MANUFACTURING: Coronavirus-related challenges and opportunities in the manufacturing supply chain
The COVID-19 crisis has disrupted supply and demand in the manufacturing industry and created global financial turmoil across supply chains. In a recent survey by the National Association of Manufacturers, 59.5% of manufacturing respondents said COVID-19 had disrupted supply chains, and 67.8% said they expected overall sales to drop over the next year.
In addition to the coronavirus, U.S. manufacturers must contend with potential future disruptions such as the present hurricane season, turmoil in the oil industry, and escalating geopolitical tension and trade wars. Alone, any of these factors could upend supply chains. Combined, they present unprecedented difficulties.
To explore the current and future business ecosystems, CohnReznick recently conducted a webinar, titled “COVID-19 Challenges and Opportunities in the Manufacturing Supply Chain,” that brought together these specialists:
- Wendy Buxton, President, LynnCo Supply Chain Solutions
- Henrietta Fuchs, Partner, Manufacturing and Distribution Industry Co-Leader, CohnReznick (moderator)
- Duraid Jwayyed, Director, CohnReznick
- Jeff J. White, Partner, Manufacturing Law Industry Group Chair, Robinson+Cole
Read on for highlights from their conversation, or listen to our full webinar on-demand now.
Paradigm shifts before and after COVID-19
COVID-19 swiftly transformed consumer purchasing habits. Almost overnight, the pandemic catalyzed a shift toward digital buying and delivery across industries and supply chains, and that’s most likely here to stay, said Wendy Buxton of LynnCo. Supply chains, she added, must be able to flex with new consumer demands.
In particular, businesses will need to quickly fulfill e-commerce orders and optimize inventory to help ensure that products are available at local, as well as national, levels. “The next normal will be driven by faster delivery of e-commerce orders and the ability to satisfy customer demand from any location,” Buxton said.
Among consumers, COVID-19 has heightened demand for a streamlined, transparent delivery experience. This requires order-to-delivery times of less than a week – and in some markets as little as a few hours. Accordingly, businesses will need to synchronize supply replenishment with new demand patterns.
Delivery and order tracking provide significant opportunities for innovation, Buxton said. Businesses should prominently display expected delivery timeframes at the time of purchase, illustrated by a high level of visual tracking, she said.
Free shipping, meanwhile, remains a predominant driver of consumer decision-making. But, for now, most customers are willing to accept slower deliveries – provided there is adequate transparency in delivery dates. “The more transparency, the more tolerant customers will be of longer delivery times,” Buxton said.
Addressing force majeure and other legal issues
Businesses must also consider potential legal issues, including lawsuits and contract disputes, that may arise from COVID-19. Among these, force majeure provisions have provoked the most uncertainty.
A force majeure provision is meant to free parties from liability or obligation in the event of an occurrence beyond the parties’ control. The general test for a force majeure claim is whether it impedes a company’s ability to execute on its contract or to perform, according to Jeff J. White of Robinson+Cole.
Not surprisingly, the first legal question most businesses ask is whether their contract contains a force majeure clause and, if so, whether COVID-19 qualifies as a triggering event. The answer depends on the specific contract and the language it contains, White said.
Force majeure language is typically found in legal boilerplate near the conclusion of the contract. Look for the phrase “force majeure,” but also search for words or phrases like “act of God,” “pandemic,” “epidemic,” or “government action,” which might cover quarantine mandates.
Another phrase to watch out for is a catchall citing “events outside reasonable control of the party.” COVID-19, of course, is outside the “reasonable” control of any business. But it’s not a cut-and-dried issue because interpretation of this provision varies by state, White said. Other components necessary to create an enforceable force majeure claim include direct causation, a duty to attempt to mitigate issues, proper notices, and a lack of favoritism.
White noted an increase in supply chain companies that are falsely citing force majeure to extricate themselves from contracts. “What I’m seeing in the marketplace is people who are claiming force majeure whether they have the right to do so or not. So be careful about that,” he said.
Challenges getting to the next normal
Addressing changes in a post-pandemic business environment will require that organizations improve financial planning across the enterprise. Perhaps the biggest challenge will be accurate and timely delivery of information across the organization. Additional roadblocks include:
- An inability to collaborate and communicate planning and forecasting initiatives across functions
- Use of disconnected, fragmented data
- Manual planning processes, including the use of spreadsheets
- An inability to analyze returns on operating investments as well as monitor key performance metrics in real time
- Excessive time spent reconciling financial forecasts against actual performance
- Inability to use analytics for what-if scenario planning
Collaboration, communication, and cohesion are key. “Whether creating financial, operational, or supply chain strategies, most companies have a fragmented organizational approach to developing an overall strategy,” said Duraid Jwayyed of CohnReznick. “Data is often disconnected and siloed, and assumptions and processes are often scattered. That impedes the ability to make real-time, data-driven decisions.”
IBP: A tool to connect and automate
Improving supply chain performance and insight requires a connected view of all systems and accurate data that is accessible to all stakeholders. That is the essence of integrated business planning (IBP), a strategy that aligns people, process, and data to build a centralized, collaborative planning system. This enables organizations to balance performance, resources, and customer demand with budgetary objectives, which can help manufacturers measure and monitor the impact of COVID-19 by using analytical assumptions and modeling.
Other benefits of IBP can include:
- More accurate forecasting
- Use and sharing of real-time data for value-add analytics
- A holistic planning strategy based on business performance expectations across the organization
- Saving costs by optimizing margins, improving demand planning, reducing inventory, enhancing labor and distribution planning, and increasing inventory turns.
Working together in a crisis
In closing, Henrietta Fuchs of CohnReznick noted that there’s no better time than now to evaluate supply chain resources, controls, and risks, then share this information with business partners.
“While this is an unprecedented situation, by working together we can help mitigate and minimize the economic impact of this crisis,” Fuchs said. “Let’s all try to do our part and look out for those whose safety, health, and economic welfare are at most risk.”
Listen to our on-demand recording now for more information and insights.
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