In an ongoing blog series, we are exploring how companies can endure the COVID-19 pandemic with innovative short-term tactics while also strategically planning for a post-pandemic business environment. Check out the first entry here.
There is no one currently conducting business that has ever dealt with anything like the combined challenges presented by the coronavirus pandemic. It’s truly uncharted territory. The scale of disruption and possibility of lasting changes to how we do business post-crisis are unprecedented. Right now, most companies are in survival mode, but at some point we will come out of this. That’s why we encourage taking a moment from immediate concerns to also consider what lies ahead. When business returns to a semblance of normalcy, we anticipate B2B manufacturing, distribution and services companies will be confronted with some or all of the following impediments:
- Unplanned Inventory
- Limited Supply / On Allocation
- Limited Demand / Margin Pressure
- Employee Turnover
- Supply Chain Changes
- Touchless Commerce
The leaders who will thrive on the other end of this are considering these outcomes and preparing their organizations now. In today’s blog we will examine the impact on inventories and disruptions to supply.
Preparing for Unplanned Inventories
During this period of lockdowns, depending on the industry, many product categories are seeing weak (or zero) demand while other categories are sold out. When businesses reopen fully, they are likely to find an odd assortment of available stock on their hands. Manufacturers and distributors will need to make strategic decisions around cost deviations, markdowns and write-offs for low demand items until the effects of the pandemic are smoothed out of the system.
Conversely, as demand picks up, it is likely to be unevenly distributed as the market plays catchup. This will rapidly deplete stocks of some products, while others are left mostly untouched. Companies will need to calculate ahead negative and positive unplanned inventories and execute against this coming scenario. We highly recommend a thorough examination of current inventory levels coupled with a data-driven projection of post-pandemic demand. This advance planning will guide the business to implement incentive programs for slow moving items and place scarce items on allocation.
Among the uncertainties to iron out now are how to price in response to shifts in demand, what cost deviations to request from suppliers and, as discussed further below, how to intelligently manage an allocation environment.
Navigating a Limited Supply Environment
Multiple factors are conspiring against your steady-state supply levels, such as prolonged high consumption in some categories, disrupted supply chains and temporary repurposing of capabilities. There will be a noticeable delay in restoring supply to normal capacity. Manufacturers and distributors may have to place some products on allocation to their customers. This is a tricky balance to strike.
When deciding who will receive limited supplies, how will you weigh factors like relationship, strategic importance, and of course, profitability? Most likely your biggest clients receive large discounts. If you’re focused solely on profitable allocation, you risk alienating your top customers, who may then defect. At the same time, how much of a margin hit will you take if you allocate only to those large customers? Finding the middle ground between customer segments and channels while getting pricing right is critical to sales and bottom-line performance in an allocation environment.
We recommend an objective assessment of your pricing practices weighed against inventory position and customer strategy. Data-informed decisions eliminate the risk of being swayed into taking irrational emotional responses to events.
Stay tuned: In the next post, we will look at responding to margin strain in a prolonged limited demand environment.
Ready to get a jump-start on post-pandemic strategy? Contact us today.
Zilliant is co-hosting a webinar in May with Modern Distribution Management that will prescribe short-term pricing tactics as well as long-term strategy as we navigate the coronavirus pandemic together. Stay tuned for more information.