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Covid and the case for digital transformation

GARY PICKFORD, Tarsus

It’s been a turbulent quarter. How did distributor Tarsus fare?


Gary Pickford, chief commercial officer at Tarsus Distribution, is looking remarkably well-coiffured on the Zoom call for a man who’s technically not been allowed to visit a barber during the months-long lockdown. He says his wife, who owns a salon, cut his hair. He’s also looking curiously relaxed after the seismic shifts that have rocked the distribution business in South Africa, and, indeed, around the world. He puts this down to a ‘magical’ couple of days off, and says he turned off his computer at 5pm on a Friday, and only switched it on again on Tuesday afternoon to catch up on mail before returning to work on Wednesday.

He and other managers have recently been ‘nudging’ staff to put in for a few days’ leave, many of whom – immersed as never before in technology – hadn’t taken a proper break this year.

Pickford has been at Tarsus for 19 years of the company’s 33-year existence, and says while there have been ‘ups and downs’, nothing could have prepared him and his fellow executives for the unique set of conditions presented by Covid-19.

“The only thing that we know for sure is that there is no normal. It's gone. And the new industry, at least for us at Tarsus, is going to be more digitally oriented than it was before.”

He says this shift to digital had indeed been on the cards, but like many organisations around the world, Tarsus straddled the transactional and digital worlds.

“You actually have to put both feet in the digital camp and digitally transform your business intentionally. Otherwise, you're not going to transform fast enough. And Covid came along and just accelerated that.”

 

Lockdown blues

I ask Pickford to take a step back, and before getting into the changes the pandemic wrought on the business in general, and Tarsus in particular, describe how it managed the lockdown.

He says before lockdown day in South Africa of March 29, it had already started noticing manufacturing constraints, particularly centred around Wuhan.

“We came back in January from our holiday to a huge amount of hardship because a whole lot of our purchase orders that we'd placed in November and December were not shipping because Covid had hit China properly,” he remembers. Manufacture had ground to a halt in China as the country embarked on its severe lockdown.

 

In hindsight, he says, he and his executives were living in a ‘fool’s paradise’.

“We felt that Covid belonged to China; it wasn't going to travel across the world. And all we were concerned with was how we were going to get stock out of China, and onto planes and ships so that we could get stock to supply our market because, you know, business for us is going to be absolutely perfect,” he says with a measure of irony.

Then, the ‘perfect storm’ appeared in the form of a weakening rand in March, and the downgrading of the country by Moody’s.

As the clock ticked down to lockdown at the end of March, he says there was ‘massive panic buying, because corporates and consumers realised that if they didn’t place the orders then, the product was going to be a hell of lot more expensive by the time it arrived’.

All the stock in the South African channel was sold. “They literally cleaned out our cupboards,” he says, adding that at the same time, there wasn’t any more stock arriving from China.

The lockdown arrived, and as though frozen in time, the country sealed its borders and business ground to a halt. In April, he says, ‘absolutely nothing happened’.

“Overnight,” he remembers, “we were exposed to these new rules that you had to implement in an organisation that was now working from home.”

In the case of Tarsus, about 500 people were sent home, and the executive team, like every team the world over, had to quickly reappraise its business model. Disaster recovery plans were dusted off, but there was no time for testing them. These plans also had to be rolled out to all staff, and not just a select few.

In any event, within three or four days, the entire organisation was up and running remotely. And, he mentions, this was still the case on the day this interview took place in June, 82 days into the lockdown.

But despite the speed of implementing home work, Tarsus lost a month’s turnover, ‘and we can't recover from that in the coming months’.

 

Signs of life

Meanwhile, the ICT sector was one of the first industries allowed back under Level Four lockdown rules. This allowed it to begin trading from the end of April, although it only did a small percentage – about 10% – of what it normally sees in that month.

“You actually have to put both feet in the digital camp and digitally transform your business intentionally. Otherwise, you're not going to transform fast enough.”

There was, however, a quick recovery in May and June, driven in part by pent-up demand, as well as the requirements of those working from home.

