Apply the balm where it hurts the most ...In the first of part of the blog series here, we are trying to understand the global economic problem through the the view that matters most for organizations , the lens of "Free Cash Flow", a measure of liquidty and business performance that most organizations operate on. In the interest of keeping this discussion focused, we have limited the point of view around the "procurement and supply management" processes and response strategies , but is well applicable across all operations . As we may still be getting over the worst of this " Tsunami " , wish if all of us could share the experiences and the survival stories for the benefit of the larger supply management community .
We keep getting lashed by these heavy waves of destabilization at frequent randomness, from Katrina, to Avian flu, to global recession and while we were still struggling on these, as if not enough, now the Swine flu. The USP of all these are that we don’t know what, when and how this hit us, when we were least expecting. It takes a good toll of all of us. The good thing about this is that it wakes us all from the slumber and complacency to make us take note and innovate.
The current economic crunch is one such great "Tsunami "which has jolted all the greats and spared none.
Anyone who swims in the sea knows that to win over the "waves", one must accept, understand it and glide over than resist or stand against. Organizations are just a few of the tiny twigs floating in this vast ocean called global economy, which is now the victim here. One cannot aim to stand against it but to understand and work our way around.
To get our arms around this, let us start from where all these began on the Wall Street and how this has impacted. The Credit crisis is significantly testing organizations survival instincts across industries in all the global economies
- Commodity price indexes show this is a Buyer’s Market
- With the oversupply of the raw materials, material prices are at their all time low. Oil and commodity prices have also dropped giving a chance for material cost optimizations
- Distressed sale of material leading to spot buyers market conditions
We agree that liquidity is the primary trigger for all the malaise. Free Cash Flow is a well recognized measure for organizational health, liquidity and shareholder value. This is a widely accepted tool forward looking tool for CEO’s and Executives for business decisions and has clear linkage to valuing a company.
Here is an attempt to analyze how the current liquidity crunch is impacting the value levers leading to the Free Cash Flow measurements
Response Strategy to "Unlocking this Liquidity Lock": Organization response strategies should be to relieve these stress points of economic recession (marked red arrows with the right acupressure techniques) while making the best of the advantage points (marked blue arrows). Suppose that should be an intelligent approach to tide over the situation and prepare for a better tomorrow that be what someone said – " a bull in the china shop " going all hog at cutting costs where ever possible . An appropriate response could be to identify, plan , implement and measure results of business strategies over this value trail all over this difficult phase till we see ourselves over the hurdle
The supply management teams can be the biggest influencers in this turnaround story with their given mandate on the majority of the organizational spend. Theoretically, a 5% reduction on cost of purchase (typically 55-65% of revenue in most manufacturing companies) can improve the bottom line by up to 30-35%).Who else is better positioned to lead the change.Probability and impact of operational disruptions due to supplier bankruptcies are at an all time high. Studies say at least 65% of the automotive supplier base are under heavy financial stress at this point. Supply Management is hence a major focus area for most organizations to survive and compete.
- Are we still in time to discuss this and look for solutions to successfully impact businesses?
- What are the various strategies and models deployed by the successful organizations?
- How have organizations fared in the past recessions? Who were the winners?
- What were the success platforms then and the learning’s to take?
- What are the success stories now and the critical success factors? Anything stopping all other organizations to lead / follow?
- When and how do we get over this? Who will survive?
There are quite some questions on all our minds.
All of us have a task cut out to come with the best answers for this challenge thrown at us in the best possible way and help ensure a better tomorrow. We see job losses as major recession metrics doing the rounds and wonder if pink slips are the best strategic responses with a long term view. Often frantic measures go beyond rationale and emotions when it comes to a need of survival. It will be great if together we can come to some right answers.
It would be great if all of us hear your views, experiences and references of the pains and the results of the response strategies deployed . Each one of them matter to the community now.
…..Hope we will have enough interests for a followup series to take this discussion forward to capture the learning’s from the discussion and debate on the best solutions.