There are some events that temporarily affect demand as it happened during demonetization in India and then there are events that affect supply like local political issues. However, very rarely an event happens that affects both demand and supply making it difficult for the business planners to tackle it and almost nothing in the experience bucket to dip into. Also, rarely a single event has a global impact on changing the way business is done.
What we are currently facing is such a black swan event. What was initially seeming to be a supply issue when the outbreak was big only in China and parts of Europe is now also becoming a demand issue as the situation warrants social distancing and prioritizing essentials over discretionary spending due to uncertainty. How do business planners cope in these extraordinary times? Surely one need not get buried under the unrealistic expectations from either themselves or their tools. These events cannot be forecasted so it’s not a performance failure. On the other hand, not doing anything about it is not the best way forward either. The responsibility lies in learning from the situation, spotting the strategic shifts in trends and planning better preparedness for the future.
This event has a lot of interesting outcomes worth discussing.
Violation of law of demand: The market is witnessing an unprecedented rise in demand for personal hygiene and healthcare products like sanitizers and masks amongst others. The MOP of these products has jumped up to 10 times and yet there is a rising demand. These products can be referred to as today’s Giffen’s Goods at least for the time being. While companies are doing every bit to keep the supply lines warm in order to support the demand, the challenge for the planner lies in figuring out whether this is just an event or a new trend. An event is an outlier to an expected normal demand level but a trend is a journey towards a new demand level. There is a possibility that this outbreak may lead to a permanent change in hygiene habits of a larger population, than what was the case till now leading to a permanent shift in the demand levels of these products. While we shall wait to know the long term outcome, the demand in the short term is expected to remain high. The only caution should be the entrance of new local players trying to capture the demand at a lower price – something that we observed in the packaged drinking water industry. Hence, be realistic in your market share assumption while adjusting the demand if your organizationis in the sector positively impacted by the current situation.
A shift in the sales channel: If your city or market is in shut down mode and yet business is happening, you know which is the channel working for you. For some businesses which are totally online-only like grocery portal big basket or everything portal like Amazon, it’s an unprecedented surge in demand not only from their own customers but from those who cannot go to the store nearby, hence acquiring new customers at a rapid pace. The businesses which are omnichannel would certainly see gravitation towards online channel for sales. Again, the question for the planners here is that will they and how many of them will return to the stores post the crises? This would be the first time that there would be such a high demand surge in the online channel without the price incentive. What if the customers (especially the first-timers) like the experience and the convenience? which they are most likely to as the maturity level of both the technology and the supply chain is much better now. This is indeed a great opportunity for the online-only businesses to establish themselves beyond just a discount player and accelerate their valuation. We may in fact witness end of a deep discounting era as these companies emerge stronger. There are a lot of traditional businesses that had started an online sales channel but had a very small business mix until now. If you belong to such a business then you will certainly see a shift in that mix in the coming time. We need to plan for this shift in the sales channel both in terms of new customer acquisition and possible cannibalization of other channel demand.
Demand shaping avenues: As the demand action moves considerably online, it is only natural that the spend budget will follow suit too. The marketing spends for most consumer businesses did not still have a very high online channel share. However, this may change and you may see a new avatar of malls in form of Netflix of the world, wherein they will run their own promotions and you may have to do your own as well to get the share of clicks that replace the footfalls with eyeballs. The biggest challenge that the planners will face here is the same as the online-only companies have been facing and that is the lack of historical data for algorithms to work. However, the possible good news could be that if the deep discount and continuous promotion era do end then the demand pattern will likely be similar to the stores and hence the late entrants actually may have some advantage of utilizing the data. On other edge of the sword, however, shall be the almost negligible margin of error is maintaining optimum stock availability. In case of stock outs, the customer would not need to even go across the street to the competitor product or a seller, they are just a click away.
What about the planning tools?: With so much disruption possibility on how the business is going to be, it would be quite naive to expect that your good old chariot will help you win the war. Perhaps the time has finally come for excel to retire as a planning tool though, with honors. It has served us well but it will be unfair to push it any further. The AI/ML algorithms are fast taking over all aspects of the business and planning should actually be first to deploy them in the complex demand-supply scenarios that we shall face in times to come.
Another trend that may become norm is remote working or at least a higher number of people going remote. Hence it won’t be surprising to see future S&OP meetings happening completely over the web. Also, how will you record this event once it becomes history? does your system allow you to do so or is the function of the planners’ memory? Your system should be able to not only have the ability to auto select the best forecasting algorithm but also support the pace of online demand sensing, continuously optimize stock levels and collaborate with the dispersed teams under the same online console. Fortunately for us, these systems are already available. The ongoing short-term disruption is a good opportunity in terms of time for the companies to implement such systems, improve their processes and sharpen their saws to be ready for the new world ahead.
Financial planning: Will anything change for financial planners? I would imagine almost everything in budgeting and planning as and when all these possibilities come true. When sales channel shifts, so will the spend requirements as we move from capital intensive channels to opex intensive. We shall also become more urgent in our ROI demands. If the remote working shift happens it will mark another shift in the capex and operating costs for the organizations. The margin calculations will change and the already overworked finance teams may be under more pressure (notwithstanding work from home facility) to churn out real-time margins and working capital requirements. Again, it may be over-optimistic to expect support from excel to do all this . We need online planning tools with BI capability to support the new age finance function. For larger organizations, the time for truly integrated business planning on a single system should have arrived now.
This event is exceptional and hence the changes that it will cause shall also be exceptional. Organizations that shall consider this as yet another event that will pass before its business as usual again are likely to be in for a surprise that will unfold itself over time. These companies are likely to take usual short-term measures like cutting spends on new initiatives and only managing short term supply issues until the tide is over. On the other hand, those who foresee and recognize the bigger systematic shift will use the opportunity to accelerate process and system improvements. They shall utilize the time to ensure they are ready to meet demands of the future and from the planning function perspective, it shall have the right tools and training implemented for the battle-ready unit. The planning team also has the responsibility to show this future to the management to be able to decide which of the two organizations they want to be. Predicting this event was not the responsibility of the planning function but preparing the company to retain and grow market share profitably in the changing future, certainly is.