Many small and mid-sized suppliers to global manufacturers are strapped for cash as the battle against Covid-19 rages on. Companies are either coming off the worst of their regional outbreak; experiencing their peak; or temporarily suspending operations. Several experts say not all of those companies will survive.
“[We saw] supplier bankruptcies during the 2009 crash and is worse,” said Bindiya Vakil, founder and CEO of Resilinc, a supply chain risk management consultancy. “There has of course been a human toll with this pandemic, and that is impacting employees themselves and the greater [global] workforce.”
Resilinc, on a recent webinar, reports roughly 65 percent of small companies based in China have about two months of cash on hand. In the U.S. and Europe, companies typically plan for four to six months of cash available.
Companies are looking at various ways to ease financial pressure, such as business insurance. The types of losses companies are incurring, according to Resilinc, are financial losses including lost revenue; premiums paid to secure raw materials and parts; emergency labor costs; expedited freight costs; cash burn due to factory downtime; and employee monitoring and protection costs.
Unsurprisingly, said Vakil, the fine print in insurance policies is critical. Property policies usually cover physical loss or damage to insured property resulting from a covered risk. Sites must suffer physical damage, and risk must also be covered. A loss of profits because of people not able to come to work, or government travel restrictions, generally does not trigger property insurance coverage.
Contingent business interruption (CBI) requires covered direct physical damage to property of a customer or supplier named in the policy. Coronavirus has not caused physical damage to property, so financial losses would generally not be covered.
Trade disruption insurance (TDI) covers loss of earnings, unforeseen costs and contractual penalties that result from disrupted trade flows, according to Resilinc. Generally, TDI does not require that there be a direct physical loss to goods or their conveyances. These policies could provide some level of protection to companies.
In all cases, said Vakil, data improves the chance a claim may be approved. Manufacturers should be able to provide information on their suppliers; information on their suppliers’ suppliers, and mapping of their supply chain.
“We have seen over the years that more data only helps on the insurance side,” said Vakil. “It only helps your case, which otherwise may take years to pay a claim.”
However, there are bigger areas of risk. Manufacturers face the very real possibility that a key supplier will go bankrupt, according to Resilinc and Beroe Inc., a supply chain intelligence provider.
In general, OEMs should have a window into their suppliers’ financial health. Publicly traded companies are required to report their financials; private companies are not. Services such as Dun & Bradstreet and Rapid Ratings provide information on private companies. Businesses should focus on their key suppliers, Vakil said.
Companies should also have a sense of suppliers’ financial impact on their business. A supplier might be small, for example, but their component might represent $1 billion worth of finished goods for an OEM. In such cases, OEMs may want to build a financial case to help protect that supplier.
The consultancies recommend OEMs examine payment terms to their suppliers and consider their options. Manufacturers could pay their vendors in advance for a project scheduled in the future. This helps suppliers borrow against committed receivables.
“This is not a permanent downturn," said Vakil. “For future longevity, you have to help suppliers survive.”
OEMs could also improve payment terms. This includes paying suppliers upfront or payment on delivery instead of a typical 30-day collection cycle.
Suppliers’ costs remain high, even if they suspend operations, Beroe points out on a recent webinar. Advanced payments let money move around quickly; helps manage key relationships; and helps suppliers focus on keeping the supply chain moving. Companies could also consider purchasing expensive raw materials for the supplier, said Vakil.
Last-time-buys can also keep vendors afloat. Vakil cited a case in which a supplier was facing bankruptcy during the 2009 recession. Those products were sole-sourced, so a customer bought all that supplier’s remaining inventory. That kept the company solvent long enough to complete a successful merger.
Procurement is trying to strike a balance between keeping supplier businesses going and awareness of their own cash position, said Beroe. These strategies may be a tough sell to finance departments and corporate management
OEMs must have a strong business case to present. A company may spend $4 million with a supplier, but the business represents $4 billion end-product sales to the OEM. “You have to establish this supplier is critical to your success,” Vakil said.
Supply chain contracts are going to face another pressure, according to Resilinc. Force majeure relieves a supplier of its contractual obligations in the event of an unforeseen event – the so-called “act of god.” China has already issued thousands of such certificates for domestic businesses, according to Resilinc, which is an early warning signal for the rest of the world.
Although force majeure is not enforceable in the U.S., most manufacturers conduct business with global partners. This is a domain for legal departments, said Resilinc.
Companies can take steps to better protect themselves in the future. The Covid-19 pandemic may be an opportunity to review existing contracts, Resilinc added. Ask suppliers about their recovery time after a shutdown; specify that in the contract; and set it as an objective. In general, transparency and supply chain mapping help companies focus on their worst pain points.
Both consultancies acknowledge it’s difficult to benchmark financial health because Covid-19 is so unique.
“Covid -19 is unprecedented, and one of the biggest challenges for organizations is what is considered a traditional rating [being] applied to the current scenario,” said Rahul Devarakonda, head of compliance and risk management for Beroe. “It makes it difficult to predict.”
Beroe is looking at parameters such as suppliers’ ability to produce their products – and demand for those devices -- as a measure of financial strength. In other words, if a supplier produces 100 units, will they able to sell those 100 units? Beroe is also looking at suppliers’ locations as different regions are in different stages of the Covid-19 outbreak.
Nearly half (44 percent) of respondents to a recent Institute for Supply Management survey report their companies have no plan for current supply chain disruptions. While nearly half of those respondents said they don’t expect their supply chain operations to be impacted, the rest have been hit — and are scrambling to work through disruptions, some severe.
Amid such realities, supply management organizations have an opportunity to play to their strengths, ISM added. Those include leveraging supplier relationships and advanced mining of data, as well as exhibiting the resilience to withstand turbulence and the agility to capitalize on market changes. Such measures can strengthen company supply chains while continuing to serve customers.