Leg two: Mitigation in action
Companies are urgently powering through the risks and operations issues they identified in the triage leg to protect their positions as best they can. The issues and remediations they are addressing differ widely across sectors. Yet, nearly all businesses are working in highly manual “situation-room” mode: striving to match demand to available supply through tight spend controls that are bounded by CFO-defined cash flow and liquidity management mandates.
These companies are working to eliminate the right costs, in line with “no regrets” criteria, rather than issuing blanket cost-reduction percentage targets based on the supply chain sub-function. Here, they are getting deeper into structural costs and looking to unbound costs tied to, for example, minimum-order quantities or volumes of vendor-managed inventory. Other common mitigation actions include documenting extraordinary supply chain expenses by category (for insurance or tax relief purposes) and understanding and managing contractual obligations to suppliers, customers and leaseholders.
For those facing decreased demand, the mitigation leg also requires them to determine how to thoughtfully idle or shut down supply lines and capacity. For example, many companies are increasing their communications with suppliers, customers and workforce to jointly solve supply challenges. They are collaborating more than ever before on cross-value-chain cash flow issues in order to understand liquidity needs and to strengthen relationships — now and during the recovery.
The duration of this second leg will depend on the humanitarian impact of the COVID-19 virus, the efforts to contain the spread, and the level of relief provided from cash positions and government programs. Some see this leg as a short-term situation, while others expect it to last several months. This stage will test financial and operations resiliency in ways that the current generation of operations leaders have never experienced. The steps they take to protect their business needs, relative to their value-chain partners’ needs, will be remembered for a long time.
Leg three: Planning for recovery
Information from medical professionals and observations from the first countries impacted by COVID-19 offer hopeful signs that there will be an end to this outbreak and that a third leg, recovery, will occur at some point in 2020. The timing remains hard to forecast by sector and sub-sector, however.
What is clear is that many businesses are now creating teams to model recovery scenarios and create alternate supply chain action plans and playbooks to ensure they have the right options to match supply and demand during the recovery and ramp-up stages. Many companies are also building and pressure-testing such scenarios and governance models, even as mitigation work continues.
Those currently experiencing decreased demand should consider actions such as the following:
- Create time-based recovery scenarios. These should establish where primary sources need to be “seed-supported” to get going again, and where secondary sources are needed to mitigate any sustained issues with primary sources of supply or capacity (across materials, manufacturing, logistics and skilled workers).
- Think about new products and/or service offerings that were in the queue prior to the COVID-19 outbreak and address core questions, such as:
- Should they still be introduced?
- Should they or their fulfillment/service models be modified before being introduced?
- Would the commercial and risk profile benefit from a change in, for example, the location of the value chain, the planned volume ramp, or the pricing or marketing approach?
- Should they still be introduced?
- Determine whether borrowings made during the mitigation leg require sustained medium-term changes in cash management policy for supply days on hand or changes to payable or receivable terms.
- Understand potential changes to the competitor base given the rise in distressed assets and the anticipated increase in M&A and privatization actions brought on by valuation changes.
- Redeploy workers to the highest-value actions in order to support business continuity and attempt to get ahead of the recovery curve.
Returning to somewhat normal operations
Some businesses are anticipating a fairly quick recovery once the volume of new virus cases slows down significantly and remains low. There is some evidence of this type of scenario across several countries that were first impacted by COVID-19. A return to somewhat normal operations could move relatively quickly in market segments where customers were not too severely impacted and where there is pent-up demand. But, given that many customers are in financial distress, the initial rise in demand will likely focus on basic needs and not a full set of offerings or features. Standard products and services may be disproportionately in higher demand than more optional and expensive offerings.
In addition, whole segments of past customers may no longer be in the market due to longer-term financial hardship. This will likely apply to both consumer and industrial customers to some degree, and it will be a factor in ramp-up planning. The speed at which the virus becomes contained and the timing of the recovery ramp will depend on the level of global and local efforts taken to mitigate its spread, which is not in the control of individual businesses.
To ensure that this leg of the race is run successfully, companies should prepare a clear, comprehensive plan that considers the best, worst and expected case ramp-up, as well as any likely change in the demand and customer mix. They should also set up the inevitable restructuring work to take full advantage of opportunities that occur as the recovery wraps up.
Leg four: Anchoring lessons learned for new ways of operating
The fourth leg, called the anchor, is a planning and action stage that integrates lessons learned from the first three legs, as well as a view of the new post-pandemic landscape that was experienced during the recovery leg. The anchor leg is the smart part of the race, which blends learning from the prior legs with available capabilities and newfound positioning. During this stage, businesses will consider the “how” and “where” of their operations in order to be fit for future growth and more resilient to deal with sudden, wide-scale operating risks.
To prepare for the anchor leg, companies are spending time now documenting what caught them off guard with COVID-19, where they were vulnerable, and what the new regulatory environment might look like when governments process lessons learned to protect citizen health and jobs. Businesses are already discussing what may be long-term, if not permanent, changes to how they will operate, how their competitive landscape will line up, the offers that make sense and the customers on which they plan to grow. The operations-related work in this leg will likely include the following:
- Rethink operating models, such as offering self-serve models versus need-to-have on-site service delivery and installation, the use of web meetings in lieu of travel to run projects and taking a different approach to second sourcing.
- Model where value is added under new weightings for supply assurance, cost management and other risks exposed in this crisis. For example, be able to assemble some supply in more than one location and have alternate supply location options.
- Improve value chain visibility, risk awareness and scenario planning tools as part of the overall contingency planning toolkit. This could include a calendar of events for pulse checks and dry runs, along with the roles and responsibilities for conducting this work and making decisions to manage any actualized risk.
- Evaluate the existing blend of sourced versus in-sourced value chain competencies (e.g., purchasing, distribution) in light of lessons learned, such as early visibility into supply chain disruptions and lack of alternate supplies.
- Critically review the clarity, consistency and comprehensiveness of terms across value chain partners, with particular emphasis on most-favored clauses, “force majeure,” minimum-order quantities, channel partner returns, customer returns and other terms.
- Brainstorm and implement innovative ways to mitigate the value chain risks that manifested in this crisis. These include instituting deeper visibility into suppliers’ vulnerabilities, creating coherence in supply chain service terms, cross-training staff, significantly increasing the level of automated workflows, and modifying leasing/subleasing models of capital equipment used in as-a-service offerings.
Smart businesses that use the relay race approach to work through the COVID-19 crisis have a good opportunity to position their operations to be less vulnerable and more resilient and competitive as they work through their operations-related actions for the balance of 2020.