We have been in lockdown situation for almost a month now. The way things are shaping up, it is difficult to hazard a guess on where they are going. Are eased out restrictions of lockdown implementable? Will companies be able to start operations after April 2020? How long will businesses be shut? After the lockdown does get lifted fully, how long will it take for things to be back to pre-Covid times? What will the aftermath of this crisis be like?
While we do not have all the answers, it is clear that beyond fostering the health and well-being of employees, organisations, especially MSMEs will need to organise all resources and capital to create a rapid response survival plan. A plan centered around 1. Conserving Cash 2. Restarting operations at the earliest and keeping supply lines running with bare bone costs 3. Closely watching and responding swiftly to changing consumption signals & evolving consumer’s behaviours and 4. Spotting opportunities of getting into adjacent product lines, in upstream-downstream integration, and creating new business /service models.
Sharing my thoughts on the steps that MSMEs need to take to survive this unprecedented crisis.
Ability to organise liquidity for next 3 quarters of operations will decide whether an organisation survives or not. In addition to conserving cash, all sources of getting funds and enhancing liquidity would need to be explored — instalment-free periods from banks, use of government support packages, evaluating cost benefit of moratoriums, postponing all non-essential capex, cutting down all non-essential costs, divesting non-essential assets, deferring consulting contracts, reducing software licenses, evaluating low cost RPA and machine automations to reduce human exposure, quickly converting inventory to cash, negotiating extended payment terms with suppliers, with electricity-gas providing government bodies, leveraging opportunities by committing long term purchase contracts, initiating communication with creditors, looking at faster AR realisation, at customers paying ahead of schedule, thinking about potential new income streams etc. etc. Delay payables only of it does not bring penalties and litigations. Every item in the P&L and Balance sheet calls for meticulous scrutiny. There are no holy cows.
Given the current uncertainty, it would only be prudent to detach supply from internal sales orders. There will be temptation to build safety stock in anticipation of likely demand, However, till there is real consumption signal in sight, prioritise cash preservation over inventory buildup. Looking for consumption signals, retail/distributors inventory depletion signals and planning deliveries strictly basis these would help avoid costly maldistribution/redistribution/write offs later. Of the many levers of inventory management, ruthlessly lowering replenishment lead times and ability to make and supply in frequent small lot sizes would serve well in current circumstances in addition to gaining understanding on latency of demand between Store, Distributors and Manufacturers.
Re-evaluate change in portfolio mix: With current restrictions, coming back to full capacity would take time. In the interim, businesses would do well prioritising capacity for high margin SKUs and de-prioritising negative marginal contribution packs & SKUs with high manufacturing/ sourcing/ logistics complexity. Unless there is serious and sure risk of losing consumers, managing costs with fewer SKUs and adjusting pricing to help consumers shift from temporary discontinued packs to next closest available pack would be worth evaluating while absolutely avoiding temptation to auction high demand products or diluting quality, packaging or any other short term profiteering measures. Operationally, by uniting planning at finance, sales and operations and by jointly evaluating scenarios needing cross functional trade-offs to quickly pick and execute the one scenario that dynamically balances supply and demand will help faster recovery.
Prepare for potential changes in channel mix: With higher social distancing, improved hygiene awareness and longer period in-house stays consumer behaviours and consumption occasions will change. Demand surge in “Essentials”, increase in online deliveries, high demand, and competition in last mile logistics, higher digitisation are already visible. While demand in categories like durables, might get deferred or reduce substantially, demand of “essentials” might shift from one channel to other. For example, suppliers that were satisfying restaurants demand will see a decrease in demand for as long as restaurants remain closed, but farms and manufacturers might only see a shift in sales from restaurant packaging to consumer packaging. Watch out for demand shift between in-home and out-of-home categories, between in-store purchase to on-line purchases. Expect reduction in and shift-out to other channels, the consumption that was earlier happening in schools, offices, Malls, movie theatres, temples bus stand, railway stations and other public places.
Demand recovery might be a prolonged U-shaped recovery. Looks like it would be a limp back to normalcy. It would only be wise to plan commitments cautiously.
Estimate Inventory - upstream & downstream: Given that there was no sale for more than a month, one needs to quickly and accurately know how much inventory is at each node (with suppliers, at factory, at DCs, distributors, retailers) and is how close to expiry. Also making sure that all inventory is quickly brought within reach and (is moved) outside impacted areas at the earliest possible. Converting inventory to cash asap, eliminating all product expiry risks through redistribution or by running effective promotions.
Most companies invest in knowing Tier1 suppliers and their businesses well. However, same may not be true for Tier 2 and Tier 3 suppliers. Close to 51% of supply chain disruptions originate with Tier 2 and Tier 3 suppliers. To avoid over dependence on one supplier, organisations often keep more than one Tier 1 supplier. Multiple Tier 1 suppliers often have one common sub-supplier. Any disruption with this common supplier, impacts all Tier 1 suppliers. The need of knowing about supplier’s suppliers has got re-emphasised once more. One needs to ask, are my suppliers in hot zone/ future outbreak zone/ conflict prone zone? What is the financial risk and vulnerabilities of my key suppliers and their sub-suppliers? How quickly can supplier A ramp capacity up or down? What share of my business is critically dependent on one supplier? Are the logistics routes between Tier 2-Tier 1 suppliers operational? Are there alternate inbound logistics options? Which of the suppliers are in financial distress and needs help? Can my business survive without this supplier? Open and transparent communication with key suppliers with a mindset to “together we swim or sink” is key in current environment.
“Force majeure” clauses might get invoked in few cases. Careful handling of such situations in the true “spirit” of agreement and not in “letter” of agreement shall be key for survival.
Strategically, in medium term, one must also look at de-risking through geographic diversification, increased visibility through digital interventions and through close watch on key supplier’s financial robustness.
Managing Factory Operations:
Getting workers back to factory: Close to 25% of work force in factories is casual labor. Majority of this labor would have shifted out to rural areas. Even when the number of daily new Covid cases start to drop, there will be a sense of fear of re-spread of infection. For casual labor, it’s a tough choice between “life” and “livelihood”. Assurance around strict enforcement of social distancing norms and prevention & control protocols, provision of protective equipment like masks, gloves to all, performance of routine temperature controls and disinfection, quarantine of non-native and/or immigrant workers, temporary stay arrangements, arrangement of to-and-fro transportation, comprehensive Covid insurance are few things that would help convince labor to come to work.
Some of the ways one can look at reducing daily head counts are-
transitioning to 12 hour shifts with appropriate government approvals and involvement of unions
deferment and or reduced frequency of non-essential works
time and motion study driven elimination of nonvalue-added work
incentivised cross-skilling and efforts to flatten peak loads by spreading work through the day
The government should provide provision for organisations to place all requests for permits & passes on-line and a “single window” for speedy approval and redressal of grievances. This would free management’s bandwidth and they can concentrate on reviving operations.
Since the lockdown was sudden and immediate, it caused unprecedented logistics slowdown. Air cargo capacity has reduced by 50%. Number of shipments stuck has increased by ~7%, order delays have increased by double digit %, while ship return-to-origin has reached >200%. Shipping lines have announced multiple empty ship runs, there is congestion at ports, air freight terminals and at warehouses. There are delays in custom clearances by CHA or due to non-availability of delivery and collection service provider, road transportation has come to a screeching halt, trucks with cargo stuck on road and highways, are untraceable; closure of state and district borders has all severely limited trucking capacities. All material flow, except essentials, has stopped. This sector has probably got hit the hardest.
While there is no one solution, some of the potential way-outs could be re-rerouting of shipments, consolidating air freight to ocean freight, changing transit countries to catch “cargo-only” aircraft, constraint led multi-stop route planning, tracking and tracing truck drivers stranded on road to initiating movement. In addition to health and safety standards at warehouses, (un)loading docks, Covid health insurance cover for bottom rung operators of this sector would help immensely in getting people back to driver seat. From government side, passing benefits of low crude prices through lower diesel prices and lower checks and controls for next 2 months would ease things out substantially.
Managing Speed of response:
Setting up a central management core (emergency response) team with cross functional representation, giving them access to all information and authority to direct resources and respond quickly to dynamically changing demand-supply and regulatory signals will help organisation responding quickly to the changing needs of business. One potential way to do this could be - A dynamic 60-90-120 days revival plan made with worst case scenarios, modelling its financial impact, especially balance sheet and P&L metrics and continuously identifying and swiftly executing actionable triggers and reworking the plan based on new signals. The ask from this team is to start operations asap, keep supply line running, preserve resources and ensure survival.
Managing under expected regulatory uncertainty:
Another major challenge for organisations is the extent to which they must deal with different – and sometimes contradictory – regulatory requirements, as they attempt to resume operations. Government notifications and advisories are coming almost daily. At times, these vary at district, municipality, or state levels. Being on the ball for next few weeks, transparent communication with government on concerns, sharing potential solutions has been helpful in co-creating solutions. Government offices has been supportive on ideas that address the dual need of running businesses and ensure that the infection does not spread.
A good plan must not only respond to this crisis but also stretch organisational capabilities and resources to give an advantage over competition. Being vigilant on consumer behaviour changes, changes in demand pattern of existing categories, identifying new categories that are likely to become relevant and reviewing existing strategy in view of these potential opportunities is equally important to ensure opportunity generated by this crisis doesn’t go waste. Deliberations should be done on questions like - What should be the new product/service offering mix? What will be our right to win in the new normal post Covid? What will be the execution (Product mix-Brand-Pack-Price-channel) strategy that will differentiate us from competition? From supply chain point of view. Are existing capacities agile enough to be repurposed for emerging categories? Is resilience, responsiveness, and reconfigurability needed / represented well in the strategy? Is there merit in building stronger digital presence, creating capability or strategic partnerships for digital commerce and last-mile delivery? and more. This is also the time to build capability and get ready to drive growth in the new normal.
While there is daily news of doom and gloom, there is hope. As per latest IMF view, India is likely to grow at 1.9% this year and 7.4% next year. A concerted effort by everyone to tackle the challenges by focusing on Cash, Costs, Employee and Customer needs will go a long way in coming out of this crisis, stronger.