Surviving the Economic Crisis in Europe: A Perspective for the Mill Products industries
The current economic crisis and inflation are together having a major impact on asset-intensive industries, particularly in Europe. Prices are rising across the board, energy supplies can no longer be taken for granted, and suppliers are sometimes threatened with bankruptcy. Add to this an inflation rate higher than it has been for the last ten years. Companies are now forced to set the course for the winter months and 2023 under severe time pressure and volatile conditions.
Energy-intensive sectors such as the metal, paper, glass, and cement industries are being hit especially hard. Companies must take appropriate measures to ensure profitability – and in some cases – even the survival of the company. There are two main levers available to address this; either price increases directed at customers or reductions in purchasing and manufacturing costs. Both are only possible within certain limits, and it is not always easy to find the right balance. How do you find the right price to remain competitive and profitable at the same time?
The high volatility and difficult predictability of raw material prices pose a particular challenge. On the one hand, a sufficient supply of raw materials for production must be ensured. At first thought, a solution could be to build up large inventories, even if purchasing prices are high. However, this strategy might expose companies to the threat of high write-offs if prices fall again in a few months.
In addition, the supply of common supporting materials can suddenly become problematic. Some required substances, such as hydrochloric acid, are produced as a by-product in industrial manufacturing. If the supplier suspends production of the main product for cost or energy reasons, unforeseeable bottlenecks can quickly occur. Alternative sources of supply must then be found on short notice.
Sales forecasting also poses numerous challenges as it strongly depends on future economic developments. The last decade was often characterized by stable, slowly changing sales volumes, which made statistical forecasting relatively easy. Under the current general conditions, however, a larger and short-term fluctuation in demand – both downward and upward – must be expected. This renders many of the classic forecasting methods useless. Not only is it important to forecast as accurately as possible, but also to estimate their reliability and be able to respond to short-term changes.
Rising energy prices, and the aftermath of COVID resulting in a lack of truck drivers, have left their unwelcome traces on transportation companies. This can be seen, among other things, in the form of rising prices as well as decreased transport capacities in the market. For example, in the paper and packaging industry, transport costs have a significant impact on profitability and competitiveness. In this respect, it is important to make the best possible use of the available capacities and to keep transport costs within reasonable limits.
Do not let the crisis pass by unused
So, what is the best way for a company to respond to the crisis now?
You may know the story of the two men walking through the jungle and encountering a lion. One of them puts down his backpack and starts putting on his running shoes.
At this, the other one starts laughing and asks, “Do you really think you’re faster than the lion with those?”
To which the other replies, “I don’t have to be faster than the lion, just faster than you.”
This is an amusing story, as long as you are the person with the running shoes. But it also fits the current economic and energy crisis: no company can stop the crisis by itself, but with the support of the right tools you will be able to master the crisis – and potentially come out of it better than the competition.
However, crisis times are not usually the time when money for large investments is abundant. In this respect, companies should think carefully about where to invest and set the right priorities to achieve the greatest effect for the short-term protection of the company. Since every crisis has an end, these investments should also contribute to the medium and long-term development of the company.
In this respect, the investments should also meet the long-term goals of the company strategy:
- Navigate through the current crisis (survival phase).
Identify which areas can be improved in the short term to best navigate through the crisis. This is where the areas of greatest impact should be prioritized, and smart investments made. These can be seen as the foundation for the more long-term initiatives below.
- Build resilience (hardening phase)
Nobody knows today when the next crisis will come and what it will look like. Therefore, it is even more important to improve the general resilience of the company. It is essential to prioritize the investment areas that will contribute to strengthening the company in the medium and long term.
- Prepare for growth (start-up phase)
As surprisingly as this crisis emerged, the next upturn can be already around the corner. Maybe, the economic baseline will initially be a lower one, but this applies equally to all companies in the industry. It is important to secure as large a share as possible of the gaps to the pre-crisis level through above-average growth compared to the competition. Investments in solutions that allow this growth to be orchestrated flexibly will pay off.
