In a previous November note, Prescriptions for Difficult Times, I provided my thoughts regarding methods to survive what may be a very protracted recessionary global period. The essence of my observations were to context obvious needs to preserve cash and cut supply chain costs not solely as a response to a crisis, but more toward a response to a competitive opportunity. Since penning this commentary, I’ve run across two other articles that warrant your attention.
A McKinsey Quarterly article entitled Freeing up cash from operations, written by Alexander Niemeyer and Bruce Simpson, highlights typical mistakes companies tend to make when they broadly slash costs during downturns. The analysts point out that during previous recessions, the dissolution of lean performance or Six Sigma groups were common, and that blanket cuts were made in operational overheads. These cuts hindered supply chain executives ability to not only manage day-to-day operations, but to position their companies for required further performance improvements that would enable their companies to emerge from the recession in a more competitive manner. The authors recommend that companies take a creative but balanced view of where to cut in company operations. Converting excess inventory to cash is an obvious opportunity, as well as scrutinizing planned capital spending. On the blog 21st Century Supply Chain, Trevor Miles points out a key caveat that inventory targets must be “right sized” from an operational perspective, and that the inventory reduction target cannot simply be a dictate from the “C” suite. Trevor astutely observes that two of the biggest contributors to excess inventories are a lack of supply chain wide visibility and overall latency in business processes, both of which are related.
Over on Supply Chain Digest, Jim Womack, the founder of Lean practices and the Lean Enterprise Institute similarly offers his suggestions in the current severe recessionary period. Mr. Womack describes the current recession in the lean term of “mega-mura”, a variation event that implies large and lengthy shifts in total demand by external customers across the economy. While I may disagree with the Wormack premise that widespread adoption of lean methods may have a dampening effect to the current recession, he does offer some interesting ideas for incorporating lean thinking in addressing cost reduction or containment. In addition to also reinforcing the notion of converting inventory to cash, other ideas include creating company-wide bonuses for all employees, predicated on profitability. Mr. Womack also advocates avoiding blanket cost-cutting. He points to other suggestions of taking back work from suppliers that are not going to part of the core supply chain going forward, or scrutinizing every key product value-stream to ascertain how it can be offered more efficiently.
In the final analysis, it is you, your management, and your supply chain colleagues who have the best collective knowledge as to what and where to cut to insure ongoing competitiveness. The one common principle that many external consultants seem to agree on is to avoid indiscriminate blanket cutting in favor of a balanced and more thoughtful approach as to what the end-state needs to be. Recessions, however severe, do come to an end, and companies best positioned for accelerated recovery tend to be the winners.