Boxes on a conveyer belt and supply chain logistics

Think of an idle Tuesday evening in your household. No plans for dinner that night, other than no one in your household will be doing the cooking. With the swipe of an app and a few taps, you can have the restaurant dinner of your choice delivered in minutes. Same goes for groceries, household items and apparel… think it, order it, get it.

As a species, especially inhabitants of metropolitan areas, we are fully conditioned to a life of immediacy, backed by an astonishing array of product options and nearly instant gratification. As a consumer, this is near-utopia: (almost) anything I could possibly want, delivered almost immediately.

This same expectation we carry as consumers has redefined the expectations of business for supply chains that deliver with similar responsiveness, speed, accuracy and gratification that we experience as consumers.

So when a major supply chain disruption event occurs, such as that unleashed by the COVID-19 pandemic, it provides companies an opportunity to think about creating new sources of revenue, refining their cost structure or maintaining growth. Companies can generate new revenue through short-term pivots, new product development, or new business partnerships. Companies can adjust their cost structure through product rationalization and enterprise-wide Dynamic Costing™ initiatives.

Pivoting through disruption

In the early weeks of the pandemic, many manufacturers pivoted to make products in high demand: automakers started making personal protective equipment (PPE); beverage manufacturers started making hand sanitizer. Companies also looked for partnership or acquisition opportunities that arose as they dealt with issues within their supply chain. A supply chain problem for Company A became a consolidation or acquisition opportunity for Company B, as well as a new revenue source.

Companies that shifted to making pandemic-related products like PPE or hand sanitizer were being opportunistic, leveraging existing production and manufacturing capabilities without incurring major capital investments.

New product development

Companies are continuing to look for ways to create value by creating new sources of revenue outside their traditional channels. A prime example of this is the auto industry. As the pandemic settled in, auto manufacturers could project sales dropping in 2020 from 16 million units to only 12 to 13 million units. Many auto manufacturers immediately shifted a percentage of their research and development (R&D) dollars to electric vehicle (EV) production. Since automakers had already forecasted lower sales of internal combustion engine vehicles for five to 10 years in the future, this shift just accelerated their EV rollout plans. They will take what sales they can get on internal combustion engine (ICE) cars now, but focus on faster EV development for the (very near) future.   

However, traditional carmakers are competing with smaller, often nimbler, companies like Tesla, Arrivals, Rivian and Nicolas that are already producing EV products for the U.S. market. These smaller companies have an advantage in that they are not hampered by legacy costs that can create barriers to more quickly bringing EV powertrain technology to market.

Looking across the entire business landscape, many companies fall in the middle: neither a larger legacy company with cash on hand and large R&D budgets, nor a small, more agile organization. To remain competitive, let alone survive, current and future market demand requires such companies to streamline their product offerings and also to develop strategic relationships that create opportunities with a multiplying effect. Many of these companies are quickly learning about product rationalization, intelligent sourcing, Dynamic Costing™ and strategic supply chains to help transform their businesses to sustain and grow.

Product rationalization

In pre-pandemic times, a nonrationalized – if not bloated – product portfolio might have been less of a concern for many organizations. Companies could more easily carry inventory of products that sold infrequently, but which were available when customers requested. During the pandemic, companies also discovered that many customers reduced purchases of formerly best-selling products and shifted demand to products that had previously not been best sellers in pre-pandemic times.

With increasing pressures on the supply chain – both in connection with and unrelated to the pandemic – companies with a broad product portfolio found it more difficult to support such a wide array of products to market. The result: companies have responded with an increased focus on product rationalization, shifting to a stable supply chain for their best-selling products, and possibly eliminating products altogether. If companies can survive without sales of certain products, they save on the cost and complexity of having every product available at all times.

Elimination of products may include selling an entire business unit to a competitor, although a company will not get much in return selling such an asset at a discount. Sophisticated buyers may recognize that the likely reason for the sale is due to a softer market for that business unit’s products, and then price enterprise value accordingly. Nevertheless, it is one of the viable levers employed by business leaders to shed costs and extract value from the business under shifting demand scenarios. 

As companies shift their product mix, they have to carefully monitor customer expectations as a result. This requires a balanced view of inventory management to ensure the right mix of product is available when, how and where the customer expects it. This organizational capability and maturity gap has been especially noticeable nearly one year into the COVID-19 pandemic, where many manufacturers and distributors across multiple industry sectors routinely fail to secure inventory to fulfill client orders. Due to such gaps in visibility and anticipatory performance, they struggle to manage their customers’ expectations.

The data is clear: the negative effects of order cancellations, restocking fees, lost revenue and reputational damage can be significant and, at volume, can add up to lasting damage to a company’s ability to thrive in their chosen market segment. This visibility and anticipatory capability is a repairable problem as we have noted here.

Life cycle of products

The pandemic has driven companies to consider the life cycle of their products beyond the immediate consumer or end-user of their product. This has been an opportunity for companies with products that have entered the mature stage of a product life cycle to extend the timeline and the dimension of their products. This strategic mindset isn’t important just in times of economic upheaval like the pandemic, but is part of the DNA of successful companies that have weathered decades of economic cycles and changing customer tastes.

Nintendo is an example of a company constantly re-thinking its markets and products. The company’s original business model at its founding in 1889 was to produce hand-painted Hanafuda cards – used in a traditional card game in Japan. Over several decades, it moved from a company that produced playing cards to one that produced the video game Pong, electronic games for arcades, handheld game consoles and game consoles for TV. The company’s culture is one of not just creating a product to satisfy a current need or desire, but to see how a product can be enhanced to appeal to a larger market. For example, during the pandemic, with stay-at-home orders in place around the world, Nintendo expanded its product line to fitness kits that catered to everyone in a household.

When competitive advantage shifts

A curious side effect of the pandemic, which required companies to innovate faster to survive, was that it shifted perceived competitive advantages in the marketplace. Consider a young company focused on product distribution with a distributed model of business: no central office, low overhead, all sales reps working in the field and everyone else working from home, and a highly digital customer experience. The company assembled and distributed a unique product where the material costs were largely borne by other companies. It had a perceived competitive advantage over its established competition that were often saddled with legacy costs and perhaps a more expensive real estate and storage footprint.

When the pandemic started, legacy companies depended on their own competitive advantage – longstanding relationships with customers, buying power and ability to access different types of credit – to survive, while they also pivoted how they did business, similar to how Nintendo has pivoted over the last 130 years. What had been a competitive advantage for the younger company (distributed model, lower overhead, few legacy costs) largely disappeared once competitors pivoted to a new model of doing business. Without access to longstanding relationships and credit lines, the younger companies had to focus more on best-in-class service to their customer base, delivery model innovation, or even buying out their competition to stay in business.

Focusing on resiliency

Now that companies have experienced the impact of a significant singular event on their business, they likely will be focused on identifying new product entries or outside constraints, variables or events that could affect their near-term viability, if not long-term longevity. This focus may push companies to make their supply chains more resilient, for example, by nearshoring.

A  June 2020 survey from Gartner  of 260 global supply chain leaders found 33% had moved sourcing and manufacturing activities out of China or plan to do so in the next two to three years. By pulling operations, manufacturing or assembly closer to the U.S., companies can minimize risk, lower lead times and increase customer satisfaction, which will increase customer retention.

Leading manufacturing and distribution companies also will be having crucial conversations with their trading partners to see if they, too, are looking at alternatives to their supply chain partners, and make decisions to switch to partners that have also adapted because of supply chain risks.

Companies are looking for the sweet spot of high product mix coupled with a highly resilient supply chain. This sweet spot is best exemplified by mass customization, an example of which is the ability for a customer to go online and order Nike Air Jordans customized by color, stitching, laces and other choices. Companies aiming for the optimal high product mix and high resilience need to adopt Industry 4.0’s goal of continuous improvement coupled with the use of Dynamic Costing™ to help a manufacturer more reliably determine the range of its actual costs.

Resilience mix chart

Dynamic Costing™ – the ability of an organization to dynamically adapt its organizational capability/control via real-time data monitoring – is described in more detail in our article “Dynamic Costing™: Empower operations to impact EBITDA.” In essence, Dynamic Costing™ helps the business understand what is selling, what it costs to sell it, and what the supply chain risk is that makes it difficult to reliably get key products out the door. These tools can help companies deal with contingency planning and develop “what-if” scenarios. They give the organization the capacity to analyze and take action using near real-time information. The ability to rapidly pivot based on changes in the business environment is key to their survival and success.

In practice, the combination of Industry 4.0 and Dynamic Costing™ provides flexibility and allows a company to rapidly change its business objectives and make appropriate decisions when a black swan event like the pandemic occurs.

Changing disruptions into solutions

The COVID-19 pandemic accelerated change on how we will live and work in the future. How we want to live now is different from what the existing business infrastructure can support. This is because it wasn't a gradual change, it was an abrupt change. This abrupt change has inspired business leaders to look at their operations in ways they never have before – and accelerating how they manage their data to make wiser choices about their product lines and supply chains. With supply chain turmoil becoming more frequent in volume and more significant in impact, leading manufacturing and distribution companies will become increasingly nimble and knowledgeable about their supply chains, not just to thrive and grow – but often, to survive.

Erich Bergen
incurred cost proposal automation
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