How can SAP help?
The current situation is of enormous consequence, especially for companies in Europe, and impacts the entire value chain. SAP can help you respond to immediate challenges, strengthen your company’s resilience, and lay the foundation for superior growth in the future.
In the following, we name six fields of action and give examples of improvements that can be implemented in the short term. Furthermore, we would like to provide food for thought for medium- and long-term optimization.
Reduce the Financial Impact
Mitigate financial risk through better forecasting, hedging of material and commodity prices, and optimization and monitoring of energy contracts.
- Short-term effects can be achieve by better managing and reducing energy consumption und gaining an accurate view of the cash positions and forecast.
- In the medium and long term, the focus should be on improving profitability by using comprehensive cost models for better decision-making and mitigating the commodity and energy pricing risk.
Create end-to-end Transparency
Visibility into energy consumption, costs and the supply chain with proactive exception management and capabilities for simulation of what-if scenarios
- Short-term effects can be achieved by improving the supply and delivery assurance into the supply chain execution using real-time GPS based information.
- In the medium and long term, the focus should be to prevent supply chain disruptions by proactively managing the supply chain leveraging advanced technologies like artificial intelligence (AI) and the Internet of Things (IoT). Implementing Industry 4.0 approaches can help to increase the visibility across the top floor and shop floor in manufacturing
Optimize Business Planning
Adjusting the product mix to volatile energy and material prices and responding to short-term demand signals to remain profitable. Optimal utilization of transport capacities.
- Short-term effects can be achieved by simulation and comparison of different scenarios for demand, supply and financial changes considering different future prices for material, energy and sales
- In the medium and long term, the focus should be to better understand customer ordering patterns and to react faster to short term changes to adjust forecasts to drive profitability. Transportation costs can be optimized by a better utilization of the transportation capacities.
Adapt production to New Reality
Optimization of energy consumption and efficiency through better maintenance and rapid implementation of improvements, estimation of energy demand and consideration of energy and material costs in production planning.
- Short-term effects can be achieved by improving the performance and reliability of the installed production lines. This will also support to implement innovative ideas for performance improvements and energy saving measures that might come up.
- In the medium and long term, the focus should be to optimize the maintenance strategies to avoid costs from over-maintaining. The overall factory output, capacity usage and competitiveness can be improved optimization of the production scheduling and constraints management.
Secure access to crucial production materials
Manage your suppliers in uncertain times and find new sources of supply to reduce dependencies.
- Short-term effects can be achieved by improving the capabilities of finding alternative sources of supply in case of supply chain disruptions and better monitor the existing ones.
- In the medium and long term, the focus should be to optimize direct spend from product design through manufacturing execution and delivery. Make risk due diligence part of the source-to-pay process to protect revenue and reputation.
Adapt to market changes with dynamic and short-term adjustment of prices. Add new services and innovations for customers and collaborate with partners using business networks
- Short-term effects can be achieved by quickly respond to market changes with dynamic pricing to protect competitiveness and profitability. Competitiveness can be improved by quick adaptations of existing processes to new realities and implementations of innovations without coding directly by business experts. competitiveness
- In the medium and long term, the focus should be to improve of the planning and analytics capabilities with real-time data and a tight integration with operation as well as the simulation of the future impact of decisions with ad-hoc and what-if analysis.
Respond to immediate challenges, build resilience, and prepare for growth
There is no magic formula that can help companies deal with inflation or economic turbulence, and it is not easy for companies to find the right balance. In times of crisis, weaknesses become more apparent that often remain hidden in good times. For example, this could be a lack of transparency or insufficient planning and response capabilities. What these are, largely depends on the individual company.
The positive message is, that it is possible to take short-term measures now to mitigate these weaknesses. These can be the first step to improve the overall resilience of the company in the medium to long term and lay the foundation for post-crisis growth.
What is your company doing to adapt to the current economic climate?
Which action areas and measures would you consider most effective in short term?
We welcome your insights and would be happy to discuss them with you.