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5R - EFESO Integrated Approach for an effective Response to COVID-19

5R – EFESO Integrated Approach for an effective Response to Covid-19​

The new Business Paradigms after​ COVID 19 Pandemic​


 

In recent weeks and months, we have seen some incredible business paradigm shifts, from huge increases in demand in some industries to total loss of demand in others. We are getting used to working and managing our businesses remotely - mostly from home – and governments that are changing the normal rules of economy. The future will be different, and we need to take these paradigm shifts into account.

The Covid-19 pandemic is expected to remain a risk throughout the next months until a vaccine is developed, see the Survey made by EFESO.

In response to this and to help all our clients, whatever impact they have felt, EFESO Consulting has developed an approach, to be carried out concurrently, that builds on many good things that we know work very successfully. We call this approach the 5Rs - Realise, React, Restart, Reshape and Reload Leadership.

 






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REALISE

The main focus of this module is to understand what and where the profit bottlenecks are






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REACT

The second module focuses on 2 key measures; cash release and EBITDA improvement.






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RESTART

Ensures that activities that can be started are driven by the chosen scenarios in the company plan






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RESHAPE

Reshape is focused on medium-term actions, once we have survived, of course.


RELOAD LEADERSHIP

The fifth and final in the EFESO 5R approach, Reload the Leadership, addresses Remote Proximity Leadership 4.0.

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Anticipate crisis effects and identify potential issues

 

The first module of the 5R approach is Realise. The main focus of this module is to understand exactly what and where the profit bottlenecks are. Next are the employees. We need the workforce to be in good health and we need to know when and how to intervene in order to protect and rebalance.

Why these two areas of focus? Because we need to address the profitability crisis caused by customers shutting down value chains and suppliers who cannot work and who maybe need to be replaced by others, even on a temporary basis. We also must rebalance our own internal capacities whilst at the same time offering responsible duty of care to our employees.

Scenarios to understand the impact on profit and cash

The Realise team has to provide some scenarios that illustrate a spread of KPIs and results which are based on those scenarios, where you can see you how much the EBITDA can vary from nearly 0-40%. Then there is the challenge of planning to guarantee the balance between cost and revenues, in order to generate a good cashflow.

Digital Crisis Room

So, our solution is to create a core Crisis Room, a single point of contact for the whole business. This Crisis Room is made up of representatives from each function in the business and members of the top management team. They need to develop E2E scenarios and address the key risks that they can each see from suppliers, from customers, from logistics, from IT and so on. This team has to identify the business priorities and spot, plan and solve the cash bottlenecks, through inter-functional collaboration, one example of which might be cash versus cost. All the EBITDA, cost and cash actions will be highlighted in the Realise module and implemented in React (module 2).

Realise issues end-to-end in the value chain

As well as the financial issues, the supply chain response from suppliers needs to be assessed, to make sure we can really count on the plan we have created and don’t make assumptions about things that cannot happen.

We need to plan actions on our key assets. Shutting down machines and then restarting can be an obvious opportunity, but it can also be an unpleasant surprise; we need to understand exactly what level of resources we need to run in a partially shut-down state but at the same time we need a minimum viable organization.

We need to benchmark any smart recovery actions among all sites and functions. There can be many ways to contrast and compare the top 10 things we plan to do and save ourselves time. By adopting this approach, we will be able to plan all our 5R activities within the different regions and sites in a consistent and effective way.

By the end of the Realise module, we will have set up a Crisis Room and even Functional Rooms. We will have created and considered scenarios for our business plan. We will have established key risks and mitigation plans for each of the scenarios. We will understand the activities where the biggest losses are suffered and where we can implement the important and urgent actions.

 

Key activities and tools

 

  • Create a Core Crisis Room, develop E2E scenarios and assess key Risks
  • Identify business priorities and re-plan
  • Use inter-function collaboration to Spot bottlenecks on EBITDA and Cash and activate levers to anticipate / mitigate effects
  • Assess supplier & supply chain response
  • Protect key assets and resources
  • Benchmark on smart recovery actions
  • Plan 5R activities

 

Key deliverables

 

  • Crisis room and functional rooms activated
  • Integrated business plan scenarios
  • Key risks and mitigation Plan on the 5Rs
  • Loss-making activities indentified

 

Fast Cost optimisation and Cash generation

 

The second module in the EFESO 5R approach is called React but we also add the word Survive. It focuses on 2 key measures: cash release and EBITDA improvement.

