Welcome to our Blog page. Here, you can read our firm’s latest blog posts about timely tax, accounting and audit issues.

Revamping Your Manufacturing Business for Post-Crisis Resilience

Posted by Jason Cope, CPA on Oct 12, 2020 9:00:00 AM

Well before the COVID-19 pandemic, manufacturers were bracing for an anticipated market correction at best and a recession at worst. Tariff wars had already wreaked havoc for many manufacturers, causing U.S. manufacturing to contract more than it had in a decade. For an industry so reliant on Chinese-made parts and materials, the pandemic has convinced most manufacturers of the need to diversify suppliers and/or bring operations either in or closer to the U.S.

Background

As the original epicenter of the COVID-19 pandemic, China was forced to shut down its economy, and that shutdown had far-reaching effects on U.S. manufacturing operations. As Chinese factories closed to contain the spread of the virus, transportation routes were blocked and employees couldn’t work. Most U.S. manufacturers experienced immediate supply chain disruptions as result of these sudden changes. Once the pandemic made its way to the U.S., safety became the priority for manufacturers, as they moved swiftly to protect their workers from the spread of the infection by implementing safety procedures and providing personal protective equipment (PPE) to employees.

Many manufacturers were able to avoid mandated shutdowns by being deemed essential, but others had to close according to state mandates. Aside from those manufacturing highly demanded materials, such as medical equipment and cleaning supplies, many manufacturers are struggling with depleted inventory, slow sales, squeezed profit margins and staffing issues. As the pandemic persists, manufacturers are seeking solutions to survive in an uncertain economic and political environment.

The Way Forward

The U.S. economy officially entered a recession in February. At this point, no one really knows whether the recovery will be V-shaped, U-shaped or W-shaped – which is a double-dip recession – or worse yet, an L-shaped recession, otherwise known as a depression. One thing is clear: the actions that manufacturers take today will have far-reaching effects for the future of their operations—even for the survival of their businesses. The following actions can help position your manufacturing business to succeed in the months to come.

Ensure Employee Health and Safety

By now, most manufacturers are well aware of the safety precautions they need to implement to avoid the potential spread of infection. Until an approved COVID-19 vaccine becomes available, the pandemic may last as long as 18 months or longer. Everyone wants to protect their employees, and no one wants to risk even a short-term business shutdown. OSHA has specific COVID-19 guidelines for manufacturers, which include:

                    Conduct a workplace assessment to identify areas of high risk
                    Introduce flexible work hours (staggered shifts), if feasible
                    Reposition workstations to create social distancing
                   Train workers on properly using PPE

Manufacturers may also want to redesign workspaces to allow for greater social distancing and consider remote oversight. Above all, require employees stay home if they are sick, and make it easy for workers to report any safety and health concerns.

Examine Overhead Expenditures
During a crisis, cash flow is everything. You will need to find ways to protect your cash balance if you have reduced cash flow and reduced revenues. Take a look at your operating and overhead expenses. Where can you make adjustments? If you borrow more capital, would that conflict with existing debt terms and affect your ability to meet financial covenants? Work with your accounting professional(s) to make a revised cash flow projection to protect liquidity. Together, you may be able to identify a plan to ease cash flow and reduce overhead costs.

Evaluate Your Supply Chain
During the pandemic – or any crisis – you’ll want to stay closely connected with your suppliers. This crisis has had a substantial effect on global supply chains. Some suppliers stockpiled inventory in the early days of the pandemic, but many manufacturers had uncompleted goods because of supply bottlenecks or panic stockpiling. Think about ways to mitigate risk by assessing your suppliers. What is their interruption risk? What can you be doing now to identify alternate suppliers, if you haven’t done so already? Keep in frequent touch with each supplier to gauge their ability to meet your needs as customer demands shift. Also understand your contractual obligations should you need to delay or cancel inbound orders.

Step Up Communications With Customers
Think about the effect COVID-19 has had on your customers. They may have had to reduce staffing levels and expenditures. Determine which customers are most at risk and design a plan to either address their needs or mitigate your losses. You also may need to reevaluate your pricing model. Again, your accounting professional(s) can assist you.

Conversely, what do your customers expect of you? If your customer service has fallen below pre-pandemic levels, communicate with your customers to let them know when they can expect deliveries. If there will be a delay, be transparent about it. Above all, you want to retain customer loyalty. The more you communicate, the more likely it will be that you earn (or retain) that loyalty.

Post-Crisis Expectations

There is nothing we would rather see than an effective vaccine for COVID-19. That time will come, but the pandemic will likely result in long-term changes, both in social behavior and within industry sectors. We’re already seeing manufacturers moving at least part of their supply chain from China to the U.S. or other near-shore countries. This is especially true in sectors that include medical devices, auto and electrical components—all heavily dependent on China in the past.

Certain manufacturing subsectors will see shifts in customer demands for the foreseeable future. For example, consumers want groceries delivered in high volumes and via quick delivery. The airline industry is in turmoil, and those manufacturing parts that serve the industry are feeling the effect. On the other hand, those manufacturing cleaning and health supplies, such as sanitizers and masks, have seen sales spike. Digital technologies are also expected to do very well in this socially distanced world.

E-commerce will continue to rise in popularity now that boomers who previously were unlikely to buy online have become more comfortable with digital technology. This is both good and bad for manufacturers. For example, those depending on a large retail customer base will need to shift gears quickly to sell online or risk going out of business. For some manufacturers, it might make sense to sell direct to consumers by ramping up their digital presence rather than relying on a middleman and risking slow delivery.

Just-in-time inventory has worked well as an inventory strategy in the past. However, the stockpiling and bulk buying brought on by the pandemic has changed consumer behavior. Manufacturers will need to determine whether this behavior – if permanent – will outpace their supply of goods. If so, they might want to consider a bulk sales model.

No one knows exactly how long it will take the economy to recover, and that means manufacturers must constantly monitor conditions and make adjustments every step of the way. By reviewing these issues now, manufacturers will be better positioned to weather the storm and reenter the post COVID-19 crisis in growth mode.

Do you have questions about see your manufacturing business through the COVID-19 pandemic and beyond, or about other manufacturing and distribution topics? Our manufacturing accountants can help. Please contact Jason Cope at 214-635-2508.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Manufacturing, supply chain, COVID-19, Factories