One of the biggest revelations of the coronavirus crisis is how so many small- and mid-size businesses live a hand-to-mouth existence. We’ve seen major retailers and smaller companies file for bankruptcy, even if they had never before reported a zero-revenue week.
That’s how vital cash is right now. Maintaining free cash flow and respectable output is the universal strategy for businesses as they wait for stay-at-home orders to lift. But even if everything were to open tomorrow, most companies would not be prepared to meet the surge of customer demand that would follow.
Unlimited customer demand might sound like a great thing, but trying to serve customers on Day One like it’s an iPhone launch is a recipe for chaos. To avoid getting swept away by the turmoil and harming your bottom-line — or bankrupting your business — you’ll have to limit sales based on your capacity to fulfill them.
Surviving the reopening is no small feat, but the task that follows it is infinitely more tricky: refocusing your supply chain to bounce back from the disruption.
Reopen at Pace
According to a recent survey by the Institute for Supply Chain Management, more than 80% of businesses expect — or have already experienced — supply chain disruptions due to COVID-19.
Additionally, more than 60% of those survey respondents said they had already experienced sudden delays in receiving orders from China — and many of them don’t have a contingency plan to deal with disruptions.
It will be difficult for companies to go back to business as usual after this kind of chaos. Fortunately, some strategies can help mitigate the loss of activity in your supply chain and prepare for the reopening:
1. Identify constraints. It should go without saying that you’re not ready to reopen if you haven’t taken time to evaluate your constraints and where your bottleneck should be. In this sense, unprepared means you can expect delays in meeting customer orders, and thus, profitability.
By design, your bottleneck will depend on potential delays that can happen due to people, processes and technology. You may have a bottleneck when workers don’t show up to the plant, for instance, or you might not be able to manufacture based on targets. Processes are the foundation of inventory production, forecasting and management. As a result, it’s important to identify which processes can make the biggest impact when they fail to move as expected.
It’s physically impossible to create more output than your biggest process bottleneck, so your entire reopening strategy should be based on your capacity to meet demand. Technology allows you to visualize bottlenecks in real time — or where they could be — and then helps you to prepare more effectively.
2. Liquidate by converting excess inventory to cash. The Achilles’ heel of most businesses after the COVID-19 pandemic will likely be a desire to hoard inventory to meet demand. However, this will only tie up your free cash flow and cause you to overproduce goods in anticipation of noncommitted sales.
No business will return with more cash than it had before the pandemic. For the time being, cash is more valuable than excess inventory — so liquidate the excess responsibly.
3. Reset customer expectations on delivery schedules. Customer orders will skyrocket as businesses reopen, pushing your business to fulfill the 90-day backlog of pending deliveries. However, you want to avoid the business version of the toilet paper gold rush by making it clear what’s manageable and what you can deliver on time.
The recovery is going to be a crawl, walk and run back to your pre-pandemic production levels. Your margins depend on your customers’ understanding of this reality — and when they start spending again.
4. Simplify your product offerings for now. One key strategy your business has complete control over is the complexity of your product line. Taiichi Ohno, one of the founders of lean manufacturing, proved that single-piece flow is often the ideal place to start. If you can, offer just one or a few products that will make a profit fast.
Pinpoint the biggest profit-makers in your point-of-sale and ERP systems, or look at your order receipts, and then commit to only offering the most predictable and reliable products until the disruption has passed.
5. Streamline your supplier-to-customer cycles. One of the best reasons to simplify your product offerings is because post-pandemic life will be a game of lead times. Products with the fastest conversion cycles, from supplier to customer, will help you rebuild your business’ cash flow faster — and with much less risk — than higher-margin specialty orders. Even if you have extra warehouse space, don’t overleverage yourself.
Remember, all operations must prioritize cash flow and ramped-up order fulfillment. Putting bulk order cost savings before cash flow will essentially kill this strategy. When you eventually build up cash flow, you can once again offer “on-demand” orders that take longer to churn out.
6. Focus on meeting demand rather than forecasts. With a focus on cash flow before growth, it’s crucial to promote a make-to-order strategy whenever possible. This is difficult, as the instinct is to buy products in bulk to meet expected customer demands. However, remember that more than 40 million Americans have filed for unemployment — they won’t spend according to months-old forecasts.
A make-to-order strategy that stems from actual demand will be less risky for your business. It will also allow you to collect cash fast enough to ramp up production in a safer, more sustainable way — especially if you can obtain cash upfront or on delivery.
7. Minimize process changeover. The last thing businesses should try right now is to take on several different types of orders, each with different processes. Your bottleneck is your limiting step, and more process changeovers mean more work and more strain on that bottleneck and your resources. This creates absolute chaos, and solving the problem is the holy grail of operations management.
The concept of critical chain project management, made famous by Eliyahu Goldratt, provides a simple method to solve that problem (in theory). Basically, plan around the resources required to execute. One way to do this is with machine learning, which can be used to leverage data and determine the right product mix, lead times and setups. Apply this to your post-pandemic supply chain management to reopen successfully.
8. Leverage AI-guided tech for new decision-making. On the topic of machine learning and AI, let’s clarify that post-pandemic supply chain management should not be about efficiency. Your entire strategy should operate in terms of overall effectiveness rather than “squeezing out output.” Therefore, AI and machine learning should improve process flow instead of trying to find process anomalies and defects.
As you increase production flow, use AI and machine learning to ensure you have exactly what you need to maintain output, increase cash on hand and avoid jeopardizing sustainable profitability.
So far this year, COVID-19 has wreaked havoc on businesses, supply chains and the economy at large. As businesses reopen, they face the logistical nightmare of mitigating the loss of productivity while returning to business as usual. With these strategies, you can get your supply chain ready for the chaos to come — with plenty of cash on hand to meet demand.
Ali Hasan R. is co-founder and CEO of ThroughPut, an AI supply-chain software company.
Timely, incisive articles delivered directly to your inbox.