Angus Brewer Business & Tax Consultant

Reports on how the Covid-19 outbreak is affecting supply chains and disrupting manufacturing operations around the world are increasing daily. But the worst is yet to come.

It is predicted that the peak of the impact of Covid-19 on global supply chains will occur in mid-March.  The most vulnerable companies are those which rely heavily or solely on factories in China for parts and materials. The activity of Chinese manufacturing plants has fallen in the past month and is expected to remain depressed for months.

All of this puts pressure on small to medium businesses, and it is not always easy to navigate a clear way through these challenges.
Here are 4 tips that will help your business manage potential supply chain pressures:

Identify vulnerable product lines

It is quite possible that some of your products or ranges have some dependence on China; it might only be a small component/material.  However, if this is amongst your top selling product lines then this is going to cause an issue.  Review your highest selling items, at first, and identify which ones are at risk of supply chain disruption.  This will then help you create a priority ‘hit’ list for assessing the impacts and looking at options to mitigate.  You will likely need to track your upstream suppliers several tiers back, and make sure you completely understand the true picture of your vulnerability.

Establish back-up plans

Whilst strategic re-sourcing is at the top of everyone’s lists, and may have been for some time, you may need some more short-term backup contingency plans.  Expect the unexpected, especially when core suppliers are in the front line of disruptions.  You may need to line up local supply sources that can be turned to at short notice.  This might come at a higher purchase cost, but the key to winning the day in this situation is availability and serving your customers.  Don’t be afraid to put prices up!

Set up a dedicated taskforce

Regardless of whether you directly import from China, you need to set some time and resource aside to review your products and supply chain.  
Set up a dedicated taskforce (number of personnel will depend on size and vulnerability of your business), who can:

  • Evaluate the risks to your supply chain and product lines
  • Prepare contingency plans, and drive forward re-sourcing projects
  • Work closely with finance department on scenarios/impact assessments
  • Continually monitor the situation globally and with your key suppliers
  • Provide regular reports and suggested measures to board/management level
Work closely with the finance department

All of this has an impact on the finances of your business, and cashflow in particular.  Whether it is challenges with maintaining sales volume due to shortages, buying bulk stock with quick payment terms, or maintaining your Gross Profit margins because of rising costs – it is going to be more vital then ever to have clear visibility of your finances every day and week.

  • Ensure you are clear on your breakeven, and revise if necessary
  • Ensure you have a clear weekly cashflow forecast managed in-house that forecasts out the next 6-12 weeks
  • Run scenarios based on quicker payment terms to suppliers or bulk buying of stock, and assess the cashflow impacts of your contingency plans
  • Review the impact of lower GP margins and potential shortfall in sales, and look at financing requirements if this was to happen
However, if you can get the above right and you maintain discipline and financial rigour in your business, then you can turn all of this into an opportunity!  Whilst your competitors may be struggling, you can communicate to your customers, that you are not beaten, but you have availability and on hand to serve their needs!  The key being to focus on availability, your brand and quality of product – all of which commands a higher premium to help your bottom line.