In an article published in the Sunday World, Black Business Council CEO Kganki Matabane, raises the issue about the high level of business risk in South Africa as a result of offshoring. An argument supported by both Zwelinzima Vavi General Secretary of SAFTU and Professor Raymond Parsons of the Northwest University business school in their call for government intervention in terms of policy creation (Parsons)and setting up import substituting industries (Vavi).
Offshoring has resulted in a drop in contribution to GDP from 28% to 13% from the manufacturing sector, something we need to reverse if we’re going to see South Africa emerge from the pandemic as a thriving economy. I disagree with Mr Vavi about government needing to create industries, they need to create an environment that is conducive to growth and investment. Business in South Africa needs to change our business methodology. No one needed “Policy” to start the drive to offshoring, this was a function of trying to achieve the cheapest cost per unit. Business needs to stand back and look at just how unsustainable the current business model is.
Looking at the level of business risk, offshoring has significantly increased the level of business risk for all businesses that import product or materials into the country. Risk relates to the likelihood of disruption to our supply chains. Disruptions themselves fall into various categories and translate into a certain level of risk. Putting this into perspective, if a ship carrying your materials sinks, it may take 3 months to replace the material and possibly additional cost to expedite it. This can be offset by inventory on hand, short term negotiations with alternate suppliers and customers to mitigate the short-term impact until you can replenish your stock and convert to finished goods.
On the other hand, being hit by Covid-19, has exposed everyone in the supply chain to risk. I am specifically referring to 2nd, 3rd and possibly 4th tier suppliers. Firstly, the first major impact was felt right at the beginning of 2020, most suppliers hadn’t reopened their production facilities. China was still celebrating Chinese New Year and they extended this break to give themselves time to assess the full impact. We are now 4 months down the track and still the majority of businesses are yet to open again. It was mentioned in a webinar that Covid-19 is a Black Swan, and a 1 in 100-year disaster. At this time, no one knows when we will start operating across the economy, so this is definitely the greatest risk business has experienced in my lifetime.
The table below gives guidelines on where to start looking at your product basket and raw materials and categorise them so that you can start building strategies in order to mitigate risk.
While doing research for this post, I came across some very concerning statistics.
Boeing, the U.S. plane maker will reduce output for wide-body jets such as the 787 Dreamliner and 777X, according to a company statement. Production of the 737 Max will resume gradually as key customers like Southwest Airlines Co. shelve growth plans. With factory activity slowing, Boeing will reduce employment by 10%, or about 16,000 jobs.
IATA, the international air transport association reported that air-cargo carriers experienced a “severe” capacity shortfall during the month of March. Global demand for air cargo actually fell 15.2% in terms of cargo tonne kilometres (CTKs) in the month. At the same time, however, global capacity, measured in available CTKs, plunged by 22.7% as a result of all passenger flights being grounded. IATA also reported a doubling in demand for pharmaceutical shipments that are critical to battling the coronavirus pandemic.
Who in your business is carrying out a Cost to Serve analysis? In these times, it is about the most important analysis you can do. It is imperative that you determine which of your products are profitable and which aren’t. Standard costing uses the fair share principle, whereas production in your manufacturing facility happens in real time and actual costs are allocated to your product. This may be acceptable when you aren’t faced with the decision of what to cull in order for your business to survive. The last thing any business can afford is to cull profitable lines and end up running into the wall.
It is also critical to have someone in your organization who is independent of your operating staff carry out this analysis. Right now, operating staff are trying to protect your brand by ensuring that materials are available and if not, putting alternative strategies in place to keep customers happy.
The Cost to Serve analysis should be a 2-prong approach:
- Are your popular brands actually profitable?
- If not, what can be done in the processes to make them profitable?
- If yes, is there anything we can do to increase the contribution margin?
- What strategy is feasible for the unprofitable tail?
- What is the potential write off risk if these are discontinued immediately?
- Can we re-engineer processes to make them more profitable?
- Can we find alternative raw materials suppliers that are cheaper or more cost effective?
- Can we shorten the Supply chain and reduce inventory on hand, while maintaining or improving customer service?
- Identify the impact to operating costs if the tail is culled. Will we need to retrench? or do we need to shut a portion of our factory down?
It is important to take a holistic view of the organization and have these exercises carried out by cross functional teams. Everyone is a specialist in their own areas of the business, but looking at an exercise described above, your will need Supply Chain, Marketing, Sales, Production, Engineering and QA / QC input. If the correct individual is appointed to the Analyst role, then meetings can be kept to a minimum. Questions will be posed independently and answers can be collated and circulated prior to the meeting. This way, each member gets to think about other’s responses before they add input from their area of expertise. These meetings are well suited to the online space and can be carried out before people are required to report for work.
The biggest challenge for business in this time, is guiding their staff through the transition from Linear thinking to Systems thinking. If these meetings are facilitated with a linear approach, they will fail because the thinking will be at departmental level and not organizational level where it is needed. A part of this transition also needs business to take a good hard look at the Key Performance Indicators used to measure personal and team performance. How many of these are designed to deliver results at the organizational level? How many are cost focused and how many are focused on flow? Do we understand the level of conflict created by our metrics?
An example is a production facility; 2 KPIs, Cost per unit and Customer service always conflict and the result is that the organization suffers because of constant oscillation between the strategies in order to meet performance criteria. Metrics going forward should focus on flow as stated by Plossl’s law of manufacturing, “All benefits will be directly related to the speed of FLOW of materials and information”.
Applying this law to your business and having all employees focus on flow will start everyone moving towards a systems thinking approach. Flow can’t thrive in the Linear world, because we are always bumping our heads against the Cost per unit issue. Flow doesn’t ignore cost; it measures it at the scarcest resource and this resource is monitored and managed continually. Simply put, Flow protects cost but cost doesn’t protect flow.
To find out more about Cost to Serve and how to protect flow, contact me at firstname.lastname@example.org and we can schedule a FREE online session to discuss the topic.
To find my handbook laying out the first phase of the FLOW based approach, you can follow this link https://lnkd.in/gjBwmJm
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.