Today’s crisis era of COVID-19 containment and crashing economic demand present top managers with a truly historic challenge: they face both enormous financial and operating difficulties, and at the same time, they have a historic opportunity to reshape their companies to produce vast benefits for years to come.
Downsizing is one of the most important factors that can either weaken or strengthen your company — both during the crisis and for years after — depending on how you do it.
Downsizing has become rampant almost overnight. Major layoffs and furloughs are nearly everywhere, and managers must develop and implement effective responses in real time. Prior management practices are completely inadequate for this historic challenge.
Managers today must use different rules to make these decisions – rules which enable them to succeed in the waves of economic disruption that will continue to flow throughout our economy for at least the next six to twelve months, and for the prolonged readjustment period that follows.
Managers who get this right will own the best customers and leave their competitors in the dust. Those who get this wrong will face years of struggle trying to catch up.
Virtually without warning, many businesses are being forced to deal with unprecedented sales declines without nearly enough time to align expenses with available revenues. This is placing survival-threatening burdens on cash flow and financial reserves.
The greatest danger lies in the inability to focus reduced resources on targets that offer the greatest potential for success. Weakly-focused or unfocused broad-brush responses are certain to fail or produce inadequate results.
Poorly targeted downsizing programs, in which each department takes the same percent force reduction, will be counterproductive. Companies that use the right metrics and make surgical decisions about resource deployment and focused downsizing will survive today’s crisis and lead in the post-coronavirus markets.
Creative new approaches are essential. What worked in past will not work now. Three key principles provide the foundation for success:
Focus on Your Profit Core
Companies that divide their customers into profit peaks (large, high-profit), profit drains (large, low-profit/loss), and profit deserts (small, low-profit), find that about 10-20 percent of their customers are producing about 150 percent or more of their profits; while 15-30 percent are draining 40-50 percent or more of this amount; and fully 50-75 percent of their customers are consuming over half of their resources while producing no profits at all.
The chart above, which we call a profit map, illustrates this profitability segmentation for a company’s customers.
The same profitability segmentation characterizes your products, employees, and operational activities. The most important thing you can do is to focus your resources on your profit core by locking this business into place, converting profit drains into profit peaks, and matching the cost to serve profit deserts with their profit potential. You can do this even with a reduced workforce and shrinking revenues by managing your profit core using both more powerful metrics and sharply-focused efforts.
Powerful metrics are the essential starting point. To measure real profitability, you must analyze your company at the fundamental business level of each individual sales transaction (i.e. invoice line). Higher-level aggregations typically available today hide vital information about cost drivers and their interrelationships.
Emphasize People and Relationships
Crisis times require a renewed emphasis on people and relationships to supplement the recent trend toward impersonal systems and related digital transformations. Systems are more cost-effective in certain high-volume applications, but today’s crisis requires capable people to deal with the human concerns, questions, and complex intercompany coordination challenges that dominate our economy.
This can be seen clearly in three key areas: customers, suppliers, and supply chain.
Effective customer management requires fundamentally different programs for profit peak, profit drain, and profit desert customers.
Profit peak customers. Your objective for profit peak customers is twofold: (1) build the efficiency of your day-to-day coordination, while (2) taking steps to develop a more integrated operating relationship featuring win-win mechanisms like joint forecasting, focused vendor-managed inventory, and coordinated category management.
This requires a set of highly skilled, dedicated multifunctional customer management teams comprised of managers from sales, supply chain, finance and IT, who can link with their profit-peak customer counterparts. You must staff the teams with skilled managers who can work together to manage change in the customer. Supporting systems are a secondary need. Reducing costs by downsizing these teams would be enormously counterproductive; in fact, adding selected resources is a great investment.
These customer management teams should meet weekly (by phone, Zoom, etc.) with their customer counterparts to review critical product forecasts in light of changing actual needs, develop substitutions where necessary, take measures to generate cash, and coordinate on other immediate concerns.
In monthly meetings, they need to join with their customer counterparts to manage near-term issues like reviewing forecasts, adapting product mix to rapidly changing supply and demand trends, ensuring that replenishment systems are working properly, and installing interim coordinative mechanisms like partial vendor-managed inventory for volatile key products.
This is where you should invest people and resources, especially in tight times. You cannot do this everywhere, so bonding with your profit peak customers is a life or death issue.
Profit drain customers. Your objectives for profit drain customers also are two-fold: (1) generating cash by plugging their profit and cash drains, and (2) developing mutual operating cost reductions that increase these customers’ profits, converting them profit peaks. Offering access to secure supplies of scarce products provides a strong incentive for these customers to re-negotiate their relationships with you.
This process requires a different set of highly skilled dedicated multifunctional teams to focus on reducing the joint operating costs in order to reduce the immediate cash drains while creating profit-peak profitability levels. Weekly coordination and monthly planning meetings enable you to leverage your relevant capabilities to manage both cash and inventory.
Your profit drain customer management teams need to establish weekly coordination meetings with their customer counterparts to address rapidly changing supply-demand mismatches and other immediate concerns.
In monthly coordination meetings, these teams should focus on fixing the underlying problems that are causing the profit and cash drains. The customer’s all-in P&L, built from its transaction P&Ls, is the critical metric.
As in the case of the profit peak customer teams, downsizing this group would be disastrous.
Profit desert customers. Your prime objectives for profit desert customers are (1) to reduce your cost to serve to match their profit potential by moving them to more efficient engagement modes, and (2) to lower their priority for allocated product. This is where you should downsize by replacing people with systems. It is important to understand the actual cost to serve these customers in order to charge correctly for the services you offer.
You should use digital marketing to manage these customers, creating a ‘menu-based’ set of service offerings, and enforcing your “rules of engagement” carefully. This is where your most productive downsizing should occur.
However, a few profit desert customers may be large companies for whom you are a minor supplier. You can offer to fully meet their needs in return for a larger share of wallet and long-term contract. These are prime prospects to be developed into profit peaks.
The most effective program for transforming your suppliers is analogous to that which is best for your customers.
Your profit peaks suppliers provide your most profitable products. These suppliers warrant dedicated teams of managers who are skilled at developing and growing productive relationships featuring both weekly coordination meetings and monthly forecasting and planning meetings (along with selected early steps to build integrated processes in supply chain management, category management, and product development). The systems required are relatively standard.
Profit drain suppliers have large enough revenues to warrant dedicated teams of managers who can partner with their supplier counterparts to reduce joint operating costs. This is a good opportunity to improve your relationships and drive them toward profit peak behavior. Your supplier-specific all-in P&L will show you exactly where the drains are occurring and which actions will plug the cash and profit depletion. Reducing joint operating costs is a surprisingly effective, often hidden, profit lever.
Downsizing either of these sets of supplier management teams would be very counterproductive.
Profit desert suppliers are the “long tail” of your supplier revenue distribution. A small team should manage these suppliers using supplier portals with standard terms and low human resource requirements. This is where systems are particularly effective in lowering your costs, and this is where downsizing will be most productive.
In crisis times, most automated supply chain systems are unable to handle the highly volatile, unpredictable supply and demand. Highly skilled managers and well-designed processes with selective manual intervention are critical.
In tight supply situations, you must make customer product allocation decisions in advance, and communicate them broadly. All too often, companies do this in real-time in response to ad hoc rep requests, leading to a scramble for inventory. All too often, companies institute the default policy: first-come first-served.
During crisis, most important supply chain decisions cannot be made by supply chain managers alone. These decisions are strategic and must be made by the multifunctional teams differentially managing the company’s key segments: profit peaks, profit drains, and profit deserts.
Managing allocations – both those you receive from your suppliers, and those you give to your customers – is particularly difficult. Your profit peak suppliers probably will give you some preference, especially if you have taken measures to reduce your joint operating costs, making you a profit peak customer to them. Looking downstream, your profit peak customers warrant full allocations of product, while your profit drain customers may only get 75-80 percent of needs, and your profit desert customers may get a mere 60 percent.
In manufacturing companies, high-level inter-functional coordination is especially critical. Component shortages may block the production of certain sets of products. The all-important decisions on which products to produce and market requires both supply chain and marketing expertise.
Losing these capabilities to downsizing would be extremely problematic.
Concentrate on Practicality and Rapid Implementation
Profit segmentation must form the core of your financial planning and analysis process. This process has three essential components: (1) developing an understanding of your profit peaks, profit drains, and profit deserts; (2) creating an integrated set of programs for each segment; and (3) monitoring the performance and risk of each segment. This will guide you in building your human resource capabilities, and downsizing where it will provide an actual net benefit.
Managing through dedicated teams focused on each key profit segment – profit peaks, profit drains, and profit deserts – at both the upper-management and operational-management levels will enable you to deploy your resources wisely and maximize both your company’s near-term survival and its long-term profitable growth.
Managers have no choice but to act quickly in today’s crisis. The timeframe for effective action is very short. Those who act decisively before the situation takes over and the range of options closes will create life-preserving cash flow and lock in the best customers for years to come.