Warren Buffett on who is swimming naked

As the COVID-19 pandemic continues to lock us all down and as the light at the end of the tunnel is presenting itself and we realise it is not an oncoming train, a number of things are becoming clear:

1. Focus is starting to move to the performance of supply chains.
2. Warren Buffett’s saying is holding true. “You don’t know who is swimming naked until the tide goes out.”

Let’s think about supply chains for a moment. As many of you know supply chain is of special interest to me as it is one of my strengths that sets me aside from my competition. I am primarily business and profit focused rather than being solely technology focused, as my competitors are.

In my opinion, the current crisis will have the following implications:

• There will be significant talk about “reshoring” manufacturing back to Australia as the real risk and exposure to sourcing from countries like China hits home.
• Understanding of the real difference between price paid and total cost of “Offshoring” will become a lot clearer. Lower labour cost will take less of dominate position in manufacture or buy decisions.
• Raw materials, particularly for health industry products, will remain difficult to get for some time to come as countries where we source these raw materials implement their home country first policies.
• Strategic stock piles for health-related products will be under review after reductions of up to 60% in some countries, due to working capital reduction programs, have lowered our strategic stock levels.
• Many companies will now review their procurement strategies and reconsider having multi-supplier alternatives. Having multiple sources of supply and supporting within country manufacturing capability was a key strategic recommendation of one of my engagements for the Federal Heath Department from 2005. Something that seems to have been forgotten over time.
• Airfreight on regular passenger airlines commonly used by some companies for cold chain products (those products that have to be delivered within 72 hour windows) or light weight products are now causing issues as companies have difficulty finding flights, now that the majority of them have been cancelled. Cargo specific flights, particularly in/out of Europe often fly into different airports – an example here is Avalon in Victoria. Some companies have experienced 600% increases in freight costs along with longer freight routes from the different airports – something which is especially risky for products that have a tight shelf life or cold chain requirement, not to mention the additional costs being incurred.
• Increased focus on restoring manufacturing within country may not prove to be as simple as first imagined by some. Raw material availability for many products may have to be developed in this country e.g. API (Active Pharmaceutical Ingredient), and supply cannot be immediately turned on. Some may not be possible at all leaving us with the choice of having to hold larger buffer stocks or increased sovereign risk in the case of supply from China.

It is my contention that Innovation will actually be the key to manufacturing rather than a return to the old manufacturing philosophies that will allow us to future proof supply chains. Smart use of Industry 2.0 and other technologies such a 3D printing and the like will be the way forward.

My contacts in Europe are also starting to see a huge shortage of containers for export shippers in some areas due to the recent changes in trade due to the virus. If this continues Australian importers may be able to source product but may not be able to ship them.

For those interested in reviewing their supply chain strategy, a quick look at my 5V supply chain model might help identify the areas where you need to look. You can see the model here.  

This has implications for ERP systems as well,  both existing and potential new ones. There is a high probability many legacy systems will not support the demands of your new strategy and this new strategy should be a foundational component to the selection of any new system. However, that does not necessarily mean you need to throw the baby out with the bath water and change your system. I have been involved in a lot of projects where we fine-tune the use of an existing system and perhaps supplement this with some new technology and we achieve the result without the cost of interruption of a new system selection and deployment.

If you would be interested in chatting more about how application of this model can help your business or what implications this will have for your current system, reach out and we can chat in confidence about how I can help.

Let’s move to the unpleasant thought of Warren Buffett’s saying about swimming naked.

It seems that many have been surprised by how many organisations have been placed in receivership recently or have indicated they need government help to survive this crisis. I’ve mentioned this previously in relation to the NRL. With Australia not having had a recession for 27 years, I have suspected for some time that there are a reasonably large number of companies who have been surviving simply on cash flows and have not actually been adding value to the company. Many in the accounting world have been talking about zombie companies for some time, some of which, if a detailed analysis was to be undertaken, could or would have been classified as being insolvent – AKA swimming naked without anyone knowing.

It has been my contention for a long time many companies have been using the wrong metrics to measure business performance. There are a lot of executives using EPS, ROI, Price Earnings Ratios, EBIT, EBITDA and the like. But my issue with those measures is that it is possible to have improving sales results with these measures when you are in fact lowering or eating into the value of the business. It is my belief that an executive’s role is to enhance the value of the business during their tenure and do what it takes so the business is more valuable at the end of their time than it was when they started. Alas that requires long-term thinking. 

Regular readers will be familiar that I have spoken about the power of EVA (Economic Value Added) before. In simple terms it is a measure that takes into consideration the cost of the capital required to generate a company’s result. The formula is simple: EVA=NOPAT-WACC

Application of this is somewhat harder. However when it becomes part of a company’s DNA and the way of operating, it dramatically changes decisions for the better. I have a number of clients successfully using this measure and I have seen first hand the significant difference this has made to their business. If you are interested in understanding how this concept can help your business, reach out to me and we can have a confidential conversation. 

One observation about the virus crisis. 

I was speaking with a doctor friend of mine and they expressed significant concerns around the potential consequences of the over-use of hand sanitiser. Just like we have over-prescribed antibiotics and bugs now have a resistance, likewise over-use of sanitiser has the potential to have a similar impact. Now I’m no expert on this, but it has come from a smart guy in the field, so it may pay to be cautious about how much you use and stick to plain old soap. 

One last topic on the personal/professional front.

I am pleased to announce I have accepted an invitation to join a Global Supply Chain Think Tank led by Patrick Daly, an Irish supply chain consultant. This think tank is a Special Interest Group of SAC (Society for the Advancement of Consulting). It consists of leading thought leaders from across the globe and I am humbled to have been invited to join it. Our initial project is to develop an e-book on “Future-proofing your supply chain” with each of us from the group contributing to this joint publication. You can learn more about this here.

Remember, true independent advice can provide:

• An honest point of view
• A proven methodology
• Knowledge of what questions to ask and an ability to put an ERP vendor under pressure to prove their statements of capability
• Support to executives so their risk is minimised

If you or anyone you know is looking:

• To improve the way their business operates 
• To improve the way they leverage their current system
• To replace their current system

Give me a call for a confidential discussion on the best way to achieve this.

Until next month …

Sincerely,

David

(c) David Ogilvie