Large, well-established companies have fallen on hard times due to this pandemic.
A turnaround of business will invariably require and begin with changes to adapt to COVID-19.
As a rule, in normal circumstances, poor management is the most common major cause of business failure.
In today’s landscape, and as a precaution, outside experts are usually brought in to review critically existing operations and lines of business and propose new ideas to correct identified problems in these difficult times.
Procurement should play a large part in finding the solutions to help alleviate some of the stress of the current worldwide epidemic.
Very often outside help with new ideas will have relevant experience to help with the turnaround.
When a business is on the verge of imminent failure, usually some form of radical change will be necessary to turn the organization around. Therefore, while the techniques employed in turnaround situations are generally advisable in the typical management context, they provide a useful guide to the steps needed in a situation of extreme urgency to gain control over a critical situation.
In this case, these changes not only apply to supply chain management, but to every level of management in the company.
From a procurement standpoint, the first step in a successful turnaround will often be to stabilize the cash flow so as to stop the continuous bleed-out of liquidity from the organization.
Only rarely can a business improve if it is unable to pay its debts as they generally become due. To correct such problems, management, including procurement, will try to generate additional working capital, looking to see if there are any available fixed assets that may be spun off to improve the ability of the business to service immediate debt requirements.
Over the decades, I have been directly involved with large companies to help generate cash flow from both sides, buying company assets many years ago when I worked in New York City and even before that when I was selling off obsolete surplus equipment while working at the steel company Dofasco.
This was always a quick way to generate money using assets that were no longer required by the company. This is normally a procurement function.While this exercise is being carried out, management should also investigate, and come up with a plan to cure, other major reasons for poor cash flow (e.g. to identify lines of business that are causing a substantial drain on funds).
The most common causes of poor cash flow are:
- maintaining an excessive inventory;
- over-expenditure on capital items that have little ability to generate income in the near term;
- the holding of redundant assets or the operation of redundant production facilities;
- not collecting accounts receivable quickly enough; and
- poor management of accounts payable.
I have always been of the school that accuracy of information is a prime concern. The initial goal is to be able to forecast cash flow accurately by reference to each day and week and then to improve the relationship (i.e. to match up) revenue flows with cash demands on the company’s operations.
A change of this type may not seem particularly rational, but it will often necessitate a wholesale improvement in the organization’s system of management reporting, the introduction of more competent subordinate management over specific critical aspects of organizational operations, and the discontinuation of major projects that the organization clearly cannot afford.
Very often where a business is on the brink of failure, its creditors will assume that any information it provides will be bad. Re-establishing confidence will be critical to a successful turnaround.
My personal feelings on the art of communication is that the more you communicate on a regular basis with your customers and suppliers, the higher the level of confidence they will have in your operations.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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