As manufacturers reopen on-site operations, they need to weigh a complex balance of current and future risks.
Corporate directors discussed how they see manufacturers moving into a post-pandemic future during a virtual forum hosted by the National Association of Corporate Directors (NACD) and Grant Thornton. They indicated that manufacturers are facing some unique factors and driving unprecedented innovation as they reconsider their operations in a new environment.
As companies reopen now, and build resilience for the future
, they need to account for risks across four main impact zones.
1. Liquidity and cash flow management
What directors said:
2. Supply and demand
“A real concern is that the suppliers are going to talk about beginning the supply line, getting the business processes going – but they’re not going to tell us is their liquidity problems are so severe that they may shut down tomorrow. That’s a real concern with suppliers that are highly leveraged and have been shut down. The cash flow is going to be a huge problem and that could catch us by surprise.”
“In many cases, we think of our customer profile as being diverse and not subject to disruption – but when you have large institutional customers that make up a lot of the business, you need to look: What are they saying on their earnings reports? What are they talking about in terms of their liquidity? What are we seeing in terms of receivables, and how comfortable are we if their business were to go away rather rapidly?”
“A board normally does a certain level of scenario planning: short term, medium term, long term. Liquidity and cash flows go along with that. But now, because you weren’t sure how long or how deep this time period’s going to be, boards have been testing every extreme we could possibly come up with at all levels.”
Grant Thornton Midwest Audit Leader Janet Malzone noted, “manufacturing is hard to turn off – but it’s equally hard to turn on, knowing that the downtime could have caused both your suppliers and your customers to have risks of liquidity.”
What directors said:
3. People and labor
“The manufacturing companies I’m familiar with have spent a huge amount of time on the supply chain over the last decade, which may be what has saved a lot of those companies over time.”
“It’s just a fear that I keep raising with my companies and the boards – we have to plan. We’ve got to look at the risks and supply chain managers need to come up with contingencies for alternatives if somebody has to shut down.”
“You need low-cost sources, but I think some of the low-cost sources have been disappointing in their performance during this whole crisis. The question is, ‘Can you get more reliable suppliers, and even move suppliers back home?’ We spent a lot of time and effort developing a supply base outside the U.S., so it’s not anything that’s going to happen right now – but it’s long-term.”
Grant Thornton National Managing Partner of Consumer and Industrial Products Jeff French said, “I think there could be a long-term trend to try to incentivize companies to move supply chains back to the U.S., specifically, but maybe other countries where suppliers are more reliable or dependable.”
What directors said:
4. External factors
“Before we opened a plant and launched it, we invited employees, as well as families if they were interested, to come in and take a look at the plant where they would be working, and what the conditions would be like. And we are also frequently surveying employees regarding whether they feel safe – any concerns they want to raise –tracking those surveys and putting actions against it.”
“One thing that I’m seeing in many businesses actually is the increased comfort level with people working remotely. So, even in some more old-school operations where there was a belief that people have to mostly be in the office, I think that eyes are being opened for, number one, hey, we can get very productive with people working from home, two, in certain cases that’s actually going to increase engagement and we can get more out of them and three, what if we can actually create some cost synergies in terms of office space? That will enable us to preserve more employees. I think that what we’re going to see in the next few years is going to be a commercial real estate crisis because of companies realizing that they can be at least as productive as they were before with virtual teams and virtual workforces.”
“We are hearing from manufacturers that, for functions which can operate remotely, they’re keeping those remote and they’re focusing on safety on the shop floor and for people who do have to be working together in the office. I think that’s going to extend for quite some time,” French said. Malzone added, “Several of my clients feel like they are managing better and faster for some things. They’re getting things done and innovating at a faster speed than they ever had.”
What directors said:
Building on benefits
“One of the ways our board is thinking about it is sort of in three buckets. One is liquidity, the second is the whole process of restarting – supply chains, workforce and all that goes with that. But the third is the strategic implications of what we’re going through. What does it mean for the future workforce? What does it mean for societal changes around products, and what products will be important that are M&A opportunities which may arise from this?”
“One thing that I’m seeing on my boards, and I’m also pushing for, is the balance between protecting the core versus exploring new opportunities that are going to be open to us as a product of the crisis. Those opportunities are M&A or new product or service development, new partnerships. I think it’s a very important role that the board has, to push management to think about new opportunities because otherwise the default will be right now on protecting the core.”
French said that he’s also heard companies considering various external political factors, currency rate shifts, regulatory changes, tax changes, energy price changes and insurance costs. “In our CFO round table, we heard from several companies that are going through a renewal process with their insurance carriers, and they were seeing significant increases in the property and casualty insurance – over 20% increases. So, they are looking for ways to mitigate some of that cost.”
This pandemic has presented unprecedented problems to a range of industries, including manufacturers around the world. But the challenges do not end at recovery. Now, businesses need to plan for a new range of factors as they look to the future. “When boards looked at governance and enterprise risks in the past, they considered succession planning, supply chain, IT and some other factors. This has shone a new light on what the risks could be – shone a light into all sorts of other risks – and we’ve got to jump in and think differently,” said Malzone.
The current situation has exposed new risks, but it has exposed new opportunities as well. “There could be a lot more opportunities, new products, new partnerships or M&A opportunities, depending on your liquidity and strategy,” Malzone said. Manufacturers need to recalibrate their business continuity plans
to consider new lessons learned and prepare for potential pandemic waves and other challenges in the future.
“Directors are looking at enterprise-wide, long-term scenario planning – what are the new risks? They’re really going up and down the chain, having a lot more interaction right now and knowing that we’re all going to come out in a different place,” Malzone said.
National Managing Partner, Consumer and Industrial Products
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Midwest Audit Leader
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