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| Increased business focus to survive in a downturn |
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| Mar 2009 |
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The management challenge
While change can take anyone by surprise, many industry sectors in Asia are in a state of shock. After decades of economic growth they now have an entire generation of managers with limited experience in managing a business during turbulent times. Fears about an economic slowdown with plummeting sales and profits have become a reality in many industries.
A deepening recession will not however be all doom and gloom - while there will be losers, there will be winners as well. Research of previous recessions indicates that many companies performing in the bottom quartile emerged as top quartile performers post recession.
In terms of sector performance, PwC's "Behind the headlines: the dynamics of the consumer spending downturn" consumer survey carried out in June 2008 suggests that big-ticket items such as cars, appliances, furniture, as well discretionary sectors such as restaurants, holidays, high-fashion labels, jewellery and accessories are likely to be hardest hit. On the whole, consumers will either buy less volume or trade down to cheaper alternatives - this is already evident in the market.
Our analysis of previous recessions indicates that discretionary sectors (particularly games, toys, clothing, and small household electrical) tend to rebound more strongly while big-ticket sectors take longer to recover.
In times of a market downturn, speed and decisiveness are key survival factors. Companies who act quickly and decisively are likely to better survive and emerge more successfully post recession.
Six key initiatives companies should be considering to surviving a downturn:
- Focus the business
- Generate more cash
- Manage supplier terms
- Better buying
- Head office rationalisation
- Staff productivity
While we expect a wide variation in performance across different companies, it is possible for the most successful consumer businesses to grow during a recession. Getting the basics right is more important now than ever and success relies on:
- Understanding your customers and giving them what they want;
- Communicating the value of your product (through competitive pricing or justifying a premium); and
- Operational excellence (e.g. a well organised store portfolio and tightly controlled supply chain).
1. Focus the business 
A clear focus on the key business drivers is essential. Remain competitive through allocating resources and investments on areas that deliver most value to the customer. The rapid growth of many consumer and retail companies in the past two decades has resulted in significant complexity in terms of product SKUs (stock-keeping unit), trade promotions and customers/channels. Much of this complexity has eroded the focus on customer value and extensively increased costs. We believe better control should be exercised and many companies in the sector are increasingly focusing on three areas:
- Consumer products, product range and SKU proliferation
As consumer goods companies have sought to claim a greater market share, the number of products and SKUs have also risen. The proliferation has resulted in excess costs in terms of production, logistics and working capital. Increased M&A activity has also led to duplication of products/SKUs.
Our finding suggests that when allocating all relevant costs (e.g. manufacturing, packaging, logistics, order processing) at SKU level, up to 30% are loss-making. Eliminating loss-making SKUs can deliver many benefits. However, loss-making SKUs should be assessed for their strategic importance in terms of customer relationships, category substitution and position in the product lifecycle before culling.
A bakery company embarked on a significant SKU rationalisation programme with the goal of increasing margins by 1%. Improvements were generated in terms of reduced procurement, logistics costs, wastage/write-offs, packaging materials and working capital via inventory reduction. The extra production capacity generated by SKU reduction was utilised for new, higher value/margin products.
- In-store trade promotions
Trade promotion expenditures for consumer product companies have significantly increased over the past decade. Typically accounting for about 25% of revenue, it is one of the largest expenditure items on a P&L balance sheet. Promotions also complicate and reduce forecasting accuracy. Our work and published research suggests that up to 75% of promotions lose money and fail to grow long-term sales.
In terms of producing special packs, promotions increase cost, complexity and effort in the sales cycle. Many leading multiple grocers in the UK are now reviewing their investments in trade promotions. The focus has shifted to fewer but larger promotions, moving expenditure from promotional mechanisms such as "Buy one Get one Free" (BOGOFF) to longer term and targeted price discounts.
A snacks food manufacturer carried out a major review of its trade promotions programme with its trade partners. They jointly assessed the ROI of promotional mechanisms such as BOGOFF, extra fill, banded packs and the impact of in-store positioning (e.g. on-shelf versus gondola end). The collaborative effort to better target funds on best-performing mechanisms enabled the company to increase ROI by 30%.
- Customer profitability
All customers have different needs and should not be treated equally. This is particularly apparent in a downturn as competition intensifies to hold on to most valuable customers.
A number of factors can impact customer profitability; these include order frequency, special/bespoke products, production runs and packaging, special logistic arrangements, selling time and effort, promotional investment and trade terms. Research indicates that when costs are fully allocated, up to 25% of customers are loss making. And the size of the customer is independent, often small customers are more profitable than large ones.
Understanding customer profitability allows companies to develop alternate models to reduce the "Cost-to-serve" for unprofitable customers. This includes new pricing, logistics and service levels to improve profitability. Often, we find that companies have poor understanding of customer profitability and dissipate their resources on attracting and retaining low-value or unprofitable customers.
