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Manufacturing & Distribution

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What is the “new normal” going to look like for the American manufacturing industry? This question has been on everybody’s mind in recent weeks and will be contemplated, and perhaps remain unanswered, for many months to come. In the meantime, as our country begins to reopen and starts down the road to recovery, manufacturers will need to make critical decisions that will determine how they emerge from the COVID-19 crisis. Executives are facing difficult decisions around cash management, workforce, capital allocation, and investment in innovation. Which businesses, product lines or service offerings warrant continued investments and which ones do not?

In a period of crisis with such uncertainty, decision-making has never been more challenging. However, these challenges can be overcome. We are seeing many organizations not only survive, but thrive, during the crisis by “manufacturing” opportunities. In many cases, these items have been on board agendas for some time, but immediate action was made essential for survival by the current environment (for example, diversifying distribution, enhancing digital marketing platforms, and outsourcing or automating certain repetitive processes). Whereas, many new opportunities have been created through collaborative decision-making as companies have sought to “pivot” their businesses in order to meet the high demands of the crisis (for example, manufacturing and distributing ventilators, hand sanitizer, PPE and field hospital rooms). We have also seen companies innovate by building relationships with non-traditional business partners and industries. For example, there has been a “blurring” of the lines between the healthcare, technology, and manufacturing sectors.

To succeed through the pandemic, American manufacturers will require collaboration, structure and innovative decision-making within their organizations. It all starts with asking the right questions. Instead of “what is the new normal” going to look like, should businesses be asking “how should my new normal look in order for my business to thrive during the crisis and beyond”?

Remember before the COVID-19 pandemic (just a few months ago), many businesses were already asking these types of questions; to name a few, they were asking about digital transformation, the customer experience, robotic process automation, data and predictive analytics, and corporate responsibility and sustainability. Manufacturers who were not asking these questions before should be asking them now.

The Business Roundtable (BRT), an association of close to 200 CEOs of major US corporations, acknowledged the importance of aligning the primary objective of a firm with the long-term value drivers relevant to all stakeholders. On Aug. 19, 2019, the BRT formally adopted a new 'Statement of Purpose of the Corporation (SPC).' In its proclamation, the BRT committed corporate America to creating value for all stakeholders by adopting a five-fold mission: to deliver value to customers, to invest in employees, to deal fairly and ethically with suppliers, to support the communities in which we work, and to generate long-term value for shareholders . Even during challenging times, American manufacturers should not lose sight of the BRT’s SPC. Although urgency and decisiveness are needed, organizations cannot lose track of the long-term implications that each decision will have on their business, culture, mission, and society.
This article presents 5 tactics to help American manufacturers better position themselves to ask the right questions, make timely, well-informed decisions, and ultimately to position themselves stronger during and after the crisis. These tactics are based on our observations from businesses that have been successful before and through the crisis.

1. Establish a governance structure, which includes a Special Purpose Project Management Officer (PMO). To make quick, thoughtful decisions that are in the best interests of the company, organizations should establish a “crisis management committee” comprised of leaders across the organization. A cross-functional team will facilitate information gathering, knowledge sharing and “horizontal” decision-making. A horizontal approach positions organizations to make decisions across multiple dimensions (distribution channels, geographies, product lines, and customers) and identify those dimensions that are generating cash and profit, and those that are not (also see tactic 2). In a period of supply chain disruptions and demand shocks the industry has never seen before, where timely decisions are needed around resource allocation and prioritization, manufacturers will need to assemble a team of leaders with insights across the organization that are empowered to act. This may represent a shift in thinking for many manufacturers that are used to making decisions “vertically”.

The crisis management committee will differ depending on the size of the organization. For smaller manufacturers, the current executive team may be able to serve this role. Meanwhile, larger manufacturers may need to establishing a Special Purpose PMO that works closely with the executive team. The committee should be representative of the entire organization and include executives from sales, supply chain, product management, finance and information technology.

The effectiveness of the crisis management committee will be driven by its mandate and communication protocols. The committee’s mandate, with the oversight of the board (and executive leadership team, if separate from the committee), is to reassess the company’s vision, mission and values and to establish the company’s strategic plan through the pandemic; with a long-term perspective on recovery and corporate sustainability. The execution involves establishing and monitoring key performance indicators, prioritizing projects and tracking their progress, and allocating (capital, financial and human) resources. The crisis management committee should meet frequently and have regular interactions with the board. Similarly, Boards may need to adjust their quarterly meeting schedules to a more frequent cadence (monthly meetings).

2. Identify profit drivers to maximize recovery. In these unprecedented times, it will be important that management’s decision-making process is based on objective, detailed data. In the current environment, an aggregate view of gross-margin by product, geography, or some other dimension, with the objective of growing the top-line across all customers may no longer be the right approach, especially for manufacturers with multiple segments. Markets are fragmented, and costs and profits can vary significantly by customer or product depending on customer relationships and supply chain integration. In this market, manufacturers should consider tracking data at a granular (invoice) level to arrive at a true profit that can be analyzed across multiple dimensions; in other words, mapping profits to specific customer segments, products and distribution channels, and reporting across these variables. The ability to identify and evaluate the company’s profit drivers will enable the crisis management committee (see first tactic) to set prioritization and resource allocation strategies around the manufacturer’s segments, products and channels, and perhaps even decide whether the company must restructure in order to be successful in the long-term.

These are some of the questions that management should be asking themselves:

  • Do we have data at a level of detail to effectively evaluate what combination of customers, products and services will be the most profitable going forward?
  • Have we been measuring and managing profit at a level that allows us to make the best decisions possible for the organization (both in the short-term in response to the crisis and in the long-term in anticipation of recovery)?
  • What customers are the most profitable? Which customer relationships should we prioritize?
  • Which product offerings are most profitable? Where are my greatest risks associated with supply chain disruptions? What third-party suppliers and vendors should we prioritize?
  • What are the impacts of taxes and tariffs on my operations?
  • Should we close facilities or relocate operations?

Prior to the COVID-19 Pandemic, studies have shown that up to 30% of a company’s products or customers may be unprofitable. A quick identification of less profitable business will allow a company to take short term steps to reduce losses and negative cash flow from these identified operations.

3. Identify sources of waste for business process optimization. Manufacturers should quickly identify and immediately address sources of waste. The “Waste Wheel” is a tool that can be used by the crisis management committee or executive team to execute the company’s strategy.

  • Inventory – is there expiring inventory that can be sold at a reduced price or donated?
  • Stagnation – is there idle equipment or employees that can be redeployed?
  • Over-processing – have “on-the-fly” process changes added unnecessary steps that can be eliminated?
  • Overproduction – is the right mix of products or services still being delivered?
  • Defects – has a reduction in operations increased process failures that require better documented standardized procedures and cross training?
  • Motion – has social distancing or working remotely caused excessive employee movements that require better physical and/or electronic workspaces?
  • Transportation – has working remotely added excessive movements of information (emails) that require better collaboration tools?
  • Untapped potential – are employees and their collective problem-solving skills being utilized?

In recent years, many manufacturers began to re-evaluate their manual and repetitive processes to identify opportunities for performance improvement and cost savings through the use of automation, artificial intelligence, shared services, and outsourcing. In the last few months, this has become a necessity for many organizations. Manufacturers that have yet to optimize their business processes, should consider this a priority.

4. Establish an agile scenario planning and forecasting process. During this uncertain period where forecasts beyond 13 weeks are nearly impossible to predict, scenario planning can be a key risk management tool for the crisis management committee and executive team. Rather than spend time estimating EBITDA, cash flows or other key measures over a longer time horizon when forecasts are at best an “educated guess”, manufacturers should focus their efforts on developing reasonable scenarios for their businesses. For example, consider three scenarios based on the anticipated length of the pandemic : 9-months, 1-year, or 18-months? Given these base scenarios and other outside factors, an organization can then devise additional scenarios based on how the economic recovery may look: v-shaped, u-shaped, or w-shaped. Management then develops business strategies under each of these scenarios, so that it is prepared to execute once the higher likelihood of a particular scenario occurring becomes apparent. The crisis management committee (or similar) should establish parameters that indicate which scenario(s) becomes more likely to occur over time. The crisis management committee continually monitors these parameters and adjusts its action plans accordingly. Scenario analysis is a tool that mitigates forecast model risk in a period of unpredictability and volatility. A longer-term scenario planning process complemented by shorter-term (13-week) cash flow forecasting and modeling could be a powerful combination for manufacturers in this environment.

5. Develop a resource recovery and workforce development plan. Employee safety should come first as organizations develop and implement their resource recovery plans. As manufacturers begin to reopen and employees return to offices and facilities, the management team’s communication approach will determine the level of employee morale and engagement. It will be critical for management to deliver a transparent, genuine message around the company’s recovery plan. Management should also give their teams a mechanism to provide feedback. Each individual has their own emotions about the pandemic, so understanding how they feel about returning to work in the new environment is an important step to maintaining trust with the staff, making sure they feel safe, and ensuring that they can be productive. Management should develop written safety and health protocols, communicate these to all employees, and provide each employee with an opportunity to provide confidential feedback given their personal situation.

Establishing a “development culture” is another key element to a successful resource recovery and workforce development plan. These are some of the questions that management should be asking:

• In a remote work environment, what strategies, protocols and technology platforms should our teams employ to remain connected, to support appropriate oversight of junior staff, and to provide an effective on-the-job training environment?
• With an increased reliance on technology to operate, will our less technically skilled employees require training to stay relevant?
• Should we modify our training programs to reach remote employees?

During these difficult times, employee and community engagement are essential. Bringing an organization’s staff together to make a difference in the communities they serve can be a wonderful boost to team morale and employee engagement. This may require some creative thinking with social distancing protocols, but community-impact events are happening, teams are having fun, and businesses are making a significant difference at a time when it is needed most.

As manufacturers look towards recovery, they should not lose sight of two of the goals established by the BRT: to invest in employees and to support the communities in which we work. Businesses with this mind-set will be more successful over the long-term.

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