Embracing the value chain to cope with modern uncertainty

Thursday, 10 December 2020

Kamal Prasad photo
Kamal Prasad
Partner, Digital & Technology Advisory, BDO Australia

    Conditions in the business world have never been as fluid, or moved quite as quickly, as what is occurring today. This unprecedented level of malleability has brought new importance to building resilience into companies' strategies.

    Look back on companies' priorities 20 years ago, and you'll discover a few clear themes. Businesses were offshoring their manufacturing operations at a rapid pace, seeking to create value through the scale and speed enabled by 24-hour production at mega factories. Developing and optimising costs across the supply chains was a fixation for decades, but the tides have turned against them.

    Companies today are rethinking their priorities, eyeing new partnerships and practices and abandoning the conventional wisdom behind the offshored mega factory model. There are three general areas of change pushing them in this direction:

    • Changing consumer expectations: Customers today are thinking about brands' identities and personalities more closely than ever before. This means they can change their minds quickly based on social media posts, but it also means they are willing to wait longer or pay more for products from organisations they like and identify with. Being fastest and cheapest is not necessarily the way to win these buyers over.
    • An unstable geopolitical situation: Conditions in the political landscape are prone to shift more rapidly than before, with an impact businesses can feel in terms of tariffs, trade agreements and tax optimisation. The old model of working with offshore producers to build inventory is more difficult to manage in a world where shifting alliances are hard to predict.
    • Pandemic conditions and related disruption: Boards have recently found what it means to cope with a once-a-century level of uncertainty and broken connections. Movement of people and goods has never seen the level of setback recently inflicted by COVID-19, demonstrating gaps in classic risk management models.

    Operating models that were widely embraced only a few decades ago have proven inadequate to cope with present conditions. This gives directors a powerful incentive to find what's next for their organisations.

    How is the new model of resiliency being applied to a shifting landscape?

    The traditional way of guarding against risk was to make contingency plans based on historical precedent. What businesses have seen lately, however, has been wholly unprecedented. Boards are discovering that they have a new journey ahead of them, one that is focused on maximizing value – for their customers, ecosystem partners and suppliers.

    This relationship built on value can be broken down into three main categories:

    • Customer side: Reaching out to customers in new ways can redefine a company. For example, global consumer goods powerhouse Nestle has experimented with its own retail stores to bring its coffee products closer to its audience. Other companies are finding their own versions of this approach, making themselves more "sticky" and memorable, whether on social media platforms or in physical space.
    • Operational side: Closeness in operations can mean nearshoring or reshoring at least some production. These capabilities help brands resonate with their customers, as they can now show off where and how their goods are made and exert more control over matters such as environmental efforts and community relations. In exploring these options, diversifying location of supply to closer could also result in tax or investment benefits.
    • Supplier side: While relationships with suppliers have traditionally been relentlessly transactional — with slowness in fulfilling an order bringing penalties — the new model is different. Now, true partnerships are becoming desirable, with the companies weathering disruptions through joint strategies.

    This all adds up to a new model, one that is less based on building inventory to cope with unexpected interruptions to one that is based on shared value and relationship. After all, today's shifts in the landscape are so fast and complete that excess inventory could become an obsolete liability virtually overnight, whereas connecting with customers, ecosystem partners and supplier can help weather these changes much more effectively.

    What is data's role in the value chain?

    Companies today have access to more data than they've ever had to contemplate, and they are on a journey to make it useful. Businesses who invest in and prioritise building their data capability now will be better placed to create customer connection, take advantage of new opportunities, create new business models and reinvent existing practices that orchestrate the end to end value chain.

    And being able to effectively utilise and leverage data gives your board and executives a clearer picture of the issues and opportunities ahead and the best assumptions to adjust your business’s operations in response.

    This content is simply an overwhelming stream in its raw form. Questions boards can ask management teams’ include:

    • Are we progressively moving from gut feel to evidence-based decision-making? During times of considerable uncertainty, it is important that businesses adopt an evidence-based (e.g. data-driven) approach to decision-making as this can minimise risk, improve outcomes, prevent decision paralysis, as well as give key stakeholders greater confidence in your decisions. For companies, this will allow them to better optimise the use of key - and possibly scarce - resources as well as identify new opportunities to pivot their operations

    • Are we investing in analytics to better understand buying behaviours? Changing buying behaviours has led to several issues for companies including sudden demand surges. As a result, companies can find themselves in a difficult situation where they are struggling to consistently produce the optimal amount of products and/or inputs for their customers. Utilising analytics and predictive modelling, however, can help companies to better understand the purchasing behaviour of their customers, allowing them to more accurately forecast future demand levels. This in turn can minimise costs due to overstocking, as well as loss of revenue in the case of understocking. Finally, analytics can also assist key business decision-makers when it comes to deciding future resourcing and pricing of supplier/customer contracts.

    • Are we improving data management and reporting for cross-functional planning? As companies today are operating in both an uncertain and lean cost environment, being able to quickly identify and determine how a change in one part of the value chain has flow-on effects to another is critical. This is where implementing fit for purpose reporting (underpinned by good data management practices) significantly aids companies as it allows them to accurately estimate the degree of impact of a change (e.g. a supplier delay or border closure) on their business and which areas of their value chain will be most affected.
    • Has the data been cleansed and protected? With increasing data comes greater responsibility to manage and protect the data. Securing information and performing assurance to be certain of data security and reliability will minimise the negative consequences and reputational damage of a data breach.
    • Is the business cloud-enabled? As the need for computing resources increases on an unprecedented scale, businesses are migrating to the cloud. Cloud-based infrastructure can provide answers to the suddenly universal requirement for flexible, affordable and secure computing resources. Small organisations are embracing the cloud to instantly build out enterprise-grade networks as an operational expense. Corporations are using the resources for scalability and security, adding capacity at a rate they could not match with on-premise data centres.

    Where are companies in their value chain journey?

    Pivoting away from years of stretching supply chains around the globe and becoming more removed from other entities, companies are engaging differently with their customers and working closer to their ecosystem partners and suppliers. This also means finding new avenues to create value, all with the goal of stoking loyalty and relationships that lead to real resilience.

    Boards are in the process of exploring this new architecture to build resilient modern value chains. While doing so, they must remember to stay true to their core objectives and view the business landscape with a new lens. Since all organisations are different, emulating another company's playbook is not a viable strategy. Success means designing an approach that unlocks opportunities to create value and relationships and leverages data to bring customers, operations and supplier together in a fast changing business landscape.

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