Monday, 7 February 2022

“We didn’t plan on it being this bad” is a constant refrain we heard from management teams through December and January as they struggled with the impacts of COVID.

The knock-on impact is being felt by all of us. Rationing of toilet rolls and paracetamol, shelves empty of chicken and sausages, flights being cancelled and I still can’t get the parts I need for my bike.

Management teams had planned for the issues that have arisen, however most hadn’t planned for the issues to be as severe or as prolonged.  Most teams also acknowledge that business practices are fundamentally changing. Global suppliers are less reliant on the ‘Just In Time’ model. Instead, there is more of a ‘Just in case’ approach, with local production increasing levels of safety stock and higher costs.

One of our mining clients, for example, whose operations include quarrying, milling, a workshop and trucking activities. Hit hard by COVID absences and delays in raw material supplies, they managed to maintain the majority of production. Key initiatives included training staff in different areas of the business and moving the multi-skilled employees across operating areas, when required – for example, quarry operators in trucks and mill operators in the quarry.  When required, they also extended milling hours and increased overtime pay to meet demand as well as rehiring a recently retired truck driver. These small initiatives had a big impact.

This highlights the importance for CEOs and COOs to consider potential short-term solutions to bring back some stability and minimise the financial and operational consequences in the future. In our experience, there are five most common issues.

1. COVID-driven staff shortages

As Omicron infections increase, more and more people are forced into isolation Organisations are, therefore, suffering extreme staff shortages and uncertainty, not knowing who will be available and when. Isolating staff is a massive problem. Woolworths and Coles announced that around 40% of their distribution staff were absent, 300 of the 800 employees at Chargrill Charlies are in isolation and Qantas and Virgin Australia cut routes due to lack of staff. So, what can organisations do about it?

Resolving the immediate issue is tough. Unemployment rates are the lowest they have been since 2008 at 4.2% with an aim of 3%, and there is not a large pool of temporary staff and certainly not in the volumes or skills needed to deal with all the absences. Searching, hiring and training new workers also takes time and investment. Any solution may require a mix of the following to partially fill the resource gap:

  • Manage the problem: Establish a workforce management team for the period to solve the daily workforce challenges.
  • Increase resource base: Hire temporary staff that are available, increase rates to encourage them to work for you, increase overtime levels and rehire recently retired workers.
  • Prioritise resource: Reallocating resources across the organisation and prioritising them to the highest value activities or products.  Determining which of your activities or products you should prioritise is not easy. Generally, it becomes a mix of profitability, key customer retention and cash generation and then allocating your staff to the products that best meet your objective.
  • Prevention: Daily testing to minimise risks of further absences.

2. Freight delays

All states are seeing major delays in freight transport. Trucks are being held at borders as they await approval to cross. Delays of 3-5 days are common, causing produce to perish and adding time and uncertainty to production schedules and increasing customer complaints. Many countries also have a shortage of truck drivers, worsening the problem further. A consequence for many farmers is that crops are being left to rot in fields as farmers don’t have the transport to get them to market.

This is one of the most challenging areas for organisations as many of these factors are outside of their control. Whilst expensive, clients are increasingly relying on airfreight to provide a level of certainty.  Others are starting to invest in their own logistics capability, acquiring trucks, refrigerated trailers and hiring drivers.

3. Short supply of raw materials

The combination of reduced staffing levels and increased consumer demands result in short orders being provided. One retailer is only receiving 60% of most orders leading to many empty shelves.

Similar to staffing absences, the key is making the most of what you have and trying to minimise the disruption. If possible, allocate supply to priority products, taking careful consideration as to what priority means for your business.  Also, speak to your customers – we are finding that some clients are being far more flexible around products, packaging and delivery to ensure they can get stock on the shelves. Increase the range of suppliers you use. And, finally, talk to your suppliers – understand their challenges and what you can do to increase your certainty, even if this means paying more for a period of time to guarantee supply.

4. Increasing prices

This week, packaging provider, Amcor, announced it had implemented price increases totalling USD 650 million. All of this will flow through to the consumer. But almost all input prices are increasing as inflated transport, shipping and scarcity costs feed through the supply chain. The impact of these increases, however, will depend on the industry you operate in. Cost plus contracts are increasingly rare but mean costs can easily be passed on. Other organisations will rely on traditional annual contract renegotiations and absorb the timing difference between the increase and their ability to pass it on. Others will have to be strategic in balancing the absorption of cost increases against the impact of changing pricing structures with clients and any subsequent impact on volumes.

It is important to minimise price increases through negotiations with suppliers and/or changing suppliers. Input price increases can also provide more momentum within an organisation to look for savings within the production process and further afield to provide some level of offset.  In the logistics space, we have seen companies charge ’COVID levies‘ – short term price increases that will revert when conditions normalise. These usually require some degree of leverage to implement but have the advantage of not being seen as a permanent increase.

5. Overstretched management teams

Most management teams were working 10–12-hour days pre-COVID. Now, there aren’t enough hours in the day to deal with running the business and fighting the COVID related fires. Additionally, over-stretched and over-tired teams are more prone to making mistakes and rectifying them requires more time. It is the perfect recipe for prolonging the situation.

Businesses must stop non-core activities and projects and reallocate resources to priority areas. Some clients, for example, have implemented a marketing and advertising pause and are reallocating these teams to resolve issues elsewhere in the business. Use advisors that can work as part of your team to get things done.

The short-term challenges from COVID are not easy to overcome, and there is no ‘magic wand’ solution. However, applying a number of small, but impactful, initiatives can mitigate any negative outcomes and more long-term initiatives should be considered to prevent a recurrence. Whilst these strategies have not yet brought my bike parts back in-store, they are helping many organisations to minimise the impacts of COVID on their business.