The IMF is already predicting setbacks for the global economy, with many countries still in the middle of a lockdown. What main problems are companies facing?

That varies from sector to sector. The automotive industry and its suppliers are doing much better in the second lockdown than in the first, for example, while sectors like retail, hospitality, and services have lost the bulk of their income. So, companies in these areas are having difficulty finding financing and counterfinancing for their current and noncurrent assets.

Does that mean companies can learn from the first lockdown?

Generally speaking, companies were far better prepared for the second wave than for the first. Back in April, many companies had no idea of how to plan their liquidity against the backdrop of such a crisis.

Cash management was the dominant topic on my projects. Now it’s about more strategic questions, like how to maintain our supply chain in the long-term. Right now, companies need to make sure that they can access their goods quickly once the lockdown is lifted—ideally without tying up too much capital.

You advise companies facing the challenge of completely restructuring. How exactly do you approach that?

Here at BCG, we break down the turnaround into two phases—the first phase is about making sure the company can survive in other words, liquidity management. In the short term, having access to financial resources is the sole focus. Companies don’t just become insolvent if they have negative equity or returns are poor; they have to declare insolvency if they are no longer able to finance or refinance themselves and their value creation.

Once this critical phase is over, the focus switches to becoming competitive; in other words, how companies can achieve good returns again in the long-term. In the current crisis, it’s also important that companies don’t simply look after themselves—the partners in the ecosystem needs to pull their weight. In an ideal situation, companies will reach separate agreements with each of their suppliers, which is why procurement also plays such an important role within the company. The objective of procurement is to communicate proactively, identify the current economic status of crucial suppliers, and find ways for the various parties to support each other. One potential strategy, for instance, could be to place an order and make an (partial) advance payment now but not purchase the goods until a later date, because these strategic suppliers will become vital once business picks up again.

In other words, everything is scrutinized first?

Exactly; nothing is sacred. On that point, far too many companies fall back on routine, whereas external consultants who step back and try to create necessary transparency can usually identify areas for improvement pretty quickly. Let’s say a department orders the same quantity of components month in, month out. The obvious question is whether they actually need that level of stock, as every penny counts in this phase, so it can make sense to run stocks down initially. Another example is recruitment: New appointments might have to be put on the backburner for a while under some circumstances.

Taking tough action right at the start is better for staff as well; there’s nothing worse for them than a turnaround that drags on and on for years. They’ll burn out and lose the will to actively support the transition.

How long does a turnaround like this normally take?

The actual restructuring takes place in the first year. The more steps a company works through in that period, the earlier it will achieve positive results. It has to implement 80% of the measures in the very first year, so that the effects are visible quickly. The second phase is then about looking further ahead, making the company competitive again in the long-term and setting overarching goals—we refer to that as a North Star.

A North Star?

Yes, it’s all about shaping the strategy and communicating it, so that everyone in the company can be guided by it. On the one hand, it’s important for motivating all the staff and, on the other hand, it’s important for the financiers as well—after all, they have to believe in the mission, too. Specifically, the company must define what its future business model will look like and where performance improvements are required.

That then determines the products it will offer in the future and what organizational structure makes sense. We use standard competitive returns to predict a target balance sheet and give a top-down definition of what cost components can be generated and where. Then we lay the groundwork step by step, so that the company is successful and stronger when it emerges from its turnaround.

Spring cleaning that can pay dividends

Many companies fail to organize their spare parts stock and either ignore or neglect key parameters for inventory management – even though structuring their spare parts management can save millions, as the following example from food production demonstrates.

There’s nothing glamorous about spare parts. Not only do they cost money and take up storage space, but their owners actively hope that they will never actually be needed. So it’s no wonder that many companies simply don’t pay any attention to spare parts management. What they fail to realize is that implementing a coherent system to record their spare parts stock, manage it in the long-term and adjust it to suit changing circumstances can deliver significant savings potential and efficiency gains. This can involve huge sums, even in mid-sized companies.

Spotting the problems on the balance sheet

The biggest problem in spare parts management is often the lack of an overview of what parts have been purchased and stored – as was the case at the major food producer in our example. Rather than one person in the company having overall responsibility, the managers at the individual production sites purchased the spare parts they required from different suppliers independently, without following a uniform standardization strategy. This resulted in spare parts with the same function but slightly different designs being stored in 30 locations across the six plants.