He says there has been a great demand for notebooks, and as one of the company’s focus areas, it has been beneficial for it. There are also a number of larger projects in its pipeline involving products and solutions for enterprises, many of which were invoiced in May and June. This demand, he says, does now appear to be tapering off.

Demand in retail and among consumers remains buoyant and is holding momentum. Employees in almost all industries, should they be able, continue to work from home, and many students have shifted to studying at home. He sees this consumer demand stretching ‘deep into August’, and possibly September.

The supply chain has also largely recovered, and he says it’s almost back to normal.

“China was obviously the first to be impacted negatively and most of the factories are there. But at the same time, China was the first country to come out of Covid and get ‘back to work’,” he says, adding the parentheses.

Challenges remain. Cargo space on aircraft is now at a premium, and planes are not flying as frequently as in the past. And, he says: “There are very few flights that are taking place in this direction.”

The only option has been to take to the seas, which brings its own challenges.

“There are a lot of ships coming our way. If you just look into our harbours in Durban and Cape Town, there are many ships sitting with tonnes and tonnes of containers, waiting to unload stuff because all of the freight into South Africa was diverted from air to sea freight.”

Ports have been particularly congested because they were also locked down at Level Five.

He says it takes between three to four weeks for stock to travel from the factory in China to the roller-shutter door in Johannesburg, and that’s if it clears customs without any hitches.

In fact, he says, the industry narrowly escaped disaster. While South Africa was locked down, China wasn’t, and had begun to send freight via sea in April.

“While we were in lockdown, the stock was on its way to us. If the lockdown in our industry had been extended, it would have been a calamity because the amount of stock that was starting to pile up at our ports that was destined for the tech industry was worth millions and millions of dollars.”

Over two weeks in May, he says about two months’ worth of stock was distributed.

“So it was very good timing and good coordination between the vendor and the distribution channel and the reseller partners that I think allowed for such a large amount of invoicing to take place in May in the local industry.”

 

War room

Pickford says that within the first 10 days of lockdown, a digital ‘war room’ was formed. Six executives, from six different locations around the country, met every single day.

First, they concentrated on the safety and health of the company’s employees. “We weren’t really focussed on anything else, not even ourselves. All we wanted to do was make sure the staff were safe and working from home with the tools they needed to service the reseller channel.”

And it appeared to work. He says once he and his fellow executives got over the ‘crazy fear’ that the digital platforms they were using wouldn’t be able to cope, a measure of calm was restored.

 

“Within 10 days, the business was running as smoothly as it had run when we were in the physical office in Woodmead.”

With the business stabilised, the executive team then decided to do some fact-finding. They knew things were never going to be the same once the lockdown lifted, but didn’t have all the answers, and so they turned to the channel.

As he says: “In a crisis, the best answer comes from a collective.”

Over two weeks, they had online meetings with about 50 partners, all of whom have been in the business for anything between one and four decades.

They quickly realised there were some things beyond their control, such as at the lost month of revenue, and a contraction in the economy of between 6% and 10%. What remained in its control was its response, which led to some radical decisions. “We realised that our digital tools had allowed us to pivot very quickly into a work from home environment successfully, and we knew that the world was going to be very difficult and tough.”

He says it was clear the company would need to be ‘reshaped’, and it decided to accelerate its digital strategy.

He says the executive team had been talking about its digital strategy for at least two years, but change is hard for a decades-old transactional business. Enter Covid-19.

“What Covid taught us is to let go of our fear and embrace the change. Digital transformation is probably the only way we’re going to be able to manoeuvre in a very difficult economic environment. At the same time – to continue to add value as a distributor – we are going to have to drive efficiency into ourselves and our partners so that they can deliver a better value proposition to the end-customer.”

He says it ‘pulled the trigger’ on its digital plans halfway through April, and two months later, he’s emeshed in the restructuring of the company.

 

Digital transformation by any name 

I ask Pickford what form digital transformation has taken at Tarsus, because it’s a nebulous term, and can mean different things to organisations on different paths.

