few results are placed below,
- Revenue growth ~ 2X
- Growth in Profit ~ 3X
- Reduction in Inventory ~ 50%
- Reduction in Lead Time ~ 70%
- Delivery & Reliability ~ 100%
- Substantial improvement in Cash & free Capacity is released
Business leaders irrespective of the product/service segment, need to rethink, believe & embrace Theory of Constraints, to experience the next level of growth & stability.