Although the company did record everything that was on the shelves, the overall system was rather informal and based on experience, instead of following a systematic plan. Once spare parts were purchased, the process was completed. But parts were not categorized by various criteria, even though this is essential for ongoing management of spare parts stock. This meant the food producer was also missing the opportunity to sort parts by criticality; in other words, how important they were for keeping production running smoothly, as a shortage of highly critical parts could bring the entire operation to a standstill.

Although the high number of storage locations is understandable – given that production managers want short distances between the machines and the spare parts they need – managing spare parts by location increased the variety of parts and, in turn, the costs in the long run. And naturally, stock levels mounted higher and higher. A glance at the company’s figures quickly identified the source of these inefficiencies. We linked the value of the spare parts in stock with the corresponding annual procurement volumes to give a rough comparison showing how many years’ worth of annual spare parts requirements were in stock. If this value is significantly greater than 1, then the company has more than a year’s worth in stock – which usually means there is potential for optimization. This information is a quick and easy way for companies to estimate the rough potential for reducing their inventory.

Getting your spare parts inventory in order

The first step is to identify the proportion of dead stock; the parts that are useless because the corresponding machines are no longer in use or parts that have been in storage for too long to be suitable for use. In total, this category was worth around 2,5 million euros.

The ideal stock level for each item depends on how often it is used, how easy it is to predict its use, and how important it is for production capability (criticality). Regular demand for wearing parts (maintenance parts) is typically easy to predict, so a comparatively low stock level is enough here. Items that fail without notice (repair parts) and that are critical for production capability, on the other hand, need to have higher stock levels. Optimizing stock levels here identified a further 4 million euros in potential savings.

Comparing the actual and target stock levels showed which items wouldn’t need to be ordered in the near future, as enough spare parts were in stock to cover the remaining run time for the corresponding systems. Procurement can be reduced or even halted for specific items until enough parts are drawn from stock to reduce inventory to target levels (cost avoidance). In tandem with that, the amount of capital tied in spare parts can be reduced on an ongoing basis.

How to achieve long-term results

As well as optimizing operational processes, it is important to implement lasting processes and work instructions, so that spare parts procurement is transparent and traceable in the long-term. This involves a certain amount of centralization of spare parts management, as achieving the desired results will be harder if each site continues to manage stock itself.

That shouldn’t be interpreted as unconditional support for centralization, however; having one central spare parts warehouse is often not the best solution for a company that has a high level of vertical manufacturing and operates a lot of different machines. A central warehouse typically only makes sense if a new plant is being planned, as implementing one retroactively is normally far too expensive. But the same or similar setups should already be managed centrally, so implementing virtual centralization for decentralized storage is an important step here. Simply bringing in “virtual pooling” reduced the inventory of standardized items used across locations by another 26%.

Centralizing how spare parts are ordered is another important step, as the fact that individual plants are no longer placing their own orders means there is no chance of them accidentally working against the overarching spare parts strategy. Implementing a new structure and assigning clear responsibilities enables staff to see what items are in stock and where they are held. They also now know when specific items have to be reordered for all storage locations and what quantities are required.

In addition, we have specified which parts should be used preferentially in the future and where they should be ordered from – in other words, a standardization strategy. Not something that was possible previously with 30 different storage locations, each with someone different in charge, with spare parts for the same machine purchased from different suppliers or even different manufacturers, making it impossible for the company to move parts between locations where necessary. Thanks to the new measures, the company is now in a stronger position to negotiate with suppliers, because it is placing orders in line with the standardization strategy and for larger quantities (as requirements are grouped centrally) delivering significant savings.

Reducing storage capacities has also freed up space that can be used to expand production capability and increase profit; yet another indirect positive effect of proper spare parts management.

Conclusion: Continuity is critical

The final step in projects involving spare parts management is to make sure that new mechanisms are embedded in the long-term. Falling back into old habits is often a danger when external parties bring in new ideas and then leave the company again after a certain period. In order to avoid this, we have defined strict processes and rules, and implemented a stringent and transparent monitoring system for inventory management, in addition to the setting up the spare parts strategy and determining ideal inventory levels.

Continuously following the procedure described here will identify dead stock and further inefficiencies at an early stage, to avoid stock levels gradually building up again.