At the start of the year, it would have been impossible to predict how the coronavirus pandemic would impact business. Shutdowns and lockdowns began in China in late 2019, and ever since, there have been a number of variables at play that continue to affect all points on the supply chain—from shifting levels of demand, to factory shutdowns and workforce shortages. Many businesses have experienced an immediate, steep decline in revenue, and there is still uncertainty around duration, depth of impact, and the timelines for recovery.
To account for all this uncertainty, company leaders must make some immediate, long-term changes to their operating model to remain profitable and grow. Most companies and investors have spent the past several weeks focusing on improving liquidity, working with their banks to communicate risk, and adjusting staffing to sustain in the near term – but that isn’t enough.
Historical planning and cost allocation assumptions are no longer realistic, and very few PE investments are going to deliver strong returns without first implementing transformational changes. Company leaders and PE investors need to determine the biggest operational risks facing their business and move forward from there. In recognizing that uncertainty may very well be the new norm, businesses can best align their operations to the reality of the current market by considering the following steps:
To improve your liquidity position, determine how rationalizing your product lines or SKUs could generate EBITDA or cash in the short term. At a time when every sale matters, this may sound counterintuitive, but last month’s math may no longer be relevant. Underperforming SKUs can eat away at your EBITDA in times like these when cash is tight, so consider conducting a new real cost allocation to assess not just gross margin, but also the cost of capital and the allocation of scarce resources. This should involve:
Many companies have started the process of reducing their roofline or shuttering production lines, but when it comes to rightsizing back office and customer-facing activities, efficiency is key. A flat cut across the board without any methodology is often costly and unnecessary. Similarly, valuing vertical integration at the expense of agility is potentially detrimental when it comes to ratcheting back up once we begin to recover. Instead, rightsizing should be a strategic process that necessitates:
While it may seem like suppliers would be bending over backwards to maintain business, checking in with key vendors on their health and capacity is essential in this uncertain time. This should involve looking upstream, beyond your immediate supplier. Most likely, your vendors are as worried about you as you are about your customers, so informing them of your business’ financial health will help when it comes to proactively negotiating terms. To best understand that state of their business, ask to see evidence of financial health and a contingency plan to ensure stabilized supply.
Once you have an understanding of the state of your suppliers’ businesses, develop safety net options through dual sourcing, especially if a vendor is struggling to meet the demands of your business. If you decide dual sourcing is necessary, it’s best to act fast– competitors and companies in adjacent industries will quickly consume capacity in countries with competitive labor markets.
The only certainty when it comes to demand in this current crisis is that it has become impossible to predict. Some products and resources in high demand prior to COVID-19 are now sitting in inventory gathering dust, while others that were in low demand now sit atop the sales list. Being able to align demand and supply will affect EBITDA margins and on-time delivery, but this requires more than just cutting production based on which SKUs are in demand. To ensure a more robust response that accounts for uncertainty, you should prioritize SIOP (Sales Inventory & Operations Planning) processes by:
As you scale back capacity, SIOP should ensure that factories are still being properly level-loaded, which will help conserve capital expenditures in the near-term. The alternative ends up being the more expensive option: overloading the factory will mean workers running overtime, and underloading the factory ensures you will not see the full potential of your labor costs. By allowing you to better forecast for demand, SIOP increases productivity, and lets your customers to see the true value your company is bringing them.
In times of crisis, every business needs a specialized response plan—a one-size-fits-all solution could never sufficiently account for all the nuances that make a business unique. That’s why the first step to managing through these difficult times is doing the diligence work necessary to understand the needs of your company. From there, leaders can work to build out a comprehensive plan of action to help their business survive in short term, prosper in medium term, and thrive in long term.
The current environment is unprecedented. Many businesses will experience an immediate, steep decline in revenue but with a very uncertain duration, depth of impact, and timeline for resolution.
We are not yet in a textbook restructuring situation (for most industry sectors), but many companies will be presented with a unique set of challenges and opportunities.
• Shifting levels and timing of demand
• Shifting customer needs
• Shifts in demand between product/service categories
Companies must make some immediate and longer-term changes in their operating model to remain profitable and grow.
Businesses need an approach and tools to quickly conserve cash; restructure targeted elements of the company’s value chain; and maintain credibility with stakeholders including employees, customers, suppliers, and lenders.