A dairy producer found that approximately 40% of its customers created about 250% of profits, 40% were marginally profitable and the remaining 20% were loss makers. Rather to rid the 20%, the dairy producer explored new ways to service this segment more cost-efficiently leading to improved profitability. They focused on redesigning sales and logistics service levels, and promotional investments as well as renegotiating trade terms and conditions. Although some customers were lost, the overall impact of increased profits significantly outweighed the losses.
2. Cash is king
Research indicates that in excess of 20% of liquidations are due to customer late payments. Many companies are missing considerable opportunities to generate cash by having inadequate processes and systems in place. We have found some areas of weakness.
- Sales order to cash
- Ineffective risk identification from credit design, selection or application;
- Collection strategies and workflow management not aligned with risks;
- Collection methods fail to address deteriorating customer performance; and
- Front-end control issues leading to back-end disputes.
A global consumer goods manufacturer redesigned 30 key credit and collections processes, and formulated a group credit policy. The result was a 40-day reduction in "Days Sales" outstanding, releasing over US$70m in cash in nine months.
- Procurement to payment
- Poor correlation between sales forecasting-product mix and purchasing;
- Lack of periodic review of contract terms;
- No supplier rationalisation programme in place;
- Poor supplier relations, credit holds and interest charges for late payments; and
- Discounts negotiated but not taken.
- Product forecast to distribution
- Lack of accurate sales forecasting and poor accountability for accuracy;
- Failure to adequately control lead time;
- Lack of strategy to manage obsolete stock or to quantify safety stock levels; and
- Failure to optimise trade off between capacity utilisation and inventory level.
A global media products company implemented a group wide SKU rationalisation and inventory reduction programme, generating a 50% reduction in SKUs leading to a US$35m cash generation in eight months.
3. Review supplier terms and conditions
In a downturn, manufacturers are likely to witness increased pressure from their retail customers particularly in areas such as rebates, special allowances, trade investment and payment days. These terms and conditions are often negotiated at two levels: between the key account sales teams and buyers, and also between the retailers and manufacturers finance teams (particularly payment days). Often, as different internal functions are involved in negotiations, the manufacturer may not have easy or complete visibility of the total terms negotiated. Therefore, we recommend that as negotiation pressures increase, manufacturers should align themselves internally, and closely monitor account terms and profitability in order to negotiate from an informed perspective. Compliance to the terms and conditions is just as important as negotiating them. Often, manufacturers are unaware that they are "giving away" more than their specified terms to retailers. For one food company, we found that there were more than 30 instances where they were regularly giving away non-standard/unapproved discounts, rebates, special logistics arrangements to their retailers. By eliminating non-standard/unapproved allowances and other arrangements, the company was able to generate quick and significant bottom line savings.
4. Better buying
Companies can achieve extensive purchase cost reductions by employing "Better Buying" strategies. It is typical that a 5% reduction in purchase costs can result in a 50% profit improvement. "Better Buying" involves better aggregating and leveraging buying power, better buying processes and implementing technologies such as supplier reverse auctions. Our experience in the retail sector suggests that supplier auctions are a quick and effective tool to generate significant savings. They can be set up and operated in a matter of weeks across most categories and especially in indirect expenditure items, such as stationery and other discretionary expenditure, as well as cleaning and maintenance contracts.
5. Get more value out of your head office
Many head offices are viewed as cost centres but we believe these can be a source of "value-add" to a business if the right strategies and structure are in place. Over the past decade, we have witnessed many head offices becoming "too big", costly and failing to deliver sufficient value to the business. Excessive management levels and a bureaucratic culture have also reduced the speed of decision making and response to a rapidly changing market. Eliminating head office non-value activities and bureaucracy is a quick and effective way to reduce costs and improve responsiveness. Many retailers and consumer product companies have reduced head office costs by 15% to 25% in recent years. We recommend that companies benchmark costs against their peers and identify the cost or performance gaps. They can then focus on addressing these gaps in terms of eliminating redundant or duplicate activities, functional silos and handoffs, and reducing the level of rework. Finance, IT, store operations support and buying are typically areas where companies can look into.
6. Customer-facing staff productivity
Improving staff productivity through enabling customer-facing staff to deliver quality services is key. Companies often do not match variable demand with variable staffing levels resulting in "downtime" when staff levels are excessive and reduced performance when customer levels exceed resources. In multiple branch operations, a lack of resource planning creates inequality between sites which leads to wastage in some while others struggle with work loads. Using effective staff resource planning to ensure the right number of staff is targeted at the right time can enhance performance by as much as 5% of costs or cost reductions of up to 17%.
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