“A Virus is Agnostic - It Doesn’t choose whom to Infect”
The COVID-19 pandemic has exposed us to unprecedented levels of disruption and uncertainties for organizations irrespective of the Geographies, Sector, Business Model etc. Despite multiple life-stimulating attempts by governments across the globe, the world is crawling slowly towards a deep recession. Stock markets are barely recovering from the worst crash since the infamous “Black Monday” of 1987. The global pandemic has brought the world to a complete STOP and it is certainly going to be with us for a while before we can restart the economic engine.
A Plethora of businesses now faces weeks, if not months, of extremely weak trading conditions. Businesses across a variety of sectors are finding that they need to engage in conversation with their Suppliers, Customers and Financiers to arrange short-term solutions to support their cash flows which is diminishing at an exponential rate.
In such cash crunched scenario, the Proverb “Cash is King” has never been more accurate. Companies starved of liquidity are conserving whatever cash reserves they have, such as delayed payments to vendors in their Supply chain. This puts a significant strain on working capital availability for these vendors. On the other hand, companies starve to claim their receivables but face similar backlog therefrom already cash-starved distributors and retailers impacting one Major Supply chain KPI “Cash to Cash Cycle Time” like never before which on the other hand impacts many other process levels KPI’s as well.
During this tough time, many relationships are damaged and once the crisis is over, we may well see a complete rejig of vendor and distributor bases. Companies will be forced to inject liquidity across their supply chains, for new as well as existing stakeholders in an unprecedented way.
An Eccentric Demand and Supply Enigma
We are witnessing a very rare event. Both demand and supply are capitulating to tremendous shocks in a variety of industries whereas some of the sectors such as Agriculture, Consumer goods, medical supplies, are seeing an unprecedented spike in Demand.
Currently, we are facing three main Demand and Supply scenarios:
• Immediate Spike in Demand & Supply Shock: Sectors supplying Food, essential personal care, and healthcare goods have been experiencing overstocking and demand in these sectors have gone skyrocket because of the over purchase caused by panic. Changes in demand lead to an imbalance in levels of stocking & product mix in different geographies
• Mid-term Demand & Supply Shock: Sectors involved in Non-essential goods such as retail and electronics are a part of what we refer as the mid-term demand and supply shock. They are experiencing very low demand that will likely bounce back relatively quickly once different countries across the globe start coming out of quarantine.
• Long-term Demand & Supply Shock: Non-essential, premium products and related industries such as automobiles, travel, hospitality, and tourism are a part of the long-term demand & supply shock and will experience a lower recovery rate in demand. As such, they are likely to struggle the most to avoid bankruptcies and serious cash flow crunch while fighting with supply chain distress.
The Crumbling Demand and Supply chain shutdowns are putting stress on Cash and Working Capital in the following ways:
• Suppliers are unable to deliver key components to Manufacturers On time in Full, which delays the overall Manufacturing Lead Time.
• A downswing in consumer demand leading to increased inventories across different stages of a supply chain that are more and more difficult to get rid of.
• Challenges in collecting Receivables On-Time from cash strapped customers.
• Difficulties in paying suppliers due to short term cash-flow restrictions.
Why it is the need of the hour to Understand the Importance of Working Capital during this Crisis?
1. Daily Operations require Cash:
• For Payment of Vendors
• For Payment of Employees
• To purchase more inventory
• To Pay Debt
• For Operating Facilities
2. Excess Cash Reserves Provide:
• Ability to Invest in available opportunities
• Ability to Touch up or Enhance infrastructure during Slowdown
• Improves Morale of the Shareholders as well as Employees
• Ability to invest in other strategic initiatives
Release Stress on Working Capital using Fundamental Levers
• Raise Invoices ON Time and Error Free
• Prefer Offering Shorter Payment terms in return for Discounted Payments
• Review Customer Payment terms and look for Arbitrage opportunities for customers
• Daily Monitoring of Cash Collections by prioritization of Customers based on Debtor Balance
• Facilitate regular follow-ups with Customers and Proactively Minimization of Risks associated with Disputes as well as Late Collection
• Daily Monitoring of Dispute resolution Cycle times and Identification of the Root Cause as part of Daily Problem Solving
• Facilitate Short term Financing Solutions such as Debt Factoring.
• Minimize Batch size as well as Order Quantity
• Optimize Inventory at different stages by Eliminating non-value-added activities
• Facilitate Pull based Planning
• Productivity improvement at Warehouse inbound as well as outbound Processes.
• Revise existing Safety Stock Parameters reinforced with other parameters such as Forecast Accuracy, Supply lead-time variation and Customer Service Levels
• Review Shipping/Distribution Strategies and Balance between Inventory and Full Truck Load
• Explore Opportunities for Consignment Stock
• Review Constraints at bottleneck Operations and Streamline Production to keep inventory at a Minimal Level
• Facilitate Disposal of Very slow-moving as well as Obsolete Stocks by offering Discounts
• Adhere to partial payments rather than a single bulk payment to provide a small cushion to your customers which results in better cash flows
• Increase Credit limits for Loyal Customers
• Reduce Invoice Processing Turnaround time
• Facilitate Provisions for Automated Invoice Processing over Convention Paper based
• Daily Monitoring of KPI’s with Robust and quick Mechanisms for taking Countermeasures on any deviations from Standard
• Explore opportunities for Dynamic Discounting
KAIZEN™ in Supply Chain and Distribution is the need of the Hour
Understanding the Fundamental Differences between Push and Pull Planning:
The approach to KAIZEN™ in Logistics and Supply chain via the Total Flow Management (TFM) system is one that includes the entire supply chain of a given company. The starting point for the design is the point where you are in the supply chain. Maybe your organization is a manufacturing facility or a product-distribution facility. By applying the model, you will be creating your internal pull-flow system and considering how you can expand this model, both downstream of your supply chain and upstream.
Benefits of Implementing Lean in Supply chain and Distribution
• Improved Visibility through Visual Management and Five S
• Reduced Expiry Waste
• Improved Warehouse layout to enhance Flow and reduce Order Pick time
• Simplified Warehouse Processes
• Reduce Cost
• Increases Inventory Turns which as a result improves Working capital Turns and reduces Cash to Cash Cycle time
• Optimized Inventory levels across the Supply chain without compromising Service Levels
• Improved Resource efficiency
• Reduced Working Capital
• Improve Motivation of employees on Gemba by making workplace Safer
At the end of the day improving FLOW, removing blockages, rejigging vendor, and customer terms will help deal with the tremendous strain that the market conditions are putting on businesses.
About Kaizen Institute
Kaizen Institute is the original and premier provider of KAIZEN™ services of Change Management, Business Excellence, Operational Excellence and Lean.
We support companies of all sizes in all market segments, providing them with a sustainable, competitive advantage. Our Vision is Improving the world with Everyone, Everywhere, Every Day – The KAIZEN™ Way. “KAIZEN™ means Change for the better.”
Kaizen Institute is a global organization that provides consulting and training services to companies represented in Europe, the Americas, Asia-Pacific, the Middle East and Africa. We are currently operating in 60+ Countries for 35 years.
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