The COVID-19 pandemic has exposed the unpreparedness of many companies to sudden, unexpected changes in the market. The radical disruption of demand and supply, customer and client behavior, plummeting purchasing power, and the overall downturn in the economy has caught large global corporations, mid-sized companies, and start-ups in a bind. Costs of doing business quickly rose, operational procedures did not fit the new situation, and supply chains were hampered. All this happened even as sales and revenues dropped. The lesson has been learned: strategic costing is the new imperative for business resilience in a post-pandemic business environment.
Volatility of Demand and Supply
When governments decided to impose lockdowns during the height of the pandemic around February to April 2020, the main factor was to prevent the spread of the novel corona virus. In some countries, the quarantine worked and the infections were controlled. The closure, however, of businesses affected market demand and supply. As supply chains got disrupted, many retailers had to work with a smaller inventory. In some industries, production stopped completely. What usually occurs after is that market demand exceeds the supply by several notches, creating a “seller’s market”. This situation is commonly referred to as panic buying, a negative market state that leads to high prices. When commodities are priced too high, the poor and marginalized suffer all the more. The volatility of demand and supply affects both businesses and consumers. The cost of goods and the cost of running a business are two factors that interplay dynamically, requiring constant attention and strategic interventions.
Strategic Costing as Key to Resilience
During extraordinary circumstances such as a public health crisis, many businesses immediately resort to mass layoffs to reduce overhead costs, particularly for salaries. This is not always a good option since production will also suffer. Others apply the strategy of offering early retirement for tenured employees with high salaries, followed by the hiring of newer personnel who may be offered a lower income while the company is remaining conservative in its spending.
Another way to be cost-efficient is to avoid the proverbial “square peg in a round hole” through a pre-employment skills examination. By testing the skills or competencies of an applicant, the company would know if he or she is a good match for the vacancy. A good match means that time and resources for onboarding, training, and deployment of a new hire will correspond to and meet business needs.
Cost management also entails looking at work schedules, inventory controls, and supply or material sourcing to identify inefficiencies. Businesses with long-standing relationships with suppliers also have the option of extending their credit lines to control cash outflow. Marketing also plays a major role in terms of identifying new markets for products and services while adopting new approaches to keep existing customers or clients.
Designing New Business Models
The ongoing pandemic has also prodded many companies to review their business models beginning with their value chain. This cycle of evaluation starts with the cost of input materials or ingredients, capitalization, production costs, operating expenses, and the existing plus adjusted profit margins. They also need to factor in costs related to the distribution of products or services.
After a review of the value chain, a market scan is necessary to locate new opportunities or demand. A business also needs to check its capacity or any need to change its processes to meet that new demand. a good example is a strong dine-in restaurant that lost customers after the lockdown. Instead of laying off its workers, the owner looked at the demand for food deliveries in the neighborhood. After computing the capitalization required for shifting to a food delivery business model, they converted the main dining hall into a food assembly area. Some waiters who had the ability and license to serve as the delivery crew were reassigned to that new function. Other waiters became food assemblers who packaged the orders. A few received basic training in online or phone-in order taking. A shift in their business model and tweaks in production enabled a restaurant to adjust, adapt, and even thrive in an otherwise down market.
Evaluate, Adapt, and Overcome
Perhaps three major themes are evident in the aftermath of the COVID-19 crisis: businesses need to evaluate the situation, adapt to the new business environment, and overcome obstacles through grit and persistence. While business models and costing will remain essential tools to enhance the profitability of a business, the importance of intangibles such as the character and resolve of the business owner and his team cannot be over-emphasized. It may very well be a “survival of the fittest” and the businesses that respond well to change will prevail.