When speaking to leadership teams in the present climate, many are facing a similar issue of margin pressure, due to increased costs and a tight labour market. After a decade marked by a growth-centric mentality fuelled by cheap credit, the current scenario has seen a marked change. A return to more normalised monetary policy has meant access to capital has become more expensive, while inflationary pressures mean businesses must now enhance efficiency for to maintain or grow profits. Looming in the background to this is a potential global recession.
The most recent period that bears parallels to this is the Global Financial Crash (GFC) in 2007/8. However, while there are similarities, there are also significant differences. Prior to the GFC was a period of relative stability both financially and politically, unlike the recent years characterised by persistent volatility in both areas. This has caused businesses to become much more resilient than before the GFC, meaning there is unlikely to be much that will cause panic, barring an extensive global recession, for which there will likely be ample warning.
That said, in 2023, while the economy is unlikely to be hiding the systemic issues of the GFC, companies are facing new issues. High employment and participation levels are constraining access to talent, while at the same time, despite being much more efficient than in 2007, their supply chains pressured and questions of resilience remain, with strategies like onshoring, nearshoring and China+1 gaining traction.
Consequently, companies need to be more creative to increase capacity to meet demand while maintaining profit margins. Failure to do so will find businesses falling behind their competition, with external investment likely favouring simple business models with a clear opportunity for returns. The kicker on 2007 is time. While action is certainly required, currently, leadership teams have the space to pursue holistic, deliberate strategies to maximise impact rather than impulsive, isolated reactions seen during the GFC.
As a leadership team, you may well be aware of these challenges, but unsure where or how to spend your time fixing them. As mentioned previously, you have a slight luxury of time to make a more considered decision. Below are five practical steps that may help you to address these issues and help transform your business for success in the next decade.
The core elements of your supply chain are the best place to start, as when businesses are in growth mode, they often take their eye off the cost levers and the drivers of inefficiency in their operating model. Systems and products can often be bolted on to enable growth at speed, resulting in a clunky, expensive and inefficient operating model. One area of focus could be SKU rationalisation. This needs to genuinely simplify the end-to-end supply chain and not just be a small part of it to significantly add value. In addition, looking at your business model can pay dividends, with just-in-case not efficient and just-in-time seen to carry too much risk. In most cases a move to a new operating model, which adopts smarter practices is required to achieve the simplicity required.
When improving the connectivity of your supply chain, it’s key to ensure compatibility first and foremost – an amazing solution that is incompatible with your suppliers and/or the wider market will not work. As a result, you need to ensure you have connectivity upfront as part of the architecture of your systems or processes – this will then provide adaptability. Overall, ensuring your processes and technology allow you to connect with and adapt to the rest of the world with the least friction.
The fact your business is facing cost pressures is not unique to your situation, but is probably a challenge facing your competitors, suppliers and clients. Consequently, this could be a good time to look at M&A activity to enhance your supply chain at an attractive cost. However, this only works if you have the scale and operating model to unlock the efficiencies to see a return on investment. Reducing the number of transactions and steps from the raw materials to the end product sold to a customer inevitably lowers the total direct and indirect costs. By simplifying your business model, you will also make your business more attractive to external investment, which can help you access the funds required, should this be a move you feel would be appropriate.
To lean up your business, you need to focus on the areas where you can increase value as well as decrease costs. For example, by digitising your supply chain planning using automation tools like Advanced Planning systems, business logic and AI, you can improve the effectiveness of your supply chain while reducing costs from human capital. Likewise, process mining tools can also help you identify bottlenecks, non-conformances and root-cause issues more efficiently. Overall, make sure you are not simply cutting costs but identifying areas where you can reduce costs and add value at the same time.
To succeed over the next decade, you will need to operate on an automation-first basis, i.e. the first question at each stage of a process or task should be, ‘Can this be automated?’. Not only will this increase efficiency by transferring repeatable processes to machines, but it will also reduce labour shortage issues and likely increase existing employee satisfaction by asking them to focus on tasks that are more engaging and varied. This can help reduce or remove the human capital risk and cost, which will likely benefit your business in all conditions but is a key consideration when facing a tight labour market. The final step is to codify this automation as your own work. A great example here is what Ocado has managed to achieve in this space over the past decade. By codifying your way of working, you are creating IP, which can provide additional income streams or opportunities down the line.
Overall, the key message from this is your company will likely need to create efficiencies in order to remain profitable over the next decade. The good news is that, given the slight luxury of time available, leadership teams have time to take a wider look at business issues and implement a strategy that has the greatest return on investment. A key focus must be your operating model and taking the time to step back from the day-to-day and establish what your future state needs to look like and ensure this will be fit for purpose over the next five or ten years. Despite tighter financial conditions, don’t be afraid to invest in both people and technology in this area, as a move to a simplified, connected and more automated model will help set you up for the return of growth.