Coronavirus: supply chain pressures - Quick reads - Gateley
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Coronavirus: supