Saturday, September 25, 2021

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    Business after the pandemic – a time for innovation, not a throwback to the past

    The recovery period after the pandemic and layoffs is a time that business should use for its own good, but you have to be careful and avoid decisions that only seem good.

    During the pandemic, most companies cut personnel costs: they laid off some employees, cut salaries, or did both at once. Medium- and small-sized companies that did not have a diversified reserve of resources would not have survived without it. They had to act quickly, so there were a lot of cuts.

    After the pandemic, many CEOs will probably want to revive their companies as they were before the pandemic. But that’s a big mistake because the environment and customers have changed. During the pandemic, customers started behaving in new ways (e.g., more online retail orders and direct deliveries), which caused digital giants to grow rapidly and many offline companies to be on the verge of bankruptcy. The problem is that these changes are not going anywhere. Bringing back the old structure is the easiest but counterproductive step. Recovering from a pandemic is the perfect moment for the fundamental reforms that a new era demands. Where should we start with these reforms?

    In this situation, you can either do the reforms yourself or pay outside professionals to prepare ready-made solutions for you. There is no shame in bringing in someone from the outside. And you should never spare any money to implement reforms. In this case, you can draw an analogy with writing a research paper. If you care about the grade in a subject in which you are not particularly knowledgeable, perhaps you should ask for assignment help – you’ll spend a little extra money, but get the desired result. This is also true in business – spending extra money on timely reforms is more than likely to pay off in the future.

    Perspective from the past

    Digital giants are achieving incredible growth by providing services to small clients without forging a close relationship with them. These companies have become experts at effectively serving a long line of small customers that most other businesses haven’t even thought about. It follows that companies in the old economy have a lot of room for growth aimed at increasing service share.

    For example, back in the early 1990s, a small company called Travenol Laboratories was one of the first to develop a system that was later called vendor-managed inventory. Travenol specialized in supplying hospitals. It was selling non-unique products and was stuck in what seemed to be a hopeless price war. The company began a research process and sent a small team to several serviced hospitals to find a way out of the impasse. The results were more than interesting.

    The team was surprised to find that once the goods arrived at the hospital (i.e., after purchase), the hospitals spent a lot of money on further goods flow management. Their processes duplicated many of Travenol’s processes, but without automation and on a smaller scale. After assessing the hospitals’ costs, the company realized that it was fighting for pennies in the price wars for nothing because it could earn many times more if it solved the problem of efficiency in the hospitals, which no one was addressing at the time.

    So Travenol developed a new inventory management service. The company assigned warehouse managers (called materials management coordinators) to the major hospitals it worked with. They counted the drugs and supplies in each room and clinic each day and reported the results to the company’s distribution center, where they assembled ready packages for the clinics. The company would take these packages to the hospital, and in the evening the coordinator would put them in their places.

    The system has been surprisingly effective. Hospitals’ costs have dropped by tens of percent, and so have Travenol’s, because it is now possible to optimize the number of orders.

    Furthermore, sales – even in hospitals with high supply volumes – have also increased by tens of percent due to the close interaction between Travenol managers and head nurses.

    But then many hospitals began to demand that this basic system be changed for them. Some wanted goods to be transported only to some clinics, others wanted everything to be unloaded at the admission point, and others wanted everything to be counted and laid out by themselves.

    Travenol turned out to be unprepared for these requirements: previously it simply collected orders and delivered them in large batches to hospital admissions offices. Now it turned out that it was necessary to standardize the offerings to provide hospitals with several options for new services.

    It turned out that Travenol’s vertical functional structure with division into departments was not suitable for the new service. Each hospital needed its own multifunctional team of salespeople, product managers, and supply managers, well-coordinated and able to establish close relationships with hospital counterparts.

    The company needed to decentralize its planning and management system and create separate teams for each customer. This required more qualified employees than the functional structure required. New employees had to be hired, but this investment proved very profitable.

    Segmentation by profit

    Using accurate transactional metrics and analytics principles (which allow for a complete profit and loss statement for each line of invoice), companies can divide their customers (and their products) by profitability into three main categories. These are profit sources – customers with high revenue and high profit, loss sources – customers with high revenue and low profit or loss, and insignificant customers – customers with low revenue and low profit who bring the company minimal profit but consume about 50% of its resources.

    Segmentation by profit is the basis for finding a new company structure and optimizing the size of each department.

    Sources of profit

    They generate the lion’s share of profits, so companies need to deepen their relationships with them. Integration with the customer (e.g., through an inventory management system) increases the cost to the customer of switching to another supplier, and also increases revenue and profits by strengthening the relationship between the supplier’s managers and the customer’s managers.

    Therefore, you need to introduce a decentralized planning and management system for this category of customers. Create multifunctional teams that will develop and improve their business. In these teams, both close cooperation between specialists and quality work with managers on the client’s side is important, so that you will be able to launch changes in their organization.

    The team must be skilled and experienced enough to meet all of the client’s needs. If a supplier fulfills a customer’s needs, it’s a good supplier. But if the supplier identifies and meets important needs that the customer didn’t even realize he had, he becomes a strategic partner.

    Sources of loss

    Sources of loss are large customers who cause the company to lose money. Generally, the main cause of losses is high service costs rather than non-market prices. Some customers ask for costly but non-paying services (e.g., special markings), while others order too often in small batches.

    Many of these causes can be removed, but that requires a different type of multifunctional team. They should specialize in reducing service costs. Fortunately, in most cases, it is possible to reduce costs for both the company and the customer at the same time. For example, if a customer orders too often, it is costly not only for the company but also for themselves, so implementing the right order pattern can be mutually beneficial and a source of loss will turn into a source of profit.

    Insignificant clients

    Insignificant customers are a different matter altogether. They are usually just small companies or large companies that don’t have a great need for your products – for example, a large factory that buys a few stairs from you. The main goal in working with these customers is to reduce the cost of service. This is where it really makes sense to reduce staff through digital transformation (automation of labor). Managers can reduce costs by creating purchasing portals, automated distribution centers, and limiting assortments.

    It used to be possible to become successful by entering a huge market with one offer for everyone. But today, you need to divide your customers by profitability and organize to provide the right services to the right customers in the right way. To do that, you need to restructure your organization and management system. And headcount optimization is a necessary step toward long-term success.

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