COVID19 is one of those once in a century event which not only leaves a lasting impression on the generation managing the immediate impact but also redefines the way future generations work together to make us live in harmony with our beautiful planet for many more centuries. Such events are defining moments because they impact every aspect of our lives. For the purpose of this article, we will keep it focused on the way companies must amend or alter their IBP process and ensure that this problem becomes an opportunity going forward.
The enormity and speed of this change is like a Tsunami which has currently kept, even in some of the best-run businesses; business leaders continuously ask themselves: “Are they doing enough for their enterprise to come out alive on the other side of this Public Health crisis?” Or, is it a problem which can become an opportunity in future.
It all looked like a supply chain disruption to start with and something which only had the potential to impact China’s manufacturing dependent enterprises. Sooner than anyone could imagine this initial assessment was proved to be way off the mark. As the Public health crisis started to spring up in multiple countries necessitating government action of varying degree, it started to take the shape of a perfect storm which would impact every aspect of business.
In our view, Businesses will encounter three phases of disruption. In the first phase, there will be multiple and varying degree of supply chain disruptions, caused by lockdowns in almost all major countries across the world. In the second phase, demand will be extremely volatile in the short term i.e. during the lockdown but importantly in the immediate period after lockdown. The third phase will be the most critical one as it starts first and foremost with the acceptance that the world might never be the same again. The current business plans across industries will need to be reimagined by defining the new normal around consumer and customer side. Simultaneously, as we reimagine the front end, challenge will be on effectiveness of trade and consumer spends, enormous focus on supply chain costs, labor availability and supply chain automation. Nonetheless, cash flow will always be at the center of decision making in the short term.
As the healthcare crisis unfolds itself over the next few months or quarters before a vaccine comes along, every company will approach its Day 1 (Dawn of the New Normal and Business context as we might not have imagined in a pre-COVID world) as Business Leaders grapple with challenges such as:
- The crisis has the potential to sound death knell for some industry segments/products/channels while simultaneously giving birth or new lease of life to others.
- Projecting the shape of demand recovery – V, U, or W or some other shape altogether.
- Supply chain strategy and capabilities need a fundamental shift or a flexible approach for post-COVID new normal.
- Consumer behavior in the post COVID “Contact-less economy” is bound to change which will necessitate businesses to completely redefine their portfolio approach/channel focus.
- Projecting demand impact of products/services dependent on social occasions.
The need for integration across the organization has never been felt more profoundly given the unpredictable extent and duration of this disruption. Leadership teams are realizing the importance of an effective IBP process and thus evaluating if they should make amendments or fundamentally redesign their existing process to manage this disruption. Current assumptions, composition of demand, financial and CAPEX plans will not be relevant anymore in the post COVID world. Most functions will need to go back to the drawing board and revalidate their current plans for the post COVID world. The proposed plans will need to be orchestrated, utilizing the IBP process, in order to maximize return for the enterprise in these challenging times where every $ saved enables NIL or minimal job losses.
In this article, we are proposing 3 specific suggestions that can help businesses plan better or atleast be more prepared for the short term while not losing sight of the long term
- Ensure short term is not the enemy of long term.
- Reboot New Product/Channel and Supply Chain Strategy
- Practice “Truth as we know it” – this is not the time to judge – Live with the impact of decisions
Ensure Short term is not the enemy of Long Term – This is by far the most critical value to be protected among the senior leadership team. The volatility will be both in supply and demand. Moreover, it can be both negative and positive depending on which industry/product category is the area of consideration. In the short term, cash flow will be the most important criterion in decision making. The focus on cash has the capability to impact customer/vendor relationships as well as postponing or phasing out of investments in trade, marketing and supply chain. This ‘tight rope walking” for all senior business leaders would require a clear communication of business priorities both in the short and long term. Leadership needs to be courageous and unemotional about making decisions that strike a balance between what is needed to survive in the short term and what is needed now to compete in the long term.
Consider some challenges that are currently being faced by businesses.
- Demand Management – In a category like Groceries – Demand expansion “in Home” vis-a-vis Demand contraction in “Out of Home” is being witnessed. This short term trend during COVID might change in future but may or may not come back to what it was pre-COVID. It is most likely that a new normal would be on the horizon going forward.
