SURVIVING IN THE “NEW NORMAL”

The questions on everyone’s minds at the moment. What is the world going to be like after Covid-19? How are we going to recover from the financial losses and what is business going to be like in the “New Normal”?

The panel discussion chaired by the Minister of Health Dr Mkhize, and Professor Karim on the 13th April have made it clear that the Corona virus will be with us for the foreseeable future, and the aftershock for many years to come. You can see the full slide show at https://bit.ly/34Dho4u

Countries are becoming more and more insular, protecting their own economies and citizens ahead of the global village. Suppliers of essential materials and equipment are now asking for payment in advance because demand is outstripping supply.

The global economy is shrinking at rates last seen in the great depression of 1929. Global contraction for 2020 is projected at 3% while in South Africa the IMF is projecting a 5% – 6% contraction. Governments in the Major economies are looking to make cash injections of between 10% and 15% of GDP as a stimulus. Unfortunately, South Africa doesn’t have this leeway because of the state of our economy pre-Covid-19. There is also the school of thought that this isn’t a pause, but rather an entire RESET of our economic system.

I’m sure the question on most business owners’ lips is whether they will survive. The essential services and essential goods companies from a business perspective, will be in a fairly healthy position, having been able to run their businesses throughout, albeit at a far greater cost than normal. These businesses also have a head start in learning the rules of business in the “New Normal”.

The question that concerns me is how those businesses that have closed for the duration of the Lockdown are going to get up and running. They have to get their operations going, assess who is still out there in the market place, Assess their Suppliers and Customers to see which have had to close down and then evaluate the associated financial impact in terms of sourcing and also of resulting bad debt.

The South African economy wasn’t healthy going into the pandemic, and we’ll have a mountain to climb to get back to the levels we saw pre 2007. The fact that Moody’s have finally down rated us to junk status means that investments are going to be scarcer and also more costly. Looking at the value of the ZAR last night, R 18.68: USD1 means that imports are substantially more expensive than they were in January. The ZAR has devalued by 33% from R 14.06 to R 18.68 over the past 4.5 months.

Decline of the ZAR 2020 Q1

Source: X-Rates.com https://bit.ly/2yfmEPU

When we analyse how we’re going to run our businesses going forward, we’re going to need to take a hard look at our operating models. There is no way we can pass any of the cost increases to our customers. The majority will come out of lockdown substantially worse off than when it started and the unemployment rate is going to increase significantly, all of which points to a shrinking market. Even if you don’t sell directly to the consumer, the supply chain eventually ends there and so everyone is going to feel the impact.

We may also see an increase in competition in the “essential service” markets, with businesses higher up the food chain looking to diversify to mitigate their business risk. This could possibly have already started with the excessive demand placed on cash flow making smaller operators likely acquisition targets.

Business risk

Going forward, industry will need to manage business risk far more carefully. Inventory levels, obsolescence due to shelf life, a decline in demand, higher importation costs, higher operating costs, are all factors that need to be managed, while at the same time we are going to need to become more agile and responsive to customer demand.

Areas to look at:

1. Operating Model Focus on FLOW not COST
2. Inventory levels Eliminate unnecessary stock at materials and finished goods levels and hold inventory at lowest overall cost.
3. Reduce lead time to customer Create operating systems that reduce overall lead time to Customer. Integrate process documentation as “a component of the finished product”.
4. Product contribution margin Evaluate actual cost (COGS) of each product SKUs against your standard cost and decide what to do with unprofitable products.
5. Customer Service Look to improve your customer service levels. What is the financial impact of a 5% swing?

How do we improve this without a net increase in operating cost?

Support routine field maintenance supported by the correct replacement parts

This is the time to be asking for help from specialists, don’t try to change strategy and business plans using the same thinking used to create them. Thoughtware before Software – investigate the knowledge that is in the public domain, look carefully at solutions methodologies before you consider automation. Your teams at all levels of the business need to understand the implications of their decisions on the overall business profitability before they make them.

Should you have any questions or comments, please raise them in the comments section or email to dave@sacoaching.co.za. You can also call me on +27 82 777 0922.

About the author

Dave Hudson is a supply chain and operations specialist and executive coach with over 30 years’ experience, and currently 1 of 5 endorsed Demand Driven instructors on the African continent.