• Establish frequent communications to all stakeholders, and create opportunities for 2-way communication at all levels
• Establish clear governance policies, and task forces within the organization to handle all enquiries from stakeholder groups and address and prioritize issues as they arise
• Regularly check the CDC Resources for Businesses and Employers for important updates on how to keep your employees safe
• Establish new policies around prevention and incident response
• Protect employee privacy
• Determine necessary compliance with Families First Coronavirus Relief Act
• Check with payroll providers to ensure they are creating the mechanisms to track Families First Coronavirus Relief Act for tax credits
• Start all shifts with new safety guidelines
• Increase frequency of cleaning services
• Develop alternative staffing models that mitigate future business continuity issues
• Proactively monitor employee health status
• Develop alternative shift patterns to limit exposure
• Ensure key executives are distancing to protect leadership continuity
• Implement door access control; monitor incoming employees’ temperatures
• Apply “clean room” protocols
• Launch communications to reorient employee behavior around the new mindset
• Get control of cash, assess inflows and outflows
• Control non-essential cash outflow and preserve sources of inflow through immediate communications with key cash sources and stakeholders
• Assign resource to focus on immediate management of A/R and A/P, aggressively collect on A/R and push out payments in A/P
• Extend vendor payment terms
• Review, update and optimize inventory planning and management processes to take out excess working capital immediately
• Renegotiate debt payment schedule/debt relief
• Build a detailed 3 and 6 month cash flow projection; update it weekly
• Assign resources to pursue collections on a proactive weekly basis
• Reset forecast and inventory algorithms to align with new demand projections, reducing excess working capital tied up in inventory
• Adjust supplier payment terms
• Put controls in place for placement and timing of P.O.s
• Speed up plans to secure sources of material and component supply
• Check critical supplier health and production locations, and assess contingency plan details
• Refocus manufacturing operations, and optimize planning and scheduling in volatility
• Consolidate production on most profitable facilities and production lines
• Develop actions to manage supply in the short term and diversify in longer term
• Clear, consistent communication is key, with both internal and external stakeholders
• Proactively negotiate with key vendors to ensure a stabilized supply in the near term – your suppliers are as worried about your customers as you are
• Place extra emphasis on Sales, Inventory, and Operations Planning (SIOP) processes as resource constraints set in
• Reduce 3rd party supply costs through supplier consolidation and renegotiation
• Review and de-risk your extended supply chain now – competitors and companies in adjacent industries will quickly consume capacity as they diversify operations in other low-cost supply regions
Re-examine:
• Fixed cost take out opportunities across
the entire footprint and supply network
• Sales resources
• Profitability of customers and products
• Projected procurement, HR, IT, and Finance transactional volume and staffing requirements
• Rightsizing projects that were previously delayed
Rationalize:
• Newly unprofitable products or SKUs
• Underperforming staff, facilities, or business units
• Unnecessary or non-critical capex projects
Reduce:
• Software seats
• IT maintenance costs while preserving your critical databases
• Resist the temptation to focus only on the variable cost quick hits
• Consider facility and supply chain network fixed cost rationalization, which can be your most powerful lever on EBITDA margin in the medium term under declining revenue
• Stop destroying value by selling products with negative contribution margin in a reduced revenue world. The math you did here a month ago may no longer be relevant; now it’s urgent
• Reorient sales resources to focus on the most relevant products, customers, and channels
To download this whitepaper please click the link below:
COVID-19: Managing through the crisis
As you consider reducing IT spend across your portfolio, we suggest you review the following considerations:
Suggested actions:
• Review contracts to ensure you understand terms and conditions
• Contact the provider to negotiate a win-win (call TriVista if you would like assistance)
• Conduct service cost/cash flow analysis to determine whether migration to on –premise solution is valuable
Suggested actions:
• Review any required data retention policies for industry and market, or specific customers or government agencies
• Contact service providers for ability to access historical data and negotiate as necessary for future access (call TriVista for help on this)
Suggested actions:
• Create a license inventory and cost database, if not already in place
• Identify license downgrades that will not result in tangible negative impact to the business
• Contact the provider to negotiate a win-win (call TriVista if you would like assistance)
• Consider other vendors and online offerings
Suggested actions:
• Complete an inventory of all IT assets that house data
• Identify any sensitive and confidential data resident in each asset
• Identify value of top-grade data removal versus retaining or destroying and writing off the asset
Suggested actions:
• Identify all custom applications and determine if they will be needed in the future
• Identify key individuals who have specific knowledge to support the custom applications
• Ensure ability to retain resources when needed in the future
• Review need for reinstating custom applications for any resuming business processes and ensure availability of support resources
By Katherine Kost, Managing Director & IT Practice Leader
COVID-19 Response: Critical IT Business Decisions
The continued spread of COVID-19, or the novel coronavirus, has been both swift and extensive in impact. For all businesses, this pandemic must be viewed as a health crisis first and foremost, and our top priority must be to care for the well-being of employees and customers, assist those afflicted, and mitigate the speed of transmission.