The purpose is mainly to avert a liquidity crisis with banks and shareholders. To prepare for Restart, the business needs to have some cash to meet a variety of working capital requirements. We need to be sure we can keep a good financial balance.

Boost cash generation initiatives

Therefore, the first key activities related to cash generation are to speed up the cash we get in, to slow down the cash out as much as possible, and to boost E2E order-to-cash. We need to work on inventories, Accounts Receivables and Payables. We must be smart, on one hand in creating the inventory we need so we can deliver to customers, on the other hand in getting rid of bubbles of inventory at risk of low turns, by proposing convenient deals to customers who might buy them. We might even play with pricing and volume options with suppliers and customers.

EBITDA now initiatives

Looking at it from another angle, we need to find the right balance around EBITDA. Focusing on costs, we might need to insource something we would have previously outsourced. We could reallocate people and resources to different activities, perhaps to the few categories that are still selling. We might shut down those activities, products and services that are not selling and then fine-tune the organization to reduce employee costs, whilst keeping in mind, at all times, the need to avoid operational losses. New shift patterns but also revised asset planning will increase flexibility. Using temporary unemployment and taking advantage of all the possibilities the state is offering businesses are all realistic options that we need to consider. All of these, plus renegotiating contracts with customers and suppliers, will help to fine-tune the EBITDA number.

Short-interval control on sales, cash and EBITDA improvement actions

Sustaining sales, depending upon country market conditions, is an opportunity that can be taken if the sales team is able, on a daily basis, to capture any opportunities. So, at the end of this second module, React, we will have a better sales plan and improved P&L position, created by following the scenarios that were generated by the Crisis Room. By being collaborative and practical in our actions we will have a bottom up confirmation and visibility of our plan.

  • We will have generated a real cash release despite the volume loss scenarios, to achieve the percentage of turnover that we need to survive
  • We will have achieved cost reductions and cost containment
  • Targets will have been set for capacity and levels of stock, so that whenever volumes change, we will understand which targets we need to achieve to keep the balance between turnover and cost

There is one other significant and very possible deliverable: product portfolio simplification, or de-complexity. The idea of “alternative recipes” can be a very realistic opportunity - using components that are equivalent to others, if there is a lack of raw material or a lack of capital.

 

Key activities and tools

 

  • Improve Cash generation
    • Speed-up cash-in, Delay cash-out
    • Boost Order-to-Cash E2E
  • Reduce Costs
    • Insource, re-allocate, Reduce employees' costs (TE, ...)
    • Renegotiate contracts
    • Increase flexibility
  • Sustain Sales based on Country/Market local conditions

 

Key deliverables

 

  • Updated sales plan and P&L model vs scenarios
  • Cash release vs volume scenarios
  • Cost reduction / containment - target setting for capacity and labour, material waste, stock
  • Portfolio simplification / de-complexity

 

Vertical re-start management

 

Restart ensures that the activities that can be started again are driven strictly by the chosen scenarios that make up the company plan, along with the priorities that have been set and most importantly by the customers with real demand. The pace of this is so fast that we refer to this as a vertical start-up.

Vertical start-up achieved by supply chain collaboration

We need to have vertical start-up of Sales: growth pockets need to be exploited, we need to be present at customers, sales volumes will change on a daily basis. As much as possible, operations should be demand-driven in the early phases. The next step is to involve our suppliers, on the left boundary in the supply-chain. We need to guarantee that suppliers are ready to follow our plan, to guarantee the volumes we ask for and to guarantee the lead-times that we require.

Alternative sourcing options need to be activated. Meanwhile the team must avoid a potential crisis situation due to high working capital, caused by purchasing more raw materials than required and the challenge to sell what has been produced to match demand forecast.

