BACK IN BUSINESS! What Recovery Might Look Like for Distributors

As local and federal governments continue to reduce social distancing requirements, distributors everywhere are wondering what the “new normal” might look like. How can we predict what lies ahead when all of our typical models, measurements and situations have changed so dramatically?

Like most, I’ve personally seen my reality shift both at home and at work (which of course is now also mostly at home!)My son had a very limited high school graduation.

My first visit to one of our customers at their offices included face-masks and no hand-shakes (something that I miss a lot). Most of the conversations with our customers are now via video conferences.

And almost all of those conversations quickly turn to the topic of potential scenarios for the rest of 2020 ...

Change is Coming...But How?

Distributors are eager to know what may come our way—and as I tell my clients, nobody has a crystal ball. The more folks I talk to, the more it becomes clear that visibility for the second half of 2020 is limited for data scientists, economists, and business leaders alike. We all seem to agree that recovery is en route, but what seems so tricky to nail down is the shape of that recovery.

In fact, as one of the distribution industry executives that McKinsey involves in regular surveys, I want to share an important point about the results of scenarios around the type of recovery we might have. As you can see in Figure 1, 59% of survey participants (including me)believe recovery is coming but are uncertain of the speed and shape it will take. The vertical axis represents the public health response to the virus, while the horizontal axis corresponds to economic policies.

For some distributors, recovery will likely be fast and furious like a V shape (scenario A4). For others, the demand will be up-down (scenario A2). Unfortunately, the truth is most businesses simply can’t expect demand to be as predictable as it was in previous years, which can be terrifying! In fact, in a conference call with 30+ distributors last week, I heard reports of bookings and sales declines in Q2 ranging anywhere from 50–15%, while a few even reported flat sales or moderate growth.

So, which of the nine scenarios presented in Figure 1 do you think is going to prevail?

Preparing Your Business for Any Reality...

All we seem to know is that uncertainty will abound, so in building any business scenario, it becomes critical to reduce the time it takes to detect changes in market consumption. As a result, distributors need to realize that historical processes might not be adequate when the economy returns to normal—or even for them to survive the current crisis.

For example, new orders (bookings) or last month’s sales are no longer a good proxy for demand planning. You need increased visibility of your sales (demand) with minimal latency so you can respond with immediacy.

For decades, supply chains had been under the Bullwhip Effect, wherein the quantity of items magnifies upstream. Under normal circumstances, this effect can resemble the “Computer Consumable”graph shown in Figure 2. When you have two black swans (COVID-19 and Oil Prices) happening simultaneously, however, the combination of lack of visibility, long lead times and long latency of information distorting the supply chain, the result can be as bad as the “Fresh Orange Juice”graph (see Figure 2).

So, Why is This Important for You as a Distributor?

Whether you know it or not, you are already doing scenario planning! Formally or informally, most of the people in your organization are doing some sort of scenario planning. Every week, someone in your organization is making decisions based on a future demand:

• The general manager and/or owner is considering what to do with fixed or operating cost if sales drops 30% or more.
• The sales team will plan their activities based on the customer(s) with more potential during Q2 2020 to try to hit their quota.
• The supply chain team, including buyers, expeditors and vendor management will try to have some sort of forecast by commodities and/or SKUs to place purchase orders (or not), and most of them intuitively will try to detect changes in market consumption that allow them to gauge their formal or informal scenario planning.

Let’s use the Supply Chain Mode Prediction chart (Figure 3) to illustrate a scenario assuming an even recovery from another industry: Logistics.

We see a clear drop in demand for freight services due to COVID-19, and logistics companies monitoring the market with the traditional methods (booking and sales) might think that once COVID social restrictions are lifted, their customers will get back to business. This V shape type of scenario suggests all modes of transportation will recover evenly, so if you were the sales manager or owner of a logistics company, once you see that your bookings or sales are flat and recovering, you might be wondering which transportation mode you should be investing in now to best reap the benefits of the rebound.

No Matter the Scenario, Accuracy Matters

To be fair, I have no idea if the freight cargo scenario above will prove accurate or not—but what I do know is that if companies in the logistics business use traditional methods to detect changes in market consumption, accuracy will be nearly impossible. The recovery will be uneven for each freight model and any forecast needs to take the “new normal”into account in as many ways as possible in order to avoid huge risks. Imagine if you prepaid a bunch of air freight space based on this chart assuming post-COVID demand will be 5x and you want to be ready for it...what if a second or third wave comes?

Companies that had invested years and millions of dollars in demand planning like consumer durables companies have hit a ceiling of 55–65% forecasting accuracy (pre-COVID). The data scientists in these companies are now re-engineering their models dreaming for 50% accuracy post-COVID.

So, I have two questions for you:

1. Do you measure the accuracy of your demand forecast? If so, is it better than 50%?
2. If you do not measure the accuracy of your forecast, how do you know that you are buying the right stuff for your inventory at the right time?

Getting a Better Plan in Place...

Plain and simple, distributors that are formalizing potential scenarios have a better chance to succeed during post-COVID-19. Formalizing these discussions will incorporate all stakeholders (management, sales, operations and finance), assumptions, trigger points, and potential solutions of an uneven recovery. Maybe even more importantly, these formal plans will invite discussions about the mechanisms the team is using to detect changes in market consumption and how you’ll measure the accuracy of those scenarios.

I would like to close, though, with a piece of advice from Michael Useem, faculty director of the Leadership Center and McNulty Leadership Program at the Wharton School of the University of Pennsylvania. He said:

“Leadership makes its greatest difference during times of uncertainty. The impact will be greatest when leadership comes not only from the C-suite but also from the middle ranks and front lines.”

We’re facing an unseen enemy unlike anything we’ve seen in our lifetimes, and it seems we’re finally poised to start recovering from the fight. Now, it’s time to rely on our data, our projections, and our people to make the most of that recovery effort!