These are challenging times for food manufacturers, but paralysis is not an option.
The recent downturn in the economy has been quite remarkable in its intensity, global spread and duration. There is no question or debate any longer that we are facing the worst economic environment since the Great Depression in the late 1920s and early 1930s.
On a daily basis the business press provides us more data and insights about the degree of deceleration of the U.S. economy, which had an astounding decline in real gross domestic product of 6.4 percent in the first quarter of 2009 and caused the current unemployment rate to reach almost 10 percent of the labor force. The impact of the slowdown was immediately felt in the US and other countries around the world, which prompted the International Monetary Fund to forecast a global GDP decline of 1.4 percent in 2009 in its most recent outlook issued this past July, even after acknowledging some uneven signs of stabilization. This recession has also been longer than prior recessions, considering that it officially started in December 2007 and we are still going through it.
Along with many other industries, food manufacturers are trying to determine the proper course of action in this challenging environment. Should they still rely on prior assumptions that the sector is a “defensive” one and relatively unexposed to economic cycles? Is the right attitude to “wait on the sidelines” until the overall economy recovers? Is it too risky to act?
I believe the answers to all of the above questions are “no.” My rationale stems from the realization that profound structural changes will be in place for the long term as a result of the current economic recession. These changes will affect your operations on both the supply and demand sides of your value chain, and you need to proactively address them as well as leverage the opportunities they create.
From a supply standpoint, increasing costs and dynamics in the supply chain as a result of volatility in fuel and commodity prices, coupled with wage inflation in your global sourcing footprint, will continue to create more complexity in the process of managing costs and risks in the value chain. Furthermore, access to working capital for support of ongoing operations and longer term capital for expansions will be more difficult and more costly. The financial services industry will have to absorb future losses in its current portfolios, and underlying macro-economic conditions (for example, inflationary pressures and the need to finance the public deficit) will reinforce the trend toward more costly access to capital.
From a demand perspective, it has been interesting to learn that recent studies are already indicating the emergence of the “new normal” as consumers dramatically change their purchasing habits on a long-term or even permanent basis, not very different from the supposedly short-term behavior they have been applying during the current tough economic times. Therefore, the customer search for “value” will be relentless and the information available to customers via the Internet will be more and more abundant. You may also expect increased regulatory scrutiny toward product safety as well as sustainability-related demands. In the latter case, if you are a Wal-Mart supplier, for example, your products will be assessed in the future with a score based on the recently announced Sustainable Product Index, which will capture and make visible and transparent to customers the lifecycle sustainability performance of your products. Also, you will have to deal with upcoming U.S. legislation on controlling greenhouse gas emissions.
In light of the observations above, you can see that inaction is not an option for the continuous long-term success of your company. In my view, four courses of action are available to you:
Challenge your assumptions and further your understanding about what your customers value the most. A few questions to ask yourself:
1) What are the critical elements valued by my customers concerning quality, cost, variety, availability, delivery, and sustainable features?
2) Does this definition of value create new segments and markets I am not addressing today?
3) Does this definition of value jeopardize any existing segments or weaken my competitive position in the marketplace?
Analyze your product portfolio in light of the new demands and changes you now perceive in the marketplace as well the ones you are anticipating from your customers. Ask yourself a few more questions:
1) Which existing products best capture the new definition of value?
2) What are the “value” gaps in my current portfolio, in terms of new products or new features?
3) How do I quickly develop new products and transition from the current portfolio to a new and balanced value-based portfolio across the segments I intend to serve?
Pursue operational excellence in your business and start by assessing your performance along the value chain. Some questions to consider:
1) Where are the wastes and sources of waste that I currently incur in my operations?
2) Can I improve efficiencies, increase capacity and significantly reduce costs by removing waste in my current manufacturing operations and supporting business processes?
3) How can I reduce inventory in my operations and then reduce the need for working capital and the cost to finance it?
4) How can I improve the flexibility of my operations and supply chain and more quickly react to changes in customer demand and the economics of global sourcing?
5) How can I engage my workforce to continuously improve our processes and better support this more competitive marketplace?
6) How can I engage suppliers to properly respond to my changing needs as I progressively improve the speed, the flow and the capacity of my operations, as well as the pursuit of increased supply chain responsiveness?
Pursue sustainability excellence in your business by acknowledging the synergies it will have with your pursuit of operational excellence. Ask yourself:
1) Where are the opportunities to reduce energy costs and water consumption in my operations?
2) Where are the opportunities to reduce, reuse and recycle resources in my operations, thereby minimizing waste headed to the landfill?
3) What are the opportunities for product design and packaging redesign to minimize the use of resources?
4) How do I engage my employees in the sustainability effort as well as the community where I operate?
This is certainly a broad agenda comprised of several issues that need to be reviewed, and the time available to do so is very limited. The good news is that proven tools exist that you and your team can use to facilitate and make your assessment comprehensive, cross-functional and fact-based, in alignment with the mission and the vision of your organization. Examples include a large set of Lean, Six Sigma, Supply Chain and Product Portfolio Analysis, Change Management and Sustainability tools that can help you make an assessment and support your organization in the implementation of the initiatives you and your team will prioritize. The proper selection of the tools within the mentioned portfolio will depend on the nature of the issues you want to investigate in the context of your situation and the corresponding solutions you will later implement.
Most important is the need to act and to act fast. Even though I encourage you to apply a sense of urgency in this process, I want to reemphasize the need for you to take this opportunity to observe and analyze the fundamental and long-term changes taking place in the marketplace. Review the assumptions you have been using thus far. Then, define and design your action plan with a laser focus on your customers and on the long-term success and prosperity of your organization, your shareholders and value chain partners, your people and your community.