posted on March 19, 2009
Nothing will be the same again and no one can really predict what lies in store for us. However two things are clear First the wave of financial speculation that carried all of us along in recent years is now actually destroying real value created in the real economy. Consumers, businesses and governments are paying the price for all these financial games — and there is probably more pain to come. While we in the UK are now adjusting to our over dependence on the City, my hunch is that the rest of Europe will feel the pain later as the collapse in manufacturing exports gathers pace.
Second it is also clear that all of our customers will have significantly less money to spend in the foreseeable future because the tighter availability of credit, falling asset prices on which to borrow, dramatically reduced pension incomes, higher taxes and disappearing returns on savings, which are all forcing consumers still in work to significantly adjust their spending patterns downwards — by maybe as much as 30% for a long time to come. We have already seen the dramatic switch to cheaper products in the grocery market and the slump in the purchase of durable goods and cars, whose replacement can be postponed for a while.
But these reductions in spending will extend across the whole economy, including the public sector, as governments cut public spending as their ability to increase taxes is constrained by weak economies. Already some UK hospitals are facing big holes in this year’s budgets as their customers, the Primary Care Trusts, cannot afford to pay them for all the work they have already done. The next several years could well be worse not better.
The natural responses to this dramatic collapse in demand are aggressive across the board cost cutting programmes, fire sales of excess assets, wage freezes and short time working, switching to cheaper products and deep discounting of surplus products piling up in warehouses and airfields across the country. However necessary these might be these actions are unlikely to be sufficient to survive and prosper in this new environment.
The business problem that needs to be solved right now is how your organisation can learn to deliver roughly the same functionality to customers and still make a reasonable margin while selling your products and services for say 30% lower prices. And to learn how to make these adjustments in a matter of months and not years. I doubt any of us can wait for the purchasing power of consumers to return to previous levels — we now have to prepare for this new equilibrium between costs and purchasing power In lean speak this means adjusting to a new target price in the market.
On the other hand this is a once in a lifetime moment to redefine the basis of your business model and the social bargain with your employees to create the foundations for growing sales from this new baseline and hence sustainable jobs for the future. What is different about this recession is that most of us are much more financially literate than in the past, often owning our own houses and managing our own loans, mortgages, pensions etc. And we are all learning a lot more about the realities of business and finance as this crisis unfolds. This may make it easier to face the tough choices in an open and honest dialogue with your employees.
The only way I know to make an adjustment of this scale is using lean. Not as a generalised cost cutting tool but as the basis for fundamentally redesigning your end-to-end supply chains to meet this new maybe 30% lower target price for your products or services. If every grocery product was made, shipped and sold within a week as Tesco’s best supply chains do today the savings would easily meet this target. If every auto supplier’s supply chains moved from raw material to assembled product within a month instead of anything up to a year this would go a long way towards meeting this target. If hospitals could flow twice as many patients through their existing facilities as we know is possible this would meet this target. Similar improvements are possible in every sector of the economy if management could only see how to do it.
Moreover looking at the real end-to-end opportunities also reveals a lot of additional possibilities for doing more with your existing employees rather than firing them. Lean supply chains work because activities are closely synchronised with each other and are closely aligned with customer demand. Which may make in-sourcing the right strategy for the future, rather than outsourcing and extended global supply chains.