As the world struggles with the COVID-19 pandemic, business leaders have a particular responsibility to address the crisis in a systematic and coherent manner. This means consumer products companies should try to manage a crisis across its three phases—respond, recover, and thrive.
Right now most consumer products companies find themselves in one of the first two phases. And in these phases the role of supply chains looms large.
Respond: thinking beyond cash
For many consumer products companies, they are finding themselves squarely in the “respond” phase. This involves addressing severe disruptions in the supply of raw materials, critical components, and finished products. Not only has revenue been lost by supply chain disruption downstream but also by the drop in demand upstream. This is putting sudden, unanticipated pressure on liquidity.
It’s understandable that under these circumstances the immediate response would be to focus on collecting as much cash as possible from customers. And certainly, cash flow is critical. But it’s important that at the same time consumer products leaders think long-term and holistically to keep the value chain alive.
In the respond phase, collaborating and communicating, both upstream and downstream is key.
That means, first of all, clearly differentiating and understanding who your most important customers and suppliers are. The question to ask is “can we afford for supplier X or customer Y to go bankrupt?” Ultimately, how important are they to the long-term future of your company? Then you need to walk in their shoes: which suppliers are likeliest to need short-term help to avoid bankruptcy? Which customers are most likely to have liquidity whenever the crisis ends?
The goal here is to avoid pushing your most critical clients into bankruptcy if they can’t immediately pay their bills. Consider instead whether there are short-term solutions to help support their cash flows.
Recover: putting price in its place
Some consumer products companies may already be in this recover phase. And for those who aren’t, they will be at some point. Regardless, recover is the stage where you need to start thinking ahead.
For consumer products companies, this means re-thinking their ecommerce and omni-channel approach and the adeptness and flexibility of their supply chains in responding to crises. That’s not to say that companies haven’t been doing this already—but the COVID-19 disruption is a catalyst and will accelerate the process. The two areas are of course interdependent: as you develop more e-commerce channels, your supply chains need to adapt. That way, if demand changes rapidly during another disruption, your supply chain is set up to respond just as rapidly.
A likely consideration for consumer products leaders will now be where the suppliers of their most critical components are located. If high-priority components are sourced from a single country or region, this could prove a significant problem down the road if another major disruption occurs and the supplier is suddenly forced to shut down. Companies will need to spread risk by diversifying supplier locations for important components.
What this means is that price may not be the top consideration anymore. To be sure, when it comes to sourcing, economies of scale and low price will always matter. But the current crisis is teaching us that low price can’t be the sole consideration. Companies are taking considerable risk if they depend on one supplier, or group of suppliers, in a single location. Going forward, it will be important to evaluate the delicate balance between price and risk.
As consumer product companies begin to recover from the crisis they should also be re-evaluating route-to-market and how responsive they can be during another crisis. This boils down to re-thinking channels: the more diverse your channels, the faster you can adjust should one route-to-market close down in a crisis. A footwear manufacturer, for example, might be highly dependent on retail outlets in a specific geography. But if those malls or other physical outlets close rapidly and the manufacturer lacks a robust ecommerce channel, the result would be a significant drop in revenue.
To address this, many companies may look to develop more e-commerce channels through a third-party platform. They may also opt to develop their own direct-to-consumer channel. Naturally, the latter option gives companies much more control and more flexibility to respond to changes in demand during a crisis.
In addition to e-commerce, consumer products companies must also consider other upstream options that may present themselves. Has the crisis caused a shift in demand from one channel to another—say, from restaurants to retail stores? If so, are there ways to repackage and redistribute your product to meet that demand? As part of the recovery phase, companies should consider these alternatives and how flexible their production processes are to meet new demand. Even under the best of circumstances production changes can be complex and time-consuming. But in the next crisis, taking two weeks to adjust could mean two weeks of lost revenue.
Preparing for the next crisis
How individual consumer products companies navigate the respond and recover phases of the COVID-19 crisis will of course vary by geography and by sub-sector. And much uncertainty remains as to when and how economies will reopen. But supply chain issues are something all consumer products companies will contend with at some point in this emergency. Even if this crisis fades faster than anticipated, crises are unavoidable—and consumer products companies need to be prepared.
To learn about managing in a crisis, please visit the Deloitte Global page which brings together our sector-specific insights to help businesses manage and mitigate the risk of COVID-19. For more information on supply chain recovery see the Deloitte report, COVID-19: The recovery of organizations and supply chains.
Leon Pieters is the Consumer Industry leader for Deloitte Global. In this role he has responsibility for overseeing Deloitte Global’s four consumer sectors: Automotive; Consumer Products; Retail, Wholesale & Distribution (RWD); and Transportation, Hospitality & Services (THS). Leon is charged with setting the overall strategic direction and go-to-market strategy for the practice. Currently a consulting partner in the Netherlands firm, Leon has more than 18 years of experience working with large multinationals, especially in the food & beverage space, on strategy & transformation projects across the major countries in Europe and in the United States. His key areas of expertise include supply chain strategy, operating models, process optimization, technology enablement and digital transformations. Leon is a sponsoring partner of the LGBT initiative (GLOBE) of Deloitte Netherlands and is a Board Member of Workplace Pride, the international organization for inclusiveness of LGBT employees in the workplace.