Increasing profitability during the crisis

Where to look for reserves to increase profitability in times of crisis?

The pandemic and the ensuing collapse in demand and supply have found each of us at different points in the life cycle of a company or investment project. We, too, have been working over the past weeks to urgently adapt our company strategy to the new economic realities. At the same time, we have been talking to our clients about measures that, from their perspective, could increase the profitability of the company. Despite the difficult situation, many of them are already taking these measures. Based on the experience of our clients and our own, we propose the following solutions:

• flexibility
• VA/VE
• negotiations based on strategies for difficult times
• revenue indicators linked to the supply chain
• early involvement of suppliers

An out-of-the-box approach can make all the difference

Simon from our team relies on flexibility and VA/VE

Don't fight the current. You have resources that you can use in new ways. Be agile!

Flexibility can be a way to ensure liquidity and increase profitability. A clear example of this, during Covid-19, are companies that were able to switch from their traditional production of, for example, cars or mobile phones to the production of masks within a few weeks. Another interesting example is airline operators. As passenger transport has been blocked, some of them have started to use their fleet for CARGO-type transport. Flexibility also means changing the approach to the use of company resources and sharing them. The well-known brands Aldi and McDonalds in Germany have entered into a partnership. The cooperation agreement is about making staff available to McDonalds, which has had to scale down its operations, to support the handling of the growing volume of orders with delivery on the Aldi side. In an AGILE approach, the key is to make sure that our existing suppliers fit into this strategy, that they are able to operate with sufficient flexibility. The same applies to the processes by which the company operates. Changing the business profile is usually costly and not easy. This is heavily influenced by the specifics of production lines, which can be adapted to HIGH VOLUME - LOW MIX or LOW VOLUME - HIGH MIX. The economic crisis may cause the focus on lean supply chains, in which all „waste” is eliminated, to lose popularity. Agile, AGILE-type solutions may gain. They may not be the cheapest, but they certainly make it easier for companies to adapt to a dynamically changing situation on the demand and/or supply side.

Has your business slowed down? Take advantage of the VA/VE approach

Costs in a company can be optimised through Value Analysis and Value Engineeering [VA/VE] workshops and projects. Their main objective is to analyse and identify the appropriate level of „VALUE for MONEY”. During the workshop, we answer the following questions: what parameters and functionalities are essential to meet the customer's needs and what is the customer willing or able to pay for? The universality of the methodology makes it possible to carry out the analysis in the case of new products or services, those just being launched, as well as those being delivered. In the case of current products, it may also be relevant to analyse the competitors„ offerings and align your solutions with others available on the market. During VA, we may come to the conclusion that, for example, our product is ”too good' and the customer does not see the additional benefits. An example of a feature that raised costs and was not compensated by increased customer satisfaction could be the replaceable battery in smartphones. Currently, this is not an option in most top smartphone models. The battery is an integral part of the smartphone. For reasons of a more expensive production process and a low increase in customer satisfaction, this solution has been, at least in part, abandoned.

Negotiate differently today than in times of prosperity

Rafal from our team focuses on effective negotiation

Always expand your negotiating horizon to negotiate according to your own rules

In difficult times, your client or supplier will focus on achieving a short-term goal. More often than not, he or she will negotiate one-dimensionally: 

• “you have to reduce the price by 10%, otherwise we will give up on you”.” 
• “we need to get prepaid for the next order, that's the guidance I got from the board”.” 

The atmosphere of such negotiations will thicken very quickly, they will be difficult negotiations. By counteract this, To conduct business negotiations in a positive spirit, you need to prepare yourself properly. Try to broaden the horizon of the other party, show, a longer perspective of cooperation. By doing so, you have the chance to influence a change in the other party's attitude and negotiate cooperatively. By stimulating the other party to think creatively, you can defend and even influence your company's profitability. 

Let's say you run a service company looking after properties, such as offices. Evidently, your client's goal will be to reduce service costs, especially at a time when most people work from home. Your client may request a reduction in rates or want to cancel some services. If you agree to the client's imposed course of action, you will clearly come out of the meeting at a loss for your business. By broadening the perspective of the negotiation: the time horizon and the scope of the collaboration, you can end up winning. Perhaps you will give up the care of the green areas, but you will gain the ozonation of the space or the collection of samples and their transfer to laboratories for corona virus testing.

Act pre-emptively to influence customer requests

Time is always a negotiating parameter. In a situation as dynamic as the one we have today, it is difficult to predict what demands a supplier or customer will come out with. It is worth acting in advance to shape the expectations and demands of the other party. Let us illustrate this with an example of the purchase of plastic components, made of polypropylene or polyethylene. Due to downtime in the supply chain, there is currently a shortage of raw material - PP and PE granulate. The final customer and consumer of these products, is certainly already aware of negative oil prices. At filling stations, we are all seeing prices below PLN 4 per litre of petrol. If a manufacturer of plastic parts does not act preemptively, he is very likely to receive a request from the customer to reduce the price of the product! So what can be done to change the customer's perception of the situation? 

Before media information captures the customer's thinking, we suggest sending a letter in advance stating that, due to the allocation of pellets, there is a need for rationing and selective product supply decisions for all customers. Counterbalance the negative information with positive information. Suggest in the letter that an increase in the volume of orders will make a significant difference in maintaining supply priorities. To give the letter proper prominence, suggest that the CEO or other high-profile person in the company sign the letter. Upon receiving such a communication, the customer will probably rethink requesting a price reduction. 

Be a strategist, let your people negotiate

Reaching back years into history, we can find an analogy between negotiations and the Battle of Grunwald in 1410. The Western European chivalric ethos was that the chieftain takes a direct part in the battle. These principles were adhered to by the master of the Teutonic Order, Ulrich Von Jungingen. The Polish king, Władysław Jagiełło, did not take an active part in the battle. He observed the battle from a hilltop and made strategic decisions. This way of commanding was closer to the eastern art of war. As a director, manager or team leader, in difficult negotiation situations, just like Ulrich Von Jungingen and Ladislaus Jagiello, you have two choices:

1. Take an active part in the negotiation by becoming the spokesperson for the negotiating team and take the whole impetus of events upon yourself
2. Retreat to the position of Observer, keep quiet and let your people negotiate. Only speak up occasionally, when strategic decisions need to be made

The trap you may be setting for yourself is to assume that, in order to value an important customer or supplier, you are delegating to a negotiation meeting people high up in the company. In doing so, you are depriving yourself of the opportunity to escalate the talks to a higher level in a negotiation impasse. A strategy for difficult negotiations during a crisis should include a properly designed escalation ladder. Properly escalating talks to a higher level brings together people with a broader horizon and understanding of the complexity of the business. By sending a director to talk to a specialist you devalue your resources.

Take care of supplier relations

Monika from our team relies on relationships

Develop company revenue indicators taking into account the supply chain

There is still a perception among market leaders in the manufacturing, retail and even service industries that pushing suppliers to lower prices and extending payment terms is the way to increase a company's profitability. If a company's business strategy is short-term and survival-oriented, this approach may well keep it afloat for another year. However, what about the following years? Do we look for enemies or allies in the most difficult times? The question seems rhetorical. However, it is the current crisis that will strongly test the extent to which company managers understand that these are times when the strength of their company will be measured by the weakest relationships in its supply chain.

Look at the strategic business objectives and the KPIs developed based on them across the organisation. Define those metrics that shape the value of the business such as quality, cost, capital utilisation, NPV, NPS, etc. Know the role your suppliers play in shaping the level of these indicators. For these indicators, which are heavily dependent on the supply chain, introduce co-responsibility for their delivery.Remember to set KPI's in your supplier contracts in a measurable, transparent and fair way.

Communicate openly and frequently with your suppliers

Manufacturing companies typically spend half of their revenues on the purchase of goods and services.For non-manufacturing companies, spending accounts for around one-third of revenue.Previous research on supplier relationships indicates that companies with poor supply chain relationships pay, on average, between 3% and 8% more per unit price for the purchase of goods and services compared to companies that have worked on the relationship over the long term, involving their CEOs and board members in building it. Let's not kid ourselves, our suppliers' sales policies are largely based on forecasts of how they will be treated over the life of the contract. No less important are the prospects of engaging them in further projects with the client and, consequently, extending the contract.

Share KPIs, requirements and specifications with suppliers on the early stages of their involvement and keep them informed of changes and feedback on the collaboration.Make sure the information is complete and includes a clear message of what needs to be improved or strengthened.Encourage questions and listen carefully to your suppliers.Share best practices or lessons learned from other suppliers or from other areas of your business, and you can be sure that suppliers share their knowledge in relation to the best solutions they have implemented with other clients.Use the knowledge and advice of suppliers to prioritise problems and solve them.

Focus on innovation and involve your suppliers

Encourage engineers, programme teams, production, purchasing and finance managers to visit suppliers and understand how they operate. Involve suppliers in developing solutions where additional resources are needed, not only human but also technological. Before you invest in new technologies get suppliers who are already working on them. This is because they are familiar with the technologies and can share their knowledge of the opportunities and risks of such investments. Outsourcing part of your processes to technology-enhanced suppliers investing in innovation should be part of your long-term business strategy. Therefore, do not be afraid to cooperate with start-ups. Secure your company's interests legally and patent-wise, but treat suppliers as external assets of your company. An example of a brave combination of a corporation and a start-up, which fits perfectly with the current pandemic crisis, is the collaboration between insurance giant PZU and SiDLY Healthcare. The two companies recently signed a contract to supply telemedicine technology to PZU Health.

Introduce rewards for suppliers most involved in the development of your business

Every link in the value chain for your target customer must make money - including your suppliers. Do you want them to be the best? So help them invest in capital, research and product development for you.Make sure you meet your contractual obligations in terms of order volumes, payment terms and the resources you commit on your side.Once you have achieved the desired levels of KPIs, make sure your suppliers are rewarded as much as your team.How can you reward your suppliers? Well, there are several ways: a higher number of lucrative projects over the next few years, incentive bonus schemes or, finally, a prestige activity. It is a well-known practice to organise company conferences to which the company's key business partners are invited. During such events, companies reward their best suppliers, if only with a symbolic statuette. Such recognition in front of other invited suppliers and company employees will make other suppliers feel more motivated to receive a similar statuette from the client's CEO next year.

What can you expect when investing time in building relationships with suppliers during a crisis?

To answer this question, let's look at the example of a company in the medical sector that has applied most of the steps described over the years in working with strategic suppliers. In addition, the investment in long-term relationships on the part of the company's purchasing department, CEO and board of directors, has yielded positive results in times of great trial. The example described is a timely one. It took place during the ongoing Covid -19 pandemic. The productive relationship strategy of this company's supply chain contributed to maintaining a continuous supply of the most demanded products during the pandemic namely: surgical masks and disinfectants. At a time when demand for these commodities had pushed their prices above 1000% on average, the medical company continued to purchase these products from its long-standing suppliers at the pre-contracted price. The palpable effect of the pandemic was a slight volume constraint for this customer due to the need to temporarily ration the goods. The relationship helped the company not only to stop the hyper increase in fixed costs, but also helped to strengthen its image among current and future customers. The medical company was prepared for the introduction of new security rules.

What action can still be taken?

The market situation is very dynamic. We are all struggling to increase the profitability of our companies. According to available reports, the automotive sector in Europe produced more than two million fewer cars this year than in the same period last year. We invite you to follow our website and to participate in our upcoming webinars, in which we will discuss the near future together with our guests.