Today's crisis of curbing corona viruses and falling economic demand presents top managers with a truly historic challenge: they face enormous financial and operational difficulties. At the same time, they have the historic opportunity to transform their companies in such a way that they will bring enormous benefits in the coming years.
This is because downsizing can either weaken or strengthen your company – both during the crisis and for years afterwards – depending on how you do it. Downsizing has become widespread almost overnight. There are layoffs and vacation days almost everywhere and they are serious.
Managers are forced to develop and implement effective responses in real time without the previously available planning lead time being available. Previous management practices are completely inadequate to successfully tackle this historical challenge within today's greatly reduced response times.
Given rapidly declining resources, managers need to get started and act quickly. If they do it right, they will have the best customers and will leave their competitors in the dust. If they do something wrong, they will have to fight for years to catch up.
To successfully thread this needle, managers have to apply different rules to make these decisions – rules that enable them to succeed in the waves of economic disruption that will continue throughout the economy for at least the next 6 years. 12 months and for the following longer readjustment period.
Practically without warning, many companies today are forced to cope with unprecedented and externally driven declines in sales without having enough time to adjust spending to available income. This combination puts cash flow and financial reserves at risk of survival.
The greatest danger in the response is the inability to focus reduced resources on goals that offer the greatest potential for success. Weakly focused or unfocused broad brush reactions almost certainly fail or lead to inadequate results.
Creative approaches are essential. What worked in the past will not work now. Three basic principles form the basis for success:
Concentrate on your core of profit.
Emphasize people and relationships.
Focus on practicality and quick implementation.
1. Concentrate on your core of profit
In practically all companies, 10 to 20% of customers, products, employees and operational activities generate 150% more profit. The most important management imperative today is to focus your resources on doubling this area of core strength.
Companies that split their customers into peaks (large, high profit), profit outflows (large, low profit / loss) and profit difficulties (small, low profit) typically find that about 10 to 20% of their customers earn they gain about 150 +% more; 10-30% consume 40-50 +% more profit; and 50-80% of their customers consume more than half of their resources without making a profit.
The following diagram, which we call a winning card, illustrates this profitability segmentation for a company's customers:
The same profitability segmentation characterizes your products, employees, and operational activities. The most important thing you can do is to concentrate your resources on the bottom line of your profits by fixing this business, converting profit outflows into profit spikes and matching the cost of servicing profit deserts with your profit potential. You can also do this with a reduced workforce and decreasing revenue by managing your bottom line with both more powerful metrics and more focused efforts.
More powerful metrics are the essential starting point. To measure actual profitability, you need to be able to analyze your company at the basic business level of each individual sales transaction (i.e., invoice line). Higher-level aggregations that are normally available today hide important information about cost drivers and their interrelations.
Cost-to-Service is a good example of where most systems do not disaggregate important cost elements and thus distort the true cost and profit picture. For example, in our experience of analyzing customer revenue in the tens of billions, we found that the gross margin, which is one of the most commonly used measures of profitability, seldom predicts a net profit because operating costs are so important.
2. Emphasize people and relationships
Times of crisis require a renewed emphasis on people and relationships and not the recent trend towards impersonal systems and the associated digital transformations. Systems may be less expensive in certain high-volume applications, but they cannot address the human concerns, issues, and complex challenges of intra-group coordination that prevail during crises.
This principle pays off in three key areas: customers, suppliers, and the company and supply chain.
Effective customer management requires fundamentally different programs for Profit Peak customers, Profit Drain customers and Profit Desert customers.
Customers with profit spikes. Your goal for your customers with profit spikes is two-fold: (1) systematic increase in the efficiency of your daily coordination, while (2) targeted steps are taken to build a more integrated business relationship with win-win mechanisms like joint forecasting, focused , inventory managed by the provider and coordinated category management.
To do this, you need to deploy a number of highly qualified, dedicated, multi-functional customer management teams that consist of sales, supply chain, finance, and IT managers and can connect with their customer peers at peak profits. The main requirement is to staff the teams with qualified managers who can work together to manage changes in the customer. Supporting systems are a secondary need. Here, reducing costs by reducing the size of the teams would be enormously counterproductive. In fact, adding selected resources is a great investment.
