Due to the current recession coupled with COVID-19’s shuttering effects, companies are now scrambling to cut costs in various areas and moving fast to preserve liquidity. One area in which companies are focusing is inventory. Executives tell me that after a decade of scrambling to meet consumer demand, inventory is scattered, the books feel inflated, and the true cost of holding this inventory is unknown. In response, I described five discrete inventory moves that can preserve cash and strengthen a company’s position in the face of uncertainty. Read more about it at: 5 Inventory Moves to Maximize Cashflow.
Inventory, distribution, and production are mere enablers to the organization’s operating model which also needs to be scrutinized and likely modified to meet consumer demand in a changing operating environment. The operating model provides the core operational framework by which the organization executes its business activities. Using a hub and spoke graphic, we can identify the hub as the operating model and the spokes as enabling functions (inventory management, distribution, production, etc.).
Given today’s rapidly changing environment, many operating models must change to address evolving markets. Leaders—executives to department heads—should be asking themselves the following questions related to cost, growth, and operations:
- Cost: Are my margins improving to benefit scale? If not, why? Am I making cuts simply to survive this new operating environment, hoping that I can revisit them in the future?
- Scale: Am I effectively scaling? If not, why? Should I reduce my organization’s footprint, focus my product offering, optimize my processes, or identify a demand shift?
- Efficiency: Are my processes agile enough to adjust for forecast changes? If not, why? Is work-in-progress (WIP) becoming an increasing issue? Are my supply chains interrupting my process? Do we lack redundancies where needed?
If these questions resonate within your organization, you may need to pivot your operating model. Here are five steps to help you get started.
1. Step back and objectively assess your operating model
Set aside time to separate yourself and key staff from daily activities to take an critical look at each of the enabling spokes supporting your operating model—organizational hierarchy, processes, inventory control, execution control, asset utilization, technology, distribution—and evaluate their contribution to your strategic goals. In a properly aligned operating model, enablers will have a clear sense of priorities that exist solely to support the overall strategy.
2. Identify your core offerings and key revenue drivers
Using the same focus intensity, evaluate your key revenue drivers and identify areas where scope creep and SKU proliferation have induced complexity and muddied the revenue streams. Isolate and stack these core offerings and key revenue drivers, optimize their execution, and filter out non-contributing SKUs. Repeat steps one and two in light of new insights in order to maintain a lean and agile framework that exists to support your strategic plan. The takeaway will be discovering products you can exit and creating a plan to divert resources. Repeat this cycle as many times as needed before moving forward to step three.
3. Evaluation your critical costs
Calculate the “per product/service” cost of each of your offerings. Once you make these calculations, evaluate each offering to assess whether the juice is worth the squeeze. In other words, discover your “per product/service” margins and determine which ones are contributing and which ones are detracting from your bottom line. Note: It is more important, especially during an economic crisis, to prioritize highly profitable core offerings than it is to focus on general market share. The highest revenue drivers may in fact be producing negative margins!
4. Rationalize and pivot
Document your most profitable offerings, understand what it takes to be the best in the world at execution, and strongly consider discontinuing all other offerings. This effort may require your company to pivot its marketing to a new customer segment or you may find that you need to adjust your offering to meet an evolved market. Key importance: Gain support and staff buy-in by ensuring your staff understands the benefits of this portfolio rationalization. They will be the ones executing the new vision.
5. Leverage metrics to build culture and momentum
The most important part about optimization is ensuring there are systems in place to keep from reverted back to the old way of doing business. With the financial calculations complete, the optimizations mapped, and the operating model aligned to your strategic goals, leverage both individual and collective metrics to shape the culture and develop operational momentum.
Do you need to modify your operating model?
Optimizing an operating model involves more than adjusting an organization chart or shifting direct reports. Doing so can be a daunting endeavor. The barriers to unlocking profitability, achieving cultural alignment, and reducing operational complexity are many.
At Turner 360 Consulting, we tailor options to suit your needs exactly where you are. From a single workshop to a broad transformation program, we focus on changes that not only increase your survivability during turbulent times, but also drive profits and scale.
If COVID-19 has affected your business, and you are unsure how to attract customers in this new environment, it could be time to revisit your operating model to ensure it is providing a sturdy bridge between your strategic ambition and execution.