He says that luckily, Tarsus didn’t need to start from scratch, and had already started investing in the digitisation of its warehouse a couple of years back. Other areas of the business had also benefitted, such as the use of robotics in its shipping department. It had also started investing in its ecommerce distribution portal, allowing orders to be placed any time of the day or night without having to speak to an agent in a call centre.

He says this has seemed to work, digitising separate streams which then flow together and carry the firm into a new way of doing business. He emphasises, again, that it was Covid that had prompted the business to move with such speed.

But while parts of the business were being modernised hither and thither, it also needed to translate into real business outcomes lest it become an exercise in investing in digital for digital’s sake.

He says distribution is a low margin business, and is probably in the ‘most aggressive’ part of the tech products supply chain. He reckons that it’s also the distributor that carries the most margin pressure, and all distributors have thus paid attention to stripping unnecessary costs from the value chain.

 

What this all means is that Tarsus is now better able to focus on improving the customer experience.

He says there’s little to distinguish one distributor from another; most deliver their goods timeously, and at more or less the same price as they’re all buying the same stock from the same factories.

What resellers do spend time on, however, is procurement, and especially when the wrong product is delivered.

This ‘correcting the incorrect delivery, or correcting the incorrect spec’ means that the product has to be returned and a new product shipped. Delivery, in South Africa, often results in lost or damaged goods.

He says most of their customers spend vast amounts of time trying to work out which piece of hardware will be the best fit for a particular job, and ‘spend their lives on the phone trying to rectify slow or incorrect deliveries’.

“The speed at which I can resolve these queries is directly proportional to allowing the skills inside my business to be focused on the customer, and not focused on manual processes that could be done by a machine.”

For example, if a customer places an order for a notebook, the only value a Tarsus salesperson can provide is capturing the order on another platform. There’s also a high risk of the incorrect details being captured, or of miscommunication.

A digital platform has put paid to many of these problems. The salesperson, meanwhile, is now freed up to engage with customers on more complex solutions.

He says its ecommerce portal is perhaps the most significant improver of customer service, and gives them all the information about a particular product. When they order it directly, there’s a greater chance it’s going to be what they need.

Pickford also has some ideas around improving working capital efficiency, restructuring costs, and improving margins.

Again, the answer lies in the word ‘digital’, which promises great cost savings. This, however, he repeats, means leaving the old transactional world behind.

“Everybody in the distribution space has been so focused on reducing cost over the years that you reach a plateau, and until you invest in digital tools, you're going to struggle to eke out more savings in your business.

“Working capital pressure is probably the biggest burden on distributors in South Africa. We are at the furthest point of the supply chain for most of the factories we deal with.”

This means that most vendors expect distributors in South Africa to carry a disproportionately high volume of stock in relation to the size of the marketplace.

This makes it imperative to integrate digitally with vendors, enabling a measure of forecasting to take place. It’s also getting more frequent deliveries from suppliers because it’s better able to forecast the stock it requires. This has improved its working capital outlook immensely.

 

Human cost

Much of the cost among distributors is human cost, he says, and, unfortunately, the company has had to ‘restructure and realign’ with its new digital direction. This has led to some retrenchments, mainly focussed on the transactional part of the business.

“It’s unfortunate, particularly in the current environment, but we were left with no choice. After you've lost a month's worth of revenue, you need to be a little bit fitter and leaner, going into difficult economic times.”

He won’t say exactly how many employees lost their jobs, but that it amounted to about 10% of its workforce.

He says it also measures ‘just about everything’ in the business, and the whole management team is confronted with a dashboard every time they open their laptops. This will include things like debtors days, working capital, revenue and margin, for example. The executive team is also able to gauge the performance of the its warehouse and efficiency of delivery with other warehouses in the world running the Manhattan SCALE warehouse management software

He says this measurement is the one of which he’s most proud.

“Even as a little South African distributor, we're very proud of the fact that our warehouse automation system has allowed us to deliver to global best practice standards.”

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