Industrial Engineering

Restarting Companies and The Economy

Restarting Companies and The Economy

ISE Magazine July 2020 Volume: 52 Number: 7

By Jim Tompkins

https://www.iise.org/iemagazine/2020-07/html/tompkins-feature/tompkins-feature.html

 

We grew up hearing about the Great Depression from our parents and grandparents. Like the Great Depression was for their time, the COVID-19 pandemic will be for our generation – the story we tell our children and grandchildren.

The COVID-19 pandemic created impacts not seen in our lifetime. From a record number of unemployment claims to a sharp decrease in GDP and performance issues due to in-creased demand, this is the most dynamic, uncertain time we have ever witnessed. Government restrictions, including a stay-at-home order and the closing of all nonessential businesses, amplified a volatile situation by straining commerce and the global economy.

While issuing these orders effectively closed the economy, simply lifting the restraints does not automatically reopen the economy or return business to “normal.” In my playbook, “Restarting the Economy: Guidance for Public and Private Leaders,” (link.iise.org/restarting-the-economy) I explain the huge difference between restarting the economy and relaxing government restrictions. To successfully restart the economy, companies must first be reopened, and each plan will be unique. Similarly, restarting companies requires more than just reopening store doors; the supply chain infrastructure needs to be in place for companies to be able to restart business operations.

Synchronizing supply and demand

Twenty-five years ago, the supply of goods to the consumer was in the hands of supply professionals. Retail planners worked with manufacturers to decide how much of what items they would sell to consumers. However, as each year passed, the control of the flow of goods moved from the sup-ply side to the consumer, or demand, side. Today’s sophisticated sales and operations planning (S&OP) processes at-tempt to forecast the demands of consumers and satisfy this demand by producing the right items in the right quantities at the right time.

For some products, like the amount of tomato soup consumers desire, S&OP works well; for other product categories, such as women’s fashion, it does not. But in January 2020, the whole game changed and even the best S&OP processes in the world were woefully inadequate to synchronize supply to demand.

The U.S. economy was booming in early 2020. As the Chinese population migrated to their hometowns for the annual Lunar New Year celebration, there were early reports of a virus that was very infectious and resulting in fatalities. As the virus spread, people were isolated and could not return to their workplaces. The Chinese economy was brought to its knees and the virus spread to other countries. China is often referred to as “the factory of the world” as it produces a significant portion of the materials used to manufacture products, as well as a significant portion of finished goods. Chinese manufacturers supply materials for manufacturers around the world.

The flow of materials and finished goods around the world is transported via the supply chain. The materials were planned and bought from China but not made there because factories were closed. Planning was done by forecasting demand, then buying the materials needed. In fact, one of the key objectives of supply chain management is to synchronize the supply and demand of products as they flow around the world to minimize cost and drive profitable growth.

The virus in China had a major impact on the supply of materials around the world as demands could not be filled, resulting in product shortages. The reopening of the Chinese economy was unpredictable due to a ripple effect that encountered the following set of “problem/go/problem/go” as follows:

  • The factory did not have workers.
  • Workers came back to work.
  • The factory did not have required materials.
  • Workers came back to the materials’ suppliers.
  • Truck drivers to deliver materials from manufacturers to the factories were not available.
  • Truck drivers came back to work.
  • The factories started manufacturing.
  • Truck drivers to deliver products from the factories to the port were not available.
  • Truck drivers to the port came back to work.
  • The ports did not have workers to unload trucks and load ships.
  • Port workers came back to work.
  • Ships sailed to their destinations with critical supplies of both materials and finished goods to provide the much-needed supply.

The disruption of the ripple effect as the virus spread through China was huge. Demand for products went un-filled. But just as the supply to Western countries was re-stored, the virus arrived there. It did not arrive aboard the ships of products but instead aboard airplanes carrying infected passengers. As COVID-19 spread across North America and Europe, stay-at-home orders had a major impact on demand for products. For discretionary products, demand disappeared; for health-related products, demand doubled, tripled and more. For some products, the demand shifted.

