The hope for economic recovery has been dealt a blow by changing COVID-19 restrictions. Oliver Bridge looks at the role operations can play in meeting the challenges ahead.
Our bi-annual global survey of the UK’s mid-market leaders shows that one third have closed, suspended or reduced the capacity of their operations. Businesses were expecting to see the economy begin to return to normal and pressure begin to lift, but changes to COVID-19 restrictions present an abrupt challenge to their plans.
The new rules are likely to restrict recovery and businesses will have to adapt once again to unforeseen market conditions, just as they did after lockdown. That will mean tough decisions about how they want to operate going forward and careful consideration of a range of actions that can help meet their most-pressing concerns.
The impact of the new restrictions will vary from sector to sector, so there’s no single operations strategy that will be right for all. However, our most recent client survey (180 respondents) identifies the three areas where leaders anticipate particular challenges ahead.
The ability of operations to deliver for stakeholders
Half of businesses in our survey told us their model has changed as a result of lockdown and that they are likely to continue with the new model in future. Even those aiming to return to their pre-coronavirus model are entering a market where customers’ needs and expectations have undergone a radical transformation.
In light of these changes and the announcement of further restrictions, it’s vital to review assumptions about the nature and scale of future operations.
For example, is the business looking to diversify into more-stable sectors or to spread risk by using assets to supply a broader group of customers. If so, are operations set up to support the future strategy and deliver for clients and stakeholders?
With a clear understanding of future operational requirements, consider whether any new divestments or investments are necessary. The current disruption means there may now be opportunities to pick up businesses with assets and capabilities that can help meet future needs.
Re-appraise large-scale transformation programmes, whether planned, underway or paused. Do they support your ability to deliver for customers and stakeholders in future or do they need recalibrating in light of the evolving situation?
Flexibility in your cost base
Minimising the need to raise debt, either to survive ongoing disruption or to seize new opportunities, means retaining cash in the business. A serious effort to drive down costs, with a strong focus on operational efficiency, could be the starting point.
Some of our manufacturing clients tell us their customers are buying in smaller volume and that producing smaller batches is reducing efficiency. If this is the case in your business, optimise output to reflect current levels of demand.
This needn’t mean lower profits. By removing non-profitable products from production and selling only to profitable customers, you can optimise output at a level that delivers higher profits. In order to tip the profitability equation in the right direction, make sure that you also pass rising costs on to customers.
Operations lessons from the automotive industry
Also consider reducing inventory. This is a strategy UK automotive manufacturers adopted following lockdown. With demand for cars plummeting, tens of thousands of vehicles were waiting to be sold. As demand picked up, manufacturers delayed a full restart of production to reduce inventory.
It’s a difficult balancing act to pull off. Restarting with smaller batches drives up short-term production costs, while reduced inventory creates a less-flexible supply chain, precisely at a time when demand is hard to predict. Nevertheless, the positive impact on cash balance makes it a strategy worth considering.
Wages are clearly a significant component of the cost base. As the UK Coronavirus Job Retention Scheme winds down, you may be approaching the point where you must take decisions around redundancies.
It is worth waiting a little longer, if you can, to see if new, more-targeted support for different sectors is announced.
If you have international operations, be aware that not all countries are winding down their support schemes as early as the UK. In France and Germany, for example, equivalent furlough payments are set to continue into next year and beyond.
The pandemic has exposed the risks inherent in complex, global supply chains. As a result, one third of UK mid-market leaders told us they plan to build in more resilience.
A common strategy will be to source from suppliers closer to home, either to replace existing suppliers or supplement global suppliers in the event of disruption.
To improve resilience, establish a clear understanding of where supply chain risk lies. One solution is to use specialist software, such as Llamasoft. The AI-powered platform provides transformative insights, such as early warning of supply partners at risk of failure, allowing for timely action to protect the supply chain.
Get ready for recovery
Changing restrictions confirm that significant uncertainty is likely to be a feature of the trading environment for some time. This cannot be a reason to postpone decisions about the future. Leaders should be planning now for a new reality and looking to operations to play their part in supporting future strategy, strengthening the business’s cash position and enhancing resilience.
For help planning the future of your operations, contact Oliver Bridge.