- Cash flow Management – Decisions like refusing shipment to a customer due to high accounts receivables or delaying payments to strategic vendors in order to manage overall payables will have an adverse impact on long term relationships with these external stakeholders. Any decisions to pre-build inventory given a supply disruption in the short term or optimizing on cash by shutting down all or some manufacturing sites given revenue dip in the short term vis-a-vis potential sales loss in future due to low or no inventory will be key decisions driving IBP process.
- People/Labour Availability – One of the biggest challenge being faced is the availability of frontline salespeople and labor in manufacturing and distribution. There could be significant cost increases in this area to not just incentivize people to come and work, but importantly creating an ecosystem for these people that makes them feel safe at work in these trying times. From all counts, this will be a short term hit on cost but something which is unavoidable to ensure business continuity.
- Overheads management – Given recession has already set a foot in, various approaches to management of people costs exist – reducing headcounts permanently or time-bound furlough, reducing salaries – Flat across levels or varying percentage cuts across levels.
- Supply Management – Managing partial/complete shut-down of manufacturing lines and postponing CAPEX for various activities to conserve cash in the short term vs demand projected in future, but critically preparing for Day 1 post-COVID which will vary across world markets.
There are no silver bullets for any of the above challenges. We recommend that the most effective way to tide over such challenges is to use our “2 eyes” the way they were never programmed to be used – Focus with one eye on supply responsiveness to address demand volatility in consumer and customer side while remaining focused with the other eye on projection of the demand curve which will rapidly evolve basis multiple macro variables (socio-economic and socio-political)
Let us go deeper into this “2 eyes” approach with an example – An organization might find one category (category A) of product doing very well vs another (category B) which might be performing exactly the opposite.
1st eye focuses on the short term prioritizing supply agility over undue efforts to project demand accurately. No matter the amount of effort being put on demand forecasting, it is almost impossible to estimate demand with reasonable level of accuracy. It is therefore recommended to conserve resources and focus on supply agility.
For category A, business should support an ever-increasing demand by beefing up supply even at the cost of margins and not worry about overestimation of demand expansion. But for category B, it should not lose focus on cash and thus manage channel inventory/obsolescence without worrying on potential lost sales due to wrong estimation of demand contraction. The above approach only ensures short term survival.
2nd eye focuses on the medium to long term demand plans. This enables businesses to prepare themselves during and post COVID by building assumptions around the potential trajectory (V, U, W or any other shape) which the two demand curves will take.
Scenario planning is a foundational IBP concept but also the least practiced one. If businesses must make the right decision for the short term without sacrificing the long term, it is of utmost importance to visualize the future in multiple scenarios around key variables that affect businesses. The frequency of evaluating these scenarios could range from monthly to weekly depending on information availability of change in key macro and micro variables. Leadership’s flexibility and willingness to course-correct operationally as new information emerges is key to success.
Crisis like these necessitate senior leadership to lead from the front as they administer and govern the short term. Such situations are also tailor-made to test the strength of middle management. Once the Daily/Weekly cadence of short term management is clear after first few meetings, top management is advised to take a backseat and empower middle management to execute the short term – but continue to own the outcome of the decisions taken. Focus of senior leadership should then shift to measure and track key variables both macro and micro and develop future-ready plans (could be multiple scenarios). It is important that relevance of each scenario is discussed and aligned during IBP meetings.
This “2 eyes” approach maximizes gains wherever the opportunity presents itself in the short term while protecting value of the business in the long term. It also ensures that decisions that are taken in short term under business compulsions which may not be value-creating in long term are course-corrected in future proactively.
Reboot New Product / Channel and Supply Chain Strategy – Management needs to be courageous and unemotional in assessing and developing opportunities in the area of new product, new channels and white spaces. This entails a comprehensive re-look at current plans and their relevance in the Post COVID world. In demand planning there is a concept of “Baseline Demand” and “Demand Building Blocks”. Baseline Demand is that portion of overall demand which has got developed over multiple years owing to continuous interventions on product portfolio, marketing & sales capabilities, route to market and historical expansion into new geographies among other external factors like evolving competition and near/fully substitutable products & services. Demand building blocks refer to the interventions planned on same parameters in the upcoming months typically extending into 0-36 months. The two come together to give us a projection of Demand plan over the IBP horizon of 0-36 months. Impact of COVID on baseline and demand building blocks will be different across industries/segments. It is key to assess the impact and develop multiple scenarios.
