Debates are mounting about how to reopen the economy. The engine needs to be restarted, but if we engage too soon or wait too long, the results could be disastrous. Finding a safe and reasonable approach will get people back to work and our companies back to profitability.
We are all trying to find the balance between life and livelihood. Whether businesses reopen in the beginning of May or beyond, several factors to consider include financials; demand, inventory, and supply chain; labor and physical capacity; and continuous process improvement.
When the notion of reopening was strangely distant, we encouraged companies to use the down period wisely and address issues that daily operations routinely pushed aside due to the tempo the market afforded. Management should have been taking time to:
- Reevaluate all elements of market strategy
- Establish marketing and sales efforts to expedite the revenue rebound
- Examine organizational design and assess people in their roles
- Reassess operational processes to eliminate inefficiency and waste
- Improve financial and management reporting
- Evaluate disruption risk in the supply chain and replace/duplicate resources
- Ensure enough capital, debt, and equity existed to fuel the recovery transition
In this next phase, we must not only plan on how to reopen safely and economically, but plan for what happens if another spike occurs and causes another shutdown. We had no time to plan the first time around, but we do now.
What will my revenue and expense structure look like? Can I be profitable? If not, what are my liquidity needs in the interim until I can restore profitability? If my current liquidity is insufficient, what can I do?
When COVID-19 first impacted the economy, survival and cash preservation became primary priorities for many organizations. Businesses rushed to acknowledge the elimination of revenue, align cost structures to the new reality, and apply economic assistance from government subsidy programs and other sources. Today, with continued adherence to social distancing guidelines, the time to reopen is around the corner. Numerous challenges exist. Practical questions need to be asked. Detailed planning is required. Estimating top line revenue in the post-COVID-19 period is certainly fraught with new, potentially alien assumptions, but any cash flow forecasting must start with cash receipts predicated on an estimation of revenue.
While state governments work to reengage the economy, ultimately, it will be the consumer who determines when we are really open. Just because you opened your restaurant, movie theater or store doesn’t mean you will have any patrons. Every company must create an environment where their customers and employees feel safe. Establishing clear guidelines and communicating these guidelines to the public are essential. However, what are the costs associated with these guidelines? Are there increased sanitation costs? In a consumer environment, do you need to install barriers to force separation? Regardless of the setting, have you included any virtual system costs in your estimates?
Liquidity remains the key to survival. Diligent financial management is critical, requiring multiple scenarios to be modelled to estimate whether enough cash exists or the parameters of any cash need. Forecasting demand is challenging in normal times but will be acutely difficult now. All levers need to be pulled to maximize revenue in a controlled environment with costs and expenses carefully managed. And yet, the prospect of continued losses is significant as revenues are sub-optimized, personnel are reemployed, occupancy costs resume and sources of liquidity in the coronavirus environment are limited. As we reopen, the challenges are numerous.
Even the best efforts may be insufficient for businesses, depending on their initial response to the pandemic as well as the duration they’ve been closed with reduced revenue and access to cash reserves, borrowing and/or equity support.
Of course, filing for bankruptcy protection should be considered when strategically beneficial or necessary. However, given the costs of a proceeding, a company needs to consider the objectives of any filing. Can the same objectives be achieved outside of a court proceeding? What is the company’s exit strategy?
Due to COVID-19 we’re beginning to see the dam break on retail and restaurant industry filings. The travel and hospitality industries will be quick to follow. But these are unique times, and the court process may be less sure. Courts are struggling to balance the rights of stakeholders under unusual pandemic circumstances. Timelines and rulings are less reliable today. But it takes two to tango, and while all parties in the capital structure are stressed by COVID-19, their motivations and objectives are not always the same. Hopefully, maintaining a viable business and continuing to employ personnel rises to the top of all stakeholders’ list.
Demand, Inventory, and Supply Chain
With demand an unknown, managing inventory levels and the supply chain will be critical.
KEY QUESTIONS: Are you making new products? How long do you plan to make these new products? Will there be a demand backlog? When will demand falloff? Will your products and services be considered a luxury that will not be procured as people conserve cash? Should we be utilizing a different forecasting model since demand is an unknown (as with some new offerings)? When will you reopen? How long will this state-of-business last? Is the product or service deemed essential with pent-up demand? If store-based, is there a limitation on customer traffic because of social-distancing guidelines? What will the rate of return be for customer sales and over what period? How will sales be impacted if a resurgence of the virus occurs later this year (or anytime in the future)?
Past demand assumptions might provide a foundation, but the environment has changed, at least temporarily, and different forecasting models will be required. New variables need to be explored, historic variables require modification or elimination, and the interaction between these components needs to be carefully studied over a condensed timeline. Business intelligence will be fluid, and any historic “guessing” practices will need to be abandoned.
Businesses have entered various markets to meet health and safety demands through physical and virtual delivery. The business landscape is patched together like Frankenstein’s monster and its behavior elicits fascination by some and dread for others. Thus, a waiting period will be required for market demand data to become level. We need to see how this “monster” behaves. While he stumbles through our village, we need to act. For example, economic order quantities (EOQs) may need to be redefined along with the fiscal year, treating July 2020 through December 2020 as a separate, isolated and unique time period.
KEY QUESTIONS: Do you have inventory from before the shutdown? How fast can you replenish inventory? What are the right quantities to carry with unknown demand?
The ability to restart or ramp up your operations is improved if on-hand inventory is useful and/or marketable. Many companies held excess inventory prior to the virus’ interruption of the supply chain. This led to “I told you so” speeches from purchasing agents and inventory managers who have traditionally operated under the “Just In Case” mentality instead of “Just In Time.” What was true yesterday is true today: having excessive amounts of inventory for a low-probability event is not a sustainable business practice, especially during times when cash is king.
The practice of building inventory to a traditional, simplistic forecast was highly questionable before this viral shutdown and will not work in the current environment. Replenishment-pull systems must be established with underlying statistical tools incorporating new and existing variables in a dynamic manner. The models should be adapted and refined over time as expected, but in much shorter iterative durations. This will reduce inventory levels to preserve cash — an imperative initiative in today’s economy. Safety stock, reorder points, and reorder quantities must be measured, studied, and adjusted perpetually until variations are clearly understood and applied. Agile practices like sprint meetings combined with tailored task boards may help launch and maintain these systems. This requires in-depth understanding and experience. Companies will need to hire additional full-time expert resources to guide them through this journey or contract expert consultants to establish sustainable solutions in the immediate future.
KEY QUESTIONS: Are your suppliers in states that have not reopened yet? Do you get supplies from overseas? Is your organization capable of establishing new relationships? Some suppliers may have converted their production capabilities to produce essential products to fight the virus – will they be able (or are they willing) to convert back?
Naturally, a company’s supply chain(s) must recover in order to obtain finished or raw material inventory and to deliver products or services. Evaluating your suppliers’ ability to provide continuous information and materials is a new requirement for basic operations, but not a new practice. Supplier health and safety risks, quality control, and lead time are a few of the critical characteristics to assess. New suppliers may be required to replace those without the ability to reopen or survive the ramp-up period. While this increases competition and opportunity, it also increases risk.
Some suppliers have converted their production capabilities to produce essential goods to combat the coronavirus. This is helpful if the business focuses on these products. Otherwise, this could diminish a suppliers’ capability to deliver the material you require. Working closely with such suppliers or those who have remained closed during this period was a best practice prior to sheltering in place. Now it is essential.
Localized horizontal integration has become a critical task. Creating partnerships with the domestic supply base will be key to improving quality and reducing lead times, and this also will enable a more direct physical tie between partner organizations. We may see a transition from a global supply chain to geographically or politically defined supply “pods” consisting of closely integrated, synergistic business units composed of multiple companies. At a minimum, re-establishing a self-sufficient supply chain within the U.S. or North America will be a primary focus, and the companies that do it well will win.
A key point to remember is this: things are going to be erratic for a while. Measuring, analyzing, and understanding the short- and long-term variation will be delineating activities for those that succeed. We need to synchronize with the new pandemic supply chain, normalize as the threat subsides, and be prepared for any similar scenarios in the future.
Labor and Physical Capacity
While we wait for the economy to reopen, we must address whether we have the people and the capacity to meet the needs of our businesses. Many companies furloughed their people while others continued to pay their employees. In either case, there is no guarantee that your employees will come back to work just because you are now open for business.
KEY QUESTIONS: Were you able to continue paying your personnel or do you now need to search for new hires? Do you need to reduce your headcount? Will you have enough skilled labor to meet the new demand? Do you have training materials to be able to get new hires up to speed quickly? Are prior employees available to return? Have workplace routines and guidelines been developed to protect the safety of employees and customers? Are employees willing to go back to work? Is the available skilled/experienced labor sufficient to meet new demand or customer traffic?
Businesses with the required cash and benevolence to continue employing its personnel have its workforce in place. However, many businesses had to lay off its workforce, furlough employees, and/or implement salary reductions. The level of employee reengagement must be paired with the ability to effectively and safely operate and the capability to estimate demand.
Ultimately, employees will determine whether they are willing to go back to work. To alleviate concerns, companies must learn new ways to reduce onsite, virtual, and total labor requirements overall. Lean Six Sigma provides a variety of methods and tools for achieving this goal, including value analysis, Total Productive Maintenance (TPM), quick changeover, Kaizen, and capability analysis.
KEY QUESTIONS: Can I still produce the quantities that I produced before? Is it physically possible to increase the length of our production lines to allow for proper separation? Can I produce the same amount with fewer people?
Let’s say your customer demand is high, you have the supplies you need, and employees have returned to work. Do you have the required physical capacity? Many businesses are transitioning from their traditional workspaces to more hygienic environments with increased spacing and physical barriers between employees. Naturally, these facilities are not going to be able to house the same number of resources as before, and thus, without any other change, capacity will be diminished.
Employers will need to decide whether they will keep the workspace the same, change the workspace and accept reduced capacity, or change the workplace after applying process improvement methods (increasing capacity without increasing staffing or maintaining capacity with reduced staff).
The first option is viable but is saddled with potential health and safety risks. The second option is viable as well, but only in the immediate future. It may not meet the needs of the new economy which is yet to be realized. The third option is the best for practically every organization. By identifying and eliminating waste from your operations, cycle times will drop, employees and customers will be more satisfied, and quality will improve.
Continuous Process Improvement
KEY QUESTIONS: What are your core operational processes? What are your core administrative processes? How are your processes performing? What are their potential capabilities? Are your processes reliable? Do they give you maximum flexibility? Do your processes need to change is the new environment?
Continuous process improvement remains a constant requirement and best practice in all industries. These methodologies place the focus on your customers and improve quality, responsiveness, flexibility, and efficiency while providing financial benefits as well.
Reducing overall cycle time will be critical. Implementation of tools such as single-piece flow and replenishment systems will be critical to maintaining proper inventory levels and reducing cash requirements. Training materials and visual workplaces will help overcome the perceived need for additional personnel. The Lean Six Sigma tools are more imperative now than ever before. Proper implementation will reduce costs, reduce cycle time, increase flexibility, reduce inventory requirements, free up floor space, and reduce cash needs.
Examples of Lean Six Sigma in Action
Logistics: At a third-party reverse logistics company in the apparel industry, we applied process improvement solutions including work cell design, Kanban systems, and Visual Management to a traditional but incredibly diverse product sorting line. Within two weeks, the labor requirements were reduced by 44% while output was increased by over 100% for each of four work centers. It is also important to note that no employees were let go as a result of these efforts. This allowed the company to reapply the labor and open three new work centers without increasing labor costs.
Health and Beauty Product Manufacturing: We worked with a health and beauty product contract manufacturer to reduce labor requirements on a primary production line. Leveraging detailed scientific process analysis techniques and proven facilitation methods, we were able to reduce the headcount from 20 personnel down to 12 (40% reduction) while increasing throughput and reducing defects.
Food and Beverage: While leading an enterprise-wide transformation program for an international seafood processing firm (including the divestment of obsolete properties), we designed a system-wide Lean Six Sigma deployment that yielded over $4.22M in annual, recurring savings (this figure does not include divestment revenues). Our efforts included (multiple) facility evaluations, redesign, and execution management, process redesign (production, logistics, and administration), and the creation and delivery of targeted training.
We’ve been through economic upheaval before, and we’ve thrived through major conflicts, recessions and previous viral outbreaks. Many intelligent decisions must be made in an extremely short time period for your business to succeed. Consider the perspectives, questions, example and case studies in this article as you move forward and try to foster a flexible, methodical, disciplined and scientific approach for renewed success.