Even as businesses seek to protect their workers, they must also contend with serious gaps in supply driven by quarantines, labor shortages, and travel restrictions that have slowed or shut down supply chains in affected countries. As these widely publicized supply-side issues continue to shake confidence in markets, we are also seeing steep declines in demand in industry verticals ranging from consumer goods to industrial products.
As manufacturers and their private equity sponsors assess the state of their supply chains, we’ve put together this brief guide for those looking to navigate through this uncertain time and implement strategies for protecting their business going forward.
A Unique Disruption
Most companies and executives are used to dealing with risk that is bounded – whether it’s geopolitical or environmental, risk is often understood to be exclusive to one country or region at a time. The novel coronavirus presents a unique challenge in that the risk is unbounded, since the disease spans across borders and has no clear end in sight. This makes the business impact all the more difficult to understand or qualify, since a country unaffected one day could be the site of the next outbreak.
In our globalized world, supply chains have become so long and complex that most have or will see some exposure to the outbreak. Companies should always protect themselves against single sources of supply, and yet, the COVID-19 outbreak has made a number of supply chain diversification methods seemingly ineffective.
Vertical diversification – where key processes in the production value chain are farmed out to separate, specialized suppliers who may even be in different countries – now makes a company more vulnerable to volatility, where one hit to labor, raw materials, or components in any one of these processes can shut down the entire supply chain. Additionally, sourcing from alternate countries – while generally effective – becomes more of a challenge now, since any country can potentially become the next hotbed for the virus.
Short-Term Steps
Despite these challenges, executives cannot wait patiently for the outbreak to blow over – there are tactical steps you can take to mitigate risk and lessen the impact on your bottom line. We’ve found that aggressively managing suppliers and keeping in direct and consistent contact with the factory is key to handling a production slowdown. To establish this kind of robust communication, we recommend scheduling regular status meetings.
If the supplier is seeing significant labor shortages due to coronavirus, ask specific questions to understand the risk that your promised shipment dates could be further delayed:
Once workers begin returning with some regularity, and the factory is nearing full capacity, it remains imperative that you continue to monitor production. When corresponding with suppliers, ask for priority by requesting specific details about your shipments. Have suppliers commit to ship dates and keep communication channels open to check their progress. The truth is, the squeaky wheel gets greased, and executives will need to be professional, but persistent, to get results.
For supply chains severely impacted by factory shutdowns, secondary sourcing could be an effective solution, but companies need to act fast. Sources in lower cost countries often reach capacity in times of crisis – this happened in 2018 when the tariffs hit, and we expect it will happen again.
Depending on the urgency of your situation, onshoring to the U.S. may also be a viable option. Of course, the practicality of this depends on your industry, since lead times and cost sensitivity can vary dramatically. For instance, manufacturers in the U.S. are known for their quick prototyping of high cost, low volume products – meaning temporary higher-cost production could be ramped up fairly quickly if need be.
Long-Term Protections
In the early 2000s, companies rushed to source everything from China to take advantage of the low wages, until the cost of labor began rising and they realized the shortcomings of single country sourcing. The past few years have brought about a similar lesson, when the trade war between the U.S. and China resulted in tariffs that ate away at margins. The outbreak of COVID-19 should be taken similarly as a wake-up call for companies to diversify supply chains.
Alternate sourcing plans may be more of a challenge today because of the uncertainty of the virus’ spread and reach, but the end result is still a stronger supply chain. In addition to alternative sourcing strategies, investors can also consider reconfiguring product flows to reduce lead times and improve responsiveness, take inventory out of the supply chain, or tightening cost-price linkages to stay ahead when disruption strikes.
Ultimately, the approach taken must be tailored to the needs of the company, so building out a comprehensive supply chain risk management program is essential. This entails identifying all internal and external supply continuity and cost escalation risks, and assessing the potential severity and likelihood of each affecting the supply chain. Then, determine a proactive approach to responding to each risk by asking:
Considering these basic questions is the first step in creating a proactive approach to risk management. Even if the risk presented by the novel coronavirus is unbounded, that shouldn’t stop manufacturers or sponsors from planning a tactical response. If anything, unbounded risks like pandemics demand more consideration and planning when crafting an effective action plan.
Volatility is the New Norm
Whether it’s cost changes, natural disasters, tariffs, exchange rate fluctuation, or health crises, volatility has become the norm, so assuring supply chain responsiveness and resiliency is essential to maintaining margins and business continuity.
Adopting a series of best practices for risk management is vital to protecting your business now and in the long term. If this recent outbreak has taught us anything, it’s that threats to a supply chain are often unexpected, and reacting in response to disaster puts you at risk when it comes to finding alternate suppliers – so don’t wait to diversify. The coronavirus will pass, but other crises are sure to come.
To download this article please click the link below:
Coronavirus: Managing Your Supply Chain in a Time of Crisis