Vertical start-up achieved by healthy internal assets and employees

A special team works on ensuring a vertical start-up of the operations. The ramp-up is preceded by a great deal of preparation in the weeks before. Our machines need to be checked, in detail, to be ready to run new processes or slightly different raw materials and more changeovers.

So, sub-teams need to work on Development and Operations to create ramp-up scenarios, to run internal readiness checks and to accelerate run@rate actions. We need to be in perfect shape, primarily our employees need to adopt new health and safety precautions and accept working in different conditions, e.g. a new shift configuration and organization of workforce to reduce risks.

Altogether, Development and Operations, Suppliers, and Sales, will deliver a vertical ramp-up.

All the activities we decide to restart need to guarantee On Time In Full (OTIF) deliveries on top of OEE. On Time In Full is vitally important to reach a stable level of OEE, to limit raw material waste. More than likely, we will also need to have improved stock levels. Stock levels might be slightly higher than usual because uncertainty will be higher and we need be able to respond fast.

 

Key activities and tools

 

  • Vertical start-up of Development and Operations
    • Analyze ramp-up scenarios
    • Run internal readiness check
    • Accelerate run@rate actions
  • Vertical start-up of Suppliers
    • Run supplier readiness check
    • Activate alternative sourcing options
  • Vertical start-up of Sales
    • Address growth pockets, Implement Excellence in Sales

 

Key deliverables

 

  • Vertical Ramp-up of selected activities
  • On time in full deliveries
  • Secured RM stock

 

Define business model, build resilient Value Chains

 

Reshape is focused on medium term actions, once we have survived, of course. This situation gives us a unique opportunity – there are factors that are changing externally in the market and as a result factors that will need to change inside the company, so reshaping the organization and the strategy is an important step that must be planned right from the start.

Reshape Strategy to win in the post-COVID-19 scenario

This module is extremely important, because the opportunity we have, since the spread of the COVID-19, is to think in a different way. External factors are impacting us, such as the changing behaviours of consumers who now live in a Shut-in-Economy. They have quickly got used to connecting to the market digitally. They have tried a new way of working, a new way of living, of traveling, of interacting with others.

We need to capture other risks that might come after COVID. The anticipated economic crisis will mean a different profile and different distribution of demand. Climate change might be even worse than COVID. In any case, being sensitive to sustainability will be much more important than in the past.

The focus of this team, from the beginning, even while others are thinking the short-term to survive, is: how to win in the post-COVID-19 scenario? How to build resilience in the business? We want to avoid losing competitiveness, or building another temporary value chain which is too fragile for the new changes that might occur. There is a set of activities that is built around what is being called the “New Normal”.

The new normal in customer demand

What is the “New Normal”? What will happen when consumers will again be free to operate and travel, when they have tasted the digital world? Will it, for example, still be acceptable to have a long value chain across the world? Will “open innovation” be used so successfully - to develop and convert factories and to develop healing systems and technical systems to support hospitals - something that will be used again? Most probably it will.

There will be a new demand pattern and a new fragility that we will need to understand on top of the new challenges we will face.

Implications on our operating model

In fact, we must review our strategy and our operating model. For example, can we identify more agile operating models and shorten the value chain (re-shoring or near-shoring)? Or, could we implement a total digital transformation, to have a “factory of the future” in place? Addressing business and behavioural changes in a more serious way? Another action is to define the new value proposition. Not only new products for the digital world, but also new services and a new high level of collaboration within the eco-system. This means, for example, we might share a factory with competitors, because the value is in the brand or in the service we give and not in the product itself any longer.

Implications on our organization

What we decide will depend on the industry. However, each industry will need to consistently develop an organization that is valuable for the future, starting from scratch. The organization and processes will have to be fit for the new purpose. Capabilities and skill profiles will need to be adapted and developed. Digital competences and digital processes will be critically important. Advanced Analytics will accelerate problem solving and the development of new solutions.

By the end of this module, we can reach those key deliverables.

