Reopening Business: How To Come Back With Even Stronger & More Profitable Operations, While Avoiding A Toilet Paper Gold Rush

One of the major revelations of the COVID-19 situation has been how so many non-essential small and medium-sized businesses (SMB) live hand-to-mouth. With heightened sensitivity to seasonality and the unpredictability of economic cycles, many of us have witnessed businesses that never reported a zero-revenue week in their entire history, suddenly being forced to file for bankruptcy. Many of them have closed shop while waiting in vain on an SBA PPP Loan or similar last-ditch financing option. 

Such massive structural shifts in the economy underscore just how important cash is right now. More specifically, the ability to consistently generate Free Cash Flow (FCF) while maintaining respectable output volumes is the universal strategy for all businesses that hope to make it through the pandemic-induced, economic crisis, until the lockdown is lifted. However, even if most businesses opened back up tomorrow, the vast majority would not be prepared to serve the sudden “surge” of customer demand. 

Out of the blocks, the goal should not be to fulfill "unlimited customer demand".

Most business owners think “unlimited customer demand” is the best situation possible post-lockdown. Even so, attempting to serve customers on Day 1 like you are running the next hyped-up Apple iPhone launch is an inevitable recipe for disaster.

Like breaking a long intermittent fast, businesses will have to avoid putting everything they can get their hands on into their mouths and systems, otherwise it will come at the cost of their bottom-line margins, and increase the probability of bankrupting their business in the process. Tying up cash too fast in supplier orders can be risky. Post lockdown, sales are going to be limited by your capacity to fulfill them (just like before the lockdown). So this time around, let us acknowledge that your capacity constraints exist, as the first step of avoiding some of the common counter-intuitive pitfalls that may accidentally doom your relaunch.

Congratulations, you may have navigated your company to a re-opening, but now comes the tricky part.

Identify your Constraints and align your Demand to best utilize your existing limited Capacity.

It goes without saying, that if you haven’t taken the time during this COVID-19 situation to evaluate where your constraints are, and where your bottleneck needs to be (by design), you are not prepared for these upcoming “return to business” rushes that are already beginning to sweep across some States. Most SMBs are thoroughly unprepared to deal with these unexpected delays to meet customer orders, and thus restore business back to "normal".

By prescription, your business simply cannot create more output than your biggest process bottleneck. Period. It is physically impossible. It wasn't possible before COVID-19, nor after it.

Therefore, your entire strategy should involve understanding what determines your daily output and plan your reopening strategy around this most critical bottleneck. This is the first critical step to get right during your reopening. 

Liquidate responsibly by converting excess Inventory to Cash fast.

More importantly, tying-up cash by hoarding inventory is going to be the Achilles Heel of many businesses that try to emerge post-lockdown from the economic wreckage. Overproducing goods in anticipation of non-committed sales is going to be the other tried-and-true strategy failure. Virtually no business is returning with more cash on hand than directly prior to the pandemic, which means Free Cash Flow is going to be valued more than growth-at-all-costs. 

Not productivity, but going through inventory turns faster.

They are not the same, and I personally hope American manufacturing & supply chain leaders understand this, now that they have been given a second chance.

Reset Customer Expectations on Delivery Schedules.

Just like before the lockdown, if given the opportunity, customers will order anything and everything they want from your business and push you to fulfill the 90-day backlog of pending deliveries as soon as possible. However, as a business owner, you want to prevent your version of the “toilet paper gold rush” by starting with what is manageable. In short, you must bring your business back online with what you can deliver on-time, while preserving your margins. 

This recovery is going to be a crawl, walk, and run back to your pre-lockdown production levels. However, if executed intelligently and systematically, a throughput-first approach could lead to better long-term results, well beyond previous performance records & EBITDA results.

No matter what the global experts say about your sector's forecast, your customers will determine your growth, and right now, the end consumer is not spending. To date, over 30 million Americans have filed for unemployment, and those are the people who actually showed up for the benefits.

As we talk about global “supply chain resilience" more than ever before, the return to business is going to be about “what you can control”, not “what you can exploit from the market”. Since COVID-19 has proven that customer demand can evaporate overnight, it is time to focus on sustaining your supply chain operations. 

Simplify your Product Mix.

A key strategy that your business can control today is to simplify your product line. Post-crisis, variance is the Grim Reaper.

As proven by Taiichi Ohno, the Father of the Toyota Production System (which further inspired Lean Manufacturing in the U.S.), a single-piece flow setup is probably the ideal place to start for any business that wants to minimize variance. If your business can offer just “one product”, this can lead to faster profit generation, due to lower variable cost, higher margins, and better scalability.

In other words, when you fire-up the brick ovens again, only make what you know sells (in virtually any environment).

How can you confirm what will sell?

Well, there is enough data already sitting in your Point-of-Sales (POS) Systems and your Enterprise Resource Planning (ERP) Systems where a predictive software can help you pick the best candidates for your "primary offering".

If you are an SMB that doesn’t or can’t use a computer, then look at your Order Receipts, your Purchase Orders, your Financials, your Credit Card Transactions, and other such day-to-day common business data points.

Initially, trying to offer every product under the sun once again is going to come at the cost of sustainable, repeatable cash-on-hand growth. Lead times, goods availability, and inventory storage variance will all eat into your cash-on-hand.

Therefore, it is essential to sit down as a team, especially with your marketing and sales groups (who are often pre-disposed to promising the moon as the "single offering"), and commit to a predictable and reliable portfolio of products to offer in your post-lockdown company catalog.

Focus on faster Supplier-to-Customer cycles.

Reopening is going to be a game of lead times. 

Here, we define "lead time" as the time from facilitating products from your suppliers to your customers.

