In 2013, Lavery Pennell expects leading companies to be unlocking five new areas of value to increase profits:
1. Resource productivity. Labour productivity has been a focus of most companies for decades – resulting in decreasing headcount. However, since the mid-2000’s, input materials and energy have been rapidly increasing in price, overshadowing labour cost savings. In 2013, we see leading companies beginning to turn their attention to resource productivity through a broad approach including energy efficiency, waste reduction, packaging reduction, product lightweighting, transport efficiency, recycling and remanufacturing. Unlike labour productivity, which decreases employment, resource productivity increases profits and jobs while reducing environmental impacts.
2. Revolving funds. We all like “quick wins”, but equally recognize that some improvement projects have a longer payback period. We are seeing leading organisations starting to calculate their overall cash flows with projects timed such that quick win savings are reinvested in longer return projects. The result of this “revolving fund” approach is a very high return which is attractive to most CFOs (this article reports ROIs of up to 57%). We expect investment banks and private equity firms to start to capitalize on this in 2013.
3. Supply chain collaboration. Leading companies (including Tesco and Asda) are finding that purchasing goods on a £ per unit basis leaves untapped value in such areas as transport synergies, energy savings, and packaging reduction. Attacking these areas also reduces the environmental footprint of products and encourages local producers – enhancing company brands. Until now most companies have pushed their requirements onto their suppliers, using their buying power to drive compliance; this tactic is giving way to collaborative discussions to find win-win opportunities.
4. Factory of the future. 2013 will see companies reviewing their production model. With Chinese labour costs increasing rapidly, demand volatility requiring shorter supply chains, supply security concerns and an increasing focus on working capital, local production is becoming attractive for some manufacturing sub-sectors. This thinking is also starting to include reverse logistics and reprocessing – how a company can minimize the cost of taking its products back, post-consumer, to capture the inherent value through recycling and remanufacturing.
5. Not “Sustainability” but “Value” and “Innovation”. The term “sustainability” has a confusing number of definitions (all of which are very general) and un-business-like connotations. Leading companies have realized that sustainability is really all about capturing non-traditional areas of value – financial, social and environmental – which all add to the success of a company. In these tight economic times, companies have little appetite for feel-good projects. Now it is about ROI and many of the topics traditionally discussed under the heading “sustainability” are being reframed as cost reduction, revenue growth, risk reduction, and innovation for growth programs.
We welcome your thoughts on these and wish you a prosperous 2013.
Greg Lavery, Nick Pennell and the Lavery Pennell team