We will have a strategic guideline on how to survive and win in the new scenario that we call the “Shut-in-Economy”. This will include new business models, new value propositions and new product and service portfolios. What we want to create is how the business will work tomorrow and how our future organization and future business model will cope with future crises. In parallel to that our digital transformation plan is a must-have; there is no choice - digital should absolutely play a key role in any scenario.”

 

Key activities and tools

 

  • Define the “New Normal” to structurally address new demand patterns and value chain fragility
  • Review Strategy and Operating Model
    • Identify new options for Digital Transformation, better addressing business and behavioral changes
    • Define new value propositions
  • Organization for the future
    • Design “Value- & Zero-based” organization and align processes
    • Develop new capabilities and skill profiles

 

Key deliverables

 

  • How to Survive/Win in the new scenario (“Shut-in-Economy”)
    • New business model
    • New value propositions
    • New product/service portfolio
  • Digital transformation plan

 

Remote Proximity and Leadership 4.0

 

The fifth and final in the EFESO 5R approach, Reload the Leadership, addresses Remote Proximity Leadership 4.0.

We need to focus on developing leadership in a new context, to build resilience in people and to avoid any loss of leadership and any gap in competence versus the demands of 4.0 New Normal. Why? Because the New Normal will be, as a minimum, a team inside the 4.0 environment and more likely a new Value Chain interaction in the eco-system. Remote leadership will be vital because smart working will be an increasing part of everyday life, where co-ordination and management will take place through digital, high-interaction moments.

A new mindset adapting and evolving leadership models

So, we must build this new mindset for the New Normal, to create a culture that can withstand and process recurring extreme disruptions. We need not only to change, but to change and be ready to change again. This means having the ability to adapt and evolve leadership models in times of crisis, whenever it comes, and to promote courageous, innovative and risk-taking behaviors, even in an efficiency-dominated culture (which was maybe valid up until 2019, but no longer).

Remote proximity with competencies and behaviours able to deal with digital

To cope with Remote Proximity, we have to develop a digital twin of our daily routines and to identify these Digital Interaction Moments, as illustrated here. Alongside this, we must agree a set of practices and behaviors to make these Digital Interaction Moments fit for purpose. Then we need to choose the right interaction technology and tools that can serve these very specific goals.

What does this mean for senior management? We need to deliver, for a selected leadership team, enhanced competencies and behaviors, which will make for a more flexible and competitive organization. We need those people who don’t fear change and who can lead Digital Interaction Moments effectively. We also need a roadmap for Remote Proximity and the right people to adopt and successfully implement this roadmap.

 

Key activities and tools

 

  • New mindset for the New Normal: a culture that can withstand and process recurring, extreme disruptions​
    • Develop the ability to change the leadership model in times of crisis. ​
    • Promote courageous, innovative and risk-taking behaviour even in an efficiency-dominated corporate culture​
  • Management 4.0 with Remote Proximity​
    • Creating a digital twin of our daily routines and identifying our Digital Interaction Moments​
    • Agree a set of practices & behaviours to make Digital Interaction Moments fit for purpose​
    • Choose the right interaction technology & tools that serve the specific goals & dynamics ​

 

Key deliverables

 

  • A selected leadership team with enhanced competencies and behaviour to make the organisation more flexible and competitive​
  • A new structure of Digital Interaction Moments​
  • Remote proximity roadmap​
  • Adoption and successful implementation of this roadmap​

 

EFESO Survey


 

Relying only on emergency actions like smart working, temporary unemployment and other cash-out mitigating actions would put Companies at risk in the medium term – especially should the business context not recover quickly. Businesses are expected to be impacted throughout 2020 (and beyond, according to less optimist scenarios), and many industries will structurally shift.

In the short and medium term, challenges for Companies span from survival to restart, from cash and cost performance, to sales growth and new business models, from new workforce norms to innovative operating models that can ensure companies resilience at operations restart and throughout the next months.

We have produced a report that aims at helping the fight against these economic implications, and the findings come from the responses of leaders of industrial companies from around the globe.

We will continuously update the online survey charts (the survey will remain open for at least another 4 weeks).

We will also publish a second version of the report, with enriched findings, once we have received and analysed input from the new respondents.