Businesses should evaluate the products with the fastest Cash Conversion Cycle, and double-down on ordering supplies faster for customers that pickup faster.

 Simple right? 

This is a better strategy than going for the “Hail Mary” on a high-margin specialty-good that may take 3 months to get to you from an international location. Amazon can do this, but you are better off not trying to be Amazon right now.

Faster Supplier to Customer cycles is the strategy to rebuild-up a cash position to one day take-on calculated risks with “on-demand” orders. 

Operating with smaller batches to get product out the door faster is also essential. One may argue that due to the lockdown, there is at least 45 days' worth of lost work to complete, and to do so, 45 days’ worth of bulk inventory needs to be ordered. While the purchasing department may salivate at the incredible bulk discount of required materials, bulk ordering comes at the cost of storage, static inventory and locked-up working capital. Even if you have extra warehouse space, please refrain from the gut instinct of bulk ordering excess raw materials.

Why? Because your cash deserves to stay liquid to minimize risk, and be available for other unexpected events (costs).

Ordering too much too fast will cause your business to be over-leveraged on cash, primarily because your greatest bottleneck process step will not immediately consume a 45-day buffer to keep it producing without downtime. In other words, your machines are highly unlikely to produce 45 days' worth of finished goods in the first week (unless you had an extreme availability of excess capacity prior to the lockdown, which highlights poor overall capacity planning).

Remember, operations must ensure that Free Cash Flow is prioritized, while ramping up Output. In the new world, supply chain leaders who put cost before flow will essentially handicap their businesses.

Perhaps no better example of what happens when you prioritize cost-cutting over capacity optimization comes from Oilfield Services, an industry I spent a considerable amount of my career in, at almost every level (from machine operator to geomarket services manager). For the last 5 years, cost-cutting has literally lead to bankruptcy-after-bankruptcy in the oilfield, with the stock prices of leading companies now nearly 10 times lower than before. Here is an industry that literally sells "capacity" and "flow" for a living, but measures EBITDA to determine performance.

Stop relying on flawed Forecasts. Align your Operations to meet actual Demand.

You should consider promoting a “make-to-order” strategy whenever possible. This is difficult to do, as it challenges general assumptions. 

The first instinct is to hope that a large customer will immediately require all the product to be delivered in one big bulk, which in turn will create the ideal situation to immediately collect cash in bulk, and get back to pre-lockdown financial health.

Not so fast.

Your customer has their own internal system bottleneck and capacity limitations to deal with first. This means that even if you deliver the goods on-time in-bulk, their machines, resources, and/or docks just can’t consume (eat up) your deliveries fast enough. This is evident with the recent ventilator shortage, where no amount of plastic & electronic chip boards could make the United States ramp up manufacturing fast enough to meet immediate needs.

Therefore, make-to-order strategies will be less risky to businesses, and allow you to collect cash in smaller chunks fast enough to ramp up production in a safer, and more sustainable way.

If you can shift to a “make-to-order” strategy, the next objective should be to collect cash upfront or on-delivery. Not only does pre-sales help with ensuring sales, it also allows supply chains to take more risk with riskier goods to manufacture and procure.

Any business that can collect cash upfront should be admired in this crisis, because it is essentially offering a product the customer is willing to risk liquidity for (face masks, toilet paper, pasta, etc.) 

Minimize process changeover.

One last key pitfall businesses should be particularly cautious about is taking on too many different types of orders. As mentioned, as the bottleneck is your limiting step, creating an infinite amount of work only puts strain on that specific bottleneck. And if you don’t know what your bottleneck even is, then you have no chance to remedy it and improve your flow and cycle-times.

Creating infinite variety can result in bottleneck standby time, waiting for changeover. For example, if there is variety in orders, it creates additional changeovers, additional resource requirements, and additional complexity. Instead of getting everything done simultaneously at once, everything gets delayed and costs more because of the inability to prioritize. 

This creates chaos and systemic fragility.

Solving this problem remains the “Holy Grail” of operations management. Goldratt provided a simple methodology to achieve this in theory, and now Machine Learning (ML) can be used to leverage your existing data to determine the right product mix, the best lead times, the optimal setups, and flag the most restricting bottleneck. 

Automate above Decision Making by leveraging AI-guided Technology for Operations Excellence.

Now that we are at the topic of AI-enabled throughput, let us clarify one thing: Post-COVID, your supply chain does not need efficiency. It needs effectiveness.

They are different.

Being efficient means to maximize productivity and minimize waste. Efficiency is about doing things right.

Being effective means to successfully produce a desired result. Effectiveness is about doing the right things.

Even though your team might be a bit rusty, COVID should not have impacted your ability to do things right. However, COVID definitely should have triggered a reevaluation of your operational strategy (doing the right things) going forward.

Therefore, your entire supply chain strategy should think in terms of Overall Effectiveness versus “squeezing-out more output”.

To enable end-to-end supply chain effectiveness, Machine Learning should be leveraged to improve the overall process flow, and not be wasted on simply finding “outliers”, “anomalies” and “defects” that deal with often isolated events. Unless you were an anomaly detection company, you were not in the business of dealing with Black Swan events before the lockdown & shouldn’t be after the lockdown. And for the record, COVID is not a Black Swan event (even according to Nassim Taleb himself).

Most businesses that will soon reopen should focus on increasing production (flow). AI and ML can be correctly leveraged to ensure operations managers have exactly what they need to maintain output, increase cash-on-hand, and not jeopardize sustainable profitability. 

It's important that businesses get this right, and we are here to help you at ThroughPut.ai.

To learn how we are helping global businesses achieve this with our data-driven, AI-enabled ELI software during the lockdown, please reach out to us directly at: [email protected]

The ThroughPut Team wishes you great success with the re-opening. Good luck!