How many companies will sustain this change?
A major change is under process, only determined pro-active companies will survive this change, others will vanish. It doesn’t matter how big or how old is the company. Adopting to change and accepting the change is the initiating point.
Manufacturing companies before February 2020 is totally different than that of after May 2020 because of Covid-19 affecting the global economy. The dynamics of the game is changing dramatically. The priority of the consumers is about to change drastically. Safety, Security, Food for survival have become the priority pushing back luxury products. The people who have enough money have started to tighten the strings to spend only for necessity. This is the problem, now let’s focus on the solution.
Lockdown resulted in Economy slow down. Economic slowdown resulted in reduction in buying power. Reduction in buying power results in reduced revenues and margins of manufacturers. It affects both Bottom-line as well as the Top-line. The most important macroeconomic factor is the Price elasticity of demand.
What is Price elasticity of demand?
The sensitivity of demand to change in prices. If price reduces demand increases and vice versa.
Now let us see the causes of Price elasticity of demand.
Major cause being the necessity of the product or its cost. A change in price does not always lead to the same proportionate change in demand. For example, a small change in the price of washing machine may affect to a considerable extent, whereas, large change in the price of sugar may not affect its demand. So, elasticity of demand is different for different goods. Based on your product and your customers you can assess it.
- Nature of commodity.
- Food grains, vegetables, Médecins, are necessity – inelastic.
- Fan, Refrigerator are comfort – purchase can be postponed – Elastic.
- Air-conditioner, washing machine are for more comfort – more elastic.
- Luxury Car, High end watches are high end luxury – Highly elastic.
- Availability of substitutes.
- Demand for a commodity with large number of substitutes will be more elastic.
- Even for a small rise in price will induce the buyer to go for substitutes. For example, if the price of coke increases the buyer will buy Pepsi.
- Income level
- Elasticity of demand for any commodity is generally less for higher income group in comparison with low income group.
- Demand for lower income group is highly elastic.
- Level of price
- Costly goods have high elasticity of demand as their demand is very sensitive to changes in prices.
- Like laptop price increase will result in reduction in sales quantity.
- Postponement of consumption
- Commodities like Washing machine where demand is not urgent, have highly elastic demand as it can be postponed, if price increases.
- Number of users
- If the commodity under consideration has several users then its demand will be elastic.
- For example, if price of electricity is reduced, demand increases and vice-versa.
- Share of total expenditure
- Proportion of consumer’s income that is spent on a particular commodity also influences the elasticity of demand for it.
- Low value items are more elastic. Example Salt, Needles.
- High value items are more inelastic. Example Computer, Dish washer.
- Time period
- Demand is generally inelastic in short period of time.
- It depends on weather the time period is a month or a year or a day.
- Commodities which have become habitual have less elasticity, because it becomes a necessity.
- Example Tea.
Define your product category its necessity, the segment you serve and the pricing potential. Analyse your commodity and your target customer and their customer. For example, you may be serving to a tire II automotive company and ultimately who buys your product? What is the affordability of your end customer?
Till date the pricing and margins had enough buffer. But, going forward organisations who are willing to continue in business have to rework their numbers. If your operations are not tightened you may not make the same margins, even if you manage to you may not achieve the top line.
Lower segment attracts more demand, competition increases in this over crowded segment resulting in reduction in market share of the players. Margins skew down, cartelisation also may not work as alternatives would be available in plenty.
The simple formula for selling price = Raw material cost + Production cost + profit. Of this now selling price is determined by the market, you don’t have much control on raw material cost. You are left with only two things the operation cost and the profits. Profit is the objective of the business, so we end up with optimising Production cost. This is what will be the crux for the next decade for a successful organisation.
Wastage reduction or removal, Buffer reduction and production efficiency will be crucial in winning the game. You can’t afford to play with your yield as the margin is tight. Labour force with training and skill is critical to efficient production, you may not get it with contract labour or much employee turnover. Going forward, you may get labour but, trained labour for your kind of production may not. So, retain the work force. Suppliers have to be taken care for supply of right product at the appropriate time.
The most important part of efficient production is in proper scientific production planning. No resource can be wasted, it may be material or capacity or labour. So, planning has to done with at most care as the right product has to reach the right place at the right time. “Hit and miss” strategies can no longer be experimented. A proper systematic production planning optimising the resources is the key to success. Meeting the customer demands on time every time without inventory build up is the critical part for a profitable customer satisfaction.
Then the obvious part is execution of the production plan with least deviation to stay profitable. Don’t think that this is just a two months break, this is bringing in many irreversible changes. Many organisations who refused to adopt have vanished in history. Be positive, change for a better tomorrow. If you change you can survive.