Your customer management teams have both weekly and monthly tasks. They need to meet with their customers weekly (by phone, zoom, etc.) to review critical product forecasts in the light of changing real needs, work through substitutions when necessary, take action to generate instant money, and coordinate other immediate concerns.
Every month they have to team up with their customers to deal with short-term problems, e.g. B. Checking forecasts, adapting the product mix to rapidly changing supply and demand trends, ensuring that replenishment systems are working properly, and temporarily installing coordination mechanisms such as the supplier-managed inventory for volatile key products.
You should invest your people and resources in your relationships with your customers with profit spikes, especially in difficult times. You can't do it everywhere, so identifying and engaging with your bottom-line customers is a life and death problem.
Customers with a profit outflow. Your goals for profit-draining customers are also two-fold: (1) to generate money by addressing the specific problems that cause their profit and cash outflow, and (2) to develop mutual operating cost reductions that reduce the profit and the Converting these customers boost these big customers into profit spikes. Offering access to secure supplies of scarce products can be a strong incentive for these customers to renegotiate their relationships with you.
To be successful, you need to use another group of highly qualified, dedicated, multi-functional teams to focus on reducing the common operating costs between suppliers and customers, reducing the immediate outflows of cash outflows, while maintaining a permanent level of profitability achieve and secure this in with long-term contracts. By using a parallel team approach with weekly and monthly meetings, you can use all relevant skills, especially finance and supply chain, to manage both cash and inventory.
Both Profit-Drain and Profit-Peak customer management teams must set up weekly coordination meetings with their customer colleagues to address rapidly changing mismatches between supply and demand and other immediate concerns.
The monthly coordination meetings with your profit drain customers are very different. Although short-term forecasts and related activities are important, the team should focus on changing the underlying problems that cause profit and cash outflow. Here the customer's individual profit and loss account, which results from the transaction profit and loss accounts, is the critical measurement.
This metric shows exactly where the drains occur – surprisingly often in hidden but essential elements such as the order pattern. For example, the customer can order daily instead of weekly, which is common in crisis situations when the inventory reduction is general. In this case, the customer's visible inventory savings are overshadowed by the supplier's fulfillment costs (and the customer's hidden reception costs). By slightly adjusting the price, this destructive behavior can be reversed at a relatively low cost, putting the profit-draining customer at the top of the profit list.
The supporting systems are not particularly complex, although the analysis tools such as the all-in-transaction-based profit mapping are of crucial importance. The most important accompanying element is the creation of capable teams that can build new relationships with their colleagues in the customer organizations. Just like customers with profit spikes, shrinking this group would be catastrophic.
Profit Desert customers. Your primary goal for Profit Desert customers is to lower their operating costs and lower their priority for the assigned product. This is where your downsizing should take place: It is important to lower your costs to reach the profit potential by putting them in more efficient engagement modes.
These customers form the segment that is best suited for system improvements. Here you need to understand the costs that these customers incur to ensure that you correctly bill for the services you offer. Discounts should be the exception, not the rule.
You also need to use digital marketing to communicate with and manage these customers.
It is prohibitively expensive to build personal relationships with the many customers in this segment. Instead, you should create a menu-based set of services and carefully enforce your "rules of engagement". Your most productive downsizing should take place here.
Note, however, that a few desert customers are large companies for which you are a smaller supplier. You may be able to offer to fully meet their requirements to get a larger share of wallet and long-term contracts. They are the best prospects for turning into profit spikes.
For these customers, a combination of digital systems and qualified managers is crucial for success. The first step is to provide a digital marketing test process to identify these customers, and the second step is to use a combination of digital marketing and direct sales by customer teams with profit spikes to build your relationships with them. However, the expected value of these efforts is small compared to working with your customers with profit spikes and profit cuts. Therefore, set a strict time limit for these efforts.
The most effective program for transforming your suppliers is directly parallel to the one that is most suitable for your customers.
Your top-tier suppliers deliver your most profitable products. These suppliers guarantee dedicated teams of managers who are highly skilled in developing and building productive relationships and include both weekly coordination meetings and monthly forecasting and planning meetings (along with selected early steps to build integrated processes in supply chain management, category management, and product development). . The systems required are relatively standard.
Profit Drain suppliers have enough revenue to justify dedicated teams of managers who can work with their suppliers to reduce common operating costs. It will likely take more work with these suppliers to maintain your supply, but it is critical to long-term success, especially if your customers prefer these products.
This is a good opportunity to improve your relationships with your profit drain suppliers and lead them to top-of-the-line behavior. Your suppliers will appreciate how well your teams work with them in these difficult times. Your supplier-specific all-in profit and loss account shows you exactly where the profit outflows occur and which measures to improve profits block the cash and profit outflows. In our experience, reducing common operating costs is a surprisingly effective, albeit often hidden, profit lever.
Reducing one of these groups would be extremely counterproductive.
Your Profit Desert suppliers are the "long tail" of your supplier sales distribution. A small team should manage these suppliers and every effort should be made to bring them to supplier portals with standard conditions and low staffing requirements. You don't have the resources to directly manage most of your small, low-profit suppliers. Here you need systems to reduce your costs. and again aggressive downsizing will be the most productive.
Operation and supply chain
In addition to your central supply chain systems (e.g. warehouse management, transport management, inventory management), highly qualified managers are much more important than complex systems.
In tight supply situations, it is important that you make decisions about assigning customer products in advance and communicate them broadly. All too often, companies do this in real time, resulting in an inventory where everyone tries to support their own customer priorities. This leads to the standard situation: no priorities at all and politics that comes first, serves first.
In times of crisis, traditional supply chain decisions can no longer only be made by supply chain managers. In product-constrained environments such as today, these decisions are strategic and must be made at the corporate level by the multi-functional teams that monitor and manage the company's key segments: peaks, outflows and losses.
In times of crisis, key managers across the organization must be able to assess the types of supply and demand. An important component is the general shrinkage and growth of the market, while a second critical component is the allocation of scarce products that are received from suppliers and given to customers.
The second component is particularly difficult because both the supplier and the customer status have to be monitored. Your top-tier suppliers will likely give you a preference, especially if you've taken steps to reduce your common operating costs and make you a top-tier customer. If you look downstream, your bottom-line customers guarantee full product allocation, while your bottom-line customers may only receive 75-80% of the demand and your bottom-line customers may only receive 60%.
In manufacturing companies, high-level inter-functional coordination is particularly important. A lack of certain parts or components can block the production of certain product groups. The critical decisions about which products to manufacture and market require both expertise and knowledge of the supply chain and marketing.
This provision requires a sound judgment of managers (and not of systems) in all functional areas who work together on the basis of their years of experience. Losing this ability through downsizing would be extremely problematic.
3. Concentrate on practicality and quick implementation
Profit segmentation must form the practical, critical core of your financial planning and analysis process.
It starts with developing an understanding of your profit spikes, profit outflows and profit fluctuations.
Integrated programs are then created for each segment, each reflecting the right balance between people and systems.
Finally, you need to carefully and carefully monitor the performance and risk of each profit segment. You need to consider where you can build your human resources and where downsizing brings a net profit.
Now is the wrong time to manage using aggregate metrics and comprehensive corrective actions such as fairness general downsizing (where each department does the same percentage reduction in effort). The companies that not only survive but are leaders in the post-coronavirus markets use the right metrics and surgical decisions about resources to ensure they have the cash flow and profits to attract the best customers and reacting simultaneously to today's rapidly changing world
In our experience, the formation of dedicated teams that focus on each key profit segment – peaks, outflows, and losses – at the senior management planning and oversight levels, as well as operational management and execution levels, will ensure this Use your resources wisely and maximize both your company's short-term survival and long-term profitable growth.
At the same time, it is important to align these efforts with the selective continuation of your strategic investments in areas such as product development and new technologies that are critical to your success after the end of the current crisis.
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Managers have no choice in terms of timing, since today's crisis is controlled from outside. The timeframe for effective action is very short. Those who act quickly before the situation changes and the choice of options quickly decreases will create life-sustaining cash flow and huge gains in market share from competitors who move too slowly to make a difference.
By focusing your resources on your bottom line and highlighting your key people and relationships, you can ensure that your initiatives and actions are both practical and timely in today's rapidly changing environment.