COVID which started off as a public health crisis now presents itself as a crisis that has for all practical purposes destroyed the “known composition” of the baseline demand. Simultaneously, it has also made the current Demand Building blocks, if not irrelevant, inconsequential in the short term. As with every challenge, an opportunity also presents itself. There is a general acceptance that in a post COVID world, not only would consumer habits change but also consumption occasions. Channel mix (Online to offline) has seen a gradual shift over the last 10 years and a faster change in the last 4 years. In the post-COVID world, as contact-less economy emerges, social distancing might become the norm rather than the exception followed during lockdowns. Reducing footfalls in big retail outlets could have an exponential reduction in the post COVID world allowing e-commerce to gain much more traction than even in the last 4 years.
Such projections of a future have a fundamental assumption that major policy interventions from Governments of all countries would shape a new trajectory of demand in existing categories and give birth to new categories/channel combinations. For e.g. Rural channel might become more attractive and important than what it is today for many businesses.
This, in our view is the single biggest opportunity for any business to seize. If businesses get this right, they will be favorably positioned for a future unlike those who could not imagine those opportunities and get caught up in only solving the short term challenge. This is where the collective wisdom of a senior leadership team would make the biggest difference.
Another noteworthy disruption due to COVID is in the area of labor availability both in the short and the long term. Markets dependent on migrant labor and businesses employing labor-intensive technologies would have to reconsider their current labor-management policies. This could also result in much faster adoption of automation in supply chain thereby reducing labor dependence.
In the long term, a key variable to consider would be government policy action in the area of promoting local manufacturing. This will result in businesses driving a more globally diversified supply chain (more of local) thereby reducing dependence on current manufacturing centers of the world. Leadership teams are expected to pursue more localization in manufacturing vs Importing from low cost – high lead time manufacturing sites. Changes in the cost structure as a result of such actions will need to be factored into the scenario plans.
All of the above would both decrease and increase supply chain complexity in the various constituents of Supply Chain. This necessitates creation of “fit for purpose” supply chain strategy. It would be insufficient to just have cost leadership in the supply chain while supporting new opportunities in the product or channel space. Rather what would stand out among supply chains would be their agility in servicing such opportunities thus providing a distinct competitive advantage.
To summarize, IBP process will need to capture the demand side opportunities and the supply side enablement along the axis of time so that resource management can happen in an efficient and timely manner. This is another dimension to focus on by Leadership teams during their monthly IBP meetings as they visualize the post COVID world.
Practice “Truth as we know it” – this is not the time to judge
IBP is successful when it is used as the process of managing the business by head of the organization who owns the P&L decisions. In the current COVID world, mistakes are bound to happen due to ambiguity, lack of timely information and inability to analyze/synthesize available facts to make informed decisions. Decisions taken with the best of wisdom/information at a certain point in time might get projected as failures in hindsight impacting top and bottom line as well as cash. Crisis times are not the time to Judge rather it is the time to get enterprise-level talent to collaborate and succeed in the short term while staying focused on carving out a bright future.
Business heads must ensure that they enable the right environment for everyone to still practice “Truth as we know it”. They must make decisions with available information in IBP process and should be courageous enough to live with the consequences of such decisions.
It is highly recommended that IBP process takes center stage in the fast-changing business environment due to COVID. It is important to deploy the “2 eyes” approach to manage the challenges of supply continuity in the short term. It is even more important to ensure that a “reboot approach” is used to imagine the “new normal” post COVID by developing multiple scenarios. Leadership needs to ensure that timely decisions are taken driven by “truth as we know it”, remain tolerant to honest mistakes and continue to put foremost focus on assessing and developing plans to seize long term opportunities.
This article has jointly written by Vivek Sarbhai, Director Customer Service & Logistics, Mondelez Middle East & Africa FZE & Manish Shakalya, Regional Director Integrated Business Planning – APAC, Zimmer Biomet.
Views expressed are authors’ personal and do not represent their organization’s views.