At the end of the first quarter of 2020, there was so much uncertainty that there was no synchronization of supply to demand, resulting in inventory overages of discretionary products and shortages of essential products. There were apparel stores full of inventory that were closed for business and grocery stores that remained open with near-empty shelves. At that point, COVID-19 had created tremendous uncertainty on the flow of goods, which had major impacts on the global economy.

Innovative and crisis disruptions at play

We live in an unprecedented time in the evolution of the global economy and the supply chain that supports it. This is the result of an unprecedented level of innovative disruptions and crisis disruptions peaking at the same time. If only one of these disruptions were peaking, the supply chains of the world would be shattered. But in the spring of 2020, both types of disruptions were peaking.

Innovative disruptions. The level of volatility we are experiencing is driven by the rise of digitalization and the frequency of change, also known as the “disruption cycle.” The disruption cycle is turning nonstop, beginning with an innovation that sometimes leads to entrepreneurship or, if it’s too risky, winds up dead. Businesses that move on from entrepreneurship will become disruptors, but some of those will die, too.

However, those that harness innovation and boldness will disrupt the status quo. They then move through the incubation and validation phases before becoming the new status quo and, with the addition of professional management, be-come an established firm. It is in this phase when those that are too risk-averse or resistant to change will fail. Businesses that live through this stage and move on to innovation, courageous leadership and new boldness will achieve profitable growth and value creation and become the new leader(s).

Innovative disruptions occur as companies pursue the disruption cycle. For the last three years, disruptions via digital innovations have occurred at an ever-faster rate, with today’s digital era producing the highest level of innovative disruption in history. This is partially due to the increased speed at which companies travel around the disruption cycle. Thirty years ago, an organization did so once a decade. Fifteen years ago, a loop around the cycle took five years; today, the cycle is traversed once a year or faster.

Crisis disruptions. Crisis disruptions can result from a variety of events. Here is a list of the top 15 of 2018, in order of frequency of occurrence, that accounted for 90% of all crisis disruptions.

  1. Mergers and acquisitions
  2. Factory fire or explosion
  3. Reorganization
  4. Business sale or spin off
  5. Factory slowdown or disruption
  6. Regulatory change or tariffs
  7. Extreme weather
  8. Hurricane, typhoon or cyclone
  9. Earthquake
  10. Labor strike
  11. EMA, FDA or OSHA action
  12. Fine or recall
  13. Power outage or shortage
  14. Labor action or settlement
  15. Port disruption

Interestingly, in the top 30 – which account for 99.8% of all 2018 crisis disruptions – the topic of human health or pandemic is not mentioned. Additionally, at the end of 2019, a panel of global trade experts presented the top 10 crisis disruptions they predicted would occur and mentioned nothing related to human health or pandemic.

Another way to look at crisis disruptions is by measuring their impact on the local, regional or global level and also viewed by severity. A special category of crisis events that have a huge global impact are referred to as “black swan” events that have never happened before or are extremely rare (highly improbable events); take people by surprise, as they never imagined such an event occurring; carry a massive transformational impact; and after its first occurrence, the event is rationalized in hindsight, as if it could have been expected (even if it could not).

Clearly, COVID-19 is a black swan event. The frequency of black swan events has been increasing over the last three decades, as evidenced by these events:

  • 1990: Recession
  • 2001: 9/11 terrorist attacks
  • 2008: Mortgage crisis
  • 2014: Ebola outbreak
  • 2019: COVID-19 pandemic

Each of these black swan events had major impacts on the economy and what was considered normal. In fact, all black swan events result in creating the next normal.

How innovative and crisis disruptions beget VUCA

As explained in my column (Page 22), the business world has faced unprecedented levels of VUCA – volatility, uncertainty, complexity and ambiguity. The concept of VUCA was first introduced by the U.S. Army War College in 1987 to describe the world following the Cold War. The term can also be applied to the business environment, where the combination of innovative disruptions spurring from to-day’s increasingly digital world and crisis disruptions like the COVID-19 pandemic have a tremendous impact on supply chains and commerce, producing the highest level of VUCA in history.

Let’s take a look at how VUCA impacts supply chains and commerce today and what businesses can do to overcome these challenges:

Volatility. Volatility is all about change – the nature of change and frequency of change. The nature of change is best illustrated by bugs. Take, for example, the ant: when a baby ant grows into an adult, it gets bigger, but there is no change, which is represented as continuous improvement. Grasshoppers experience transformation through changes in wings and reproductive organs. Lastly, the caterpillar under-goes a total metamorphosis, or reinvention, as it becomes a butterfly. The circle of life for companies requires completion of all three steps – continuous improvement, transformation and reinvention – to be successful in today’s digital world.

In addition to the nature of change, we also have to look at the frequency of change, also known as the “disruption cycle.” As described earlier, the pursuit of the disruption cycle is innovation and boldness that disrupt the status quo. Those that successfully navigate all the way through the disruption cycle and on to new innovation, courageous leadership and new boldness will achieve profitable growth and value creation. Then the cycle repeats.

Uncertainty.  We live in the most uncertain times in world history. This high level of uncertainty makes it impossible for us to make accurate predictions or define standard operating requirements. Instead of developing optimal solutions, we need to focus on developing flexible supply chain solutions that are capable of adapting and constantly evolving to offer a series of options. When fast-food chain Popeyes failed to accurately predict the popularity of its chicken sandwich, it blew through its entire inventory of the new menu item more than a month earlier than projected.

Optionality is the new optimality. Since you cannot predict what the future holds, make sure you have the greatest number of options available so when uncertainty hits, you can move to the option that will meet the requirements of that day, or moment.

Complexity.  The rise of digitalization and increased complexity of commerce today requires companies to “sell anywhere” and embrace a unified performance. While there used to be a clear distinction between retailers, distributors, manufacturers and wholesalers, those lines are now blurred, from grocery stores developing their own private label brands to consumer packaged goods (CPG) companies creating their own e-commerce sites and selling direct-to-consumer (D2C).

To achieve success, companies must “fish where the fish are” by selling anywhere their customers are. This includes diversifying sales strategy to incorporate all the channels and methods used by each of your customer demographics. When developing a strategy, companies must think beyond traditional digital and physical channels and evaluate all options, including mobile, desktop, social media, retail e-commerce, marketplaces, brick-and-mortar and more.

When broadening your sales strategy, it is important to maintain a single, unified supply chain, which is where complexity comes into play. This complexity drives the need to unify our channels, logistics, marketing and technology to act like a single company – or supply chain – and provide customers with a seamless shopping experience.

Ambiguity. As we enter a new era of business, there is a haziness of reality, or inability to understand what is really going to happen, that takes place across all companies and industries. Digital technology affects all businesses by paving the way for new products, services and business models. In this digital era, it is imperative for all organizations to vigorously pursue digital commerce and prevail among the lack of certainty. The COVID-19 pandemic has also fueled a rise in ambiguity, as businesses and consumers alike are unsure what the next normal will look like.

In addition to the digital imperative, we also battle the speed imperative. The speed at which the marketplace changes its mind is much faster than companies’ ability to respond. With the speed imperative, it is not about how fast you work; it is about the rate of acceleration. If it takes your organization weeks to make a decision that should only take days, you will fall behind and become a victim of the speed imperative. Likewise, the half-life of a great idea is much shorter than it used to be due to the speed of disruption. As the pace of life accelerates, you need to act faster than ever.

The path forward: Restarting companies

Many factors impact the ability to restart business operations. Like the economy, this cannot be done by simply flipping a switch. The COVID-19 pandemic separated companies by industry sector into two different categories – the haves and the have not. We look at the performance of these companies leading up to the crisis and separate them by those that were strong or weak in December. The strength or weakness of the business is based on the following factors (if you have these below, you are strong; if not, you are weak):

  • Financial stability: Strong P&L statement, balance sheet, valuation, brand equity, cash flow, liquidity, credit availability, net profit margin.
  • Customercentric: Great customer satisfaction, high re-peat business, strong pipeline of new customers and leadership understanding customers’ expectations.
  • Planning: Robust and well-understood organization plan, strategic plan, contingency plan, marketing plan, customer acquisition plan, budget plan and succession plan.
  • Execution: Clear priorities and accountability, strong metrics and feedback, responsiveness, discipline, maintain deadlines, methodical and decisiveness.
  • Unique value proposition: Pervasive across the company, a focus on applying core competencies to making customers delighted and ambassadors.
  • Energy: Passion for company success, high energy and engagement, collaborative, inspiring, aggressive, optimistic, a sense of urgency and an attitude of “getting it done.”
  • Innovation: A spirit of openness and eagerness to get better every day, to improve, to slay all sacred cows and find a digital path forward.
  • Leadership: A high level of integrity and honesty, candid open communications, perseverance, optimism, adaptability and a good judge of people.
  • Teamwork: A keen awareness of the tremendous value and importance of true partnerships with customers, suppliers and staff. Not one or two of these but all three.
  • Culture: A progressive culture based upon organizational alignment, respect, profitable growth, intolerance for mediocrity, embracing diversity and having fun.

The industry sector has to do with how your industry fared throughout the COVID-19 disruptions. Some industries were haves in that their industry did well and had ample opportunity to prosper. To the contrary, the have not saw a reduction in business and few opportunities to enhance success. From a high level, here are the haves and have not from COVID-19:

Given our prior performance ratings of weak and strong businesses and being in a have or have-not industry sector, we can see one of four paths for each business:

  1. If you entered COVID-19 as a weak business and you are in a have sector, you must pursue Doom to Boom.
  2. If you entered COVID-19 as a strong business and you are in a have sector, you must pursue Boom to Boom.
  3. If you entered COVID-19 as a strong business and you are in a have-not sector, you must pursue Boom to Hibernate.
  4. If you entered COVID-19 as a weak business and you are in a have-not sector, you must pursue Doom to Tomb.

To determine the strategy moving forward for each of these paths, we must apply the philosophy of VUCA 2.0. Developed by Bill George, a senior fellow at Harvard Business School, VUCA 2.0 represents the top four leadership traits vital for success in a VUCA world:

Vision. With the current level of uncertainty and complexity, today’s business leaders must possess a clear vision for their organization and be able to steer the company in the right direction based on its defined mission, values and strategy.

Understanding.  In order to successfully navigate the business through unpredictable times, leaders must have a thorough understanding of their organization’s capabilities and strategies and engage directly with customers and employees to gain clarity and get a pulse on the changes occur-ring in their markets.

Courage. Speed and decisiveness are crucial in times of VUCA, so today’s business leaders must have the courage to take risks and make bold decisions without hesitation or fear of criticism.

Adaptability. In today’s rapidly changing environment, business leaders must be flexible and able to quickly adapt with a series of options to address whatever is happening at the moment while still maintaining their strategic direction.

While the outcomes will vary and not all businesses will prevail, the innovative disruptions of the digital era coupled with the crisis disruptions from the COVID-19 pandemic require total reinvention and an intolerance for mediocrity to survive in today’s VUCA world.

With today’s unprecedented level of VUCA, it is impossible to predict what the future holds. COVID-19 has revealed the weaknesses in traditional supply chain models, with the introduction of the virus in China and the ripple effect it created in supply chains and commerce that, like the virus itself, spread across the world in the subsequent months.

The rise of digitalization and increased frequency of innovative and crisis disruptions require organizations to re-think their supply chain strategies and focus on building “anti-brittle” solutions. Instead of seeking ways to optimize their supply chains, organizations need to “optionize” their supply chains, deploying flexible and agile solutions that are capable of adapting and evolving to provide a series of options to address whatever is happening at any given moment. Anti-brittle supply chains operate as a living system, enabling organizations to reconfigure strategies, structures and solutions quickly and efficiently to achieve success, profitability and growth in times of VUCA.

References: IISE Magazine July 2020 (https://www.iise.org/iemagazine/2020-07/html/tompkins-feature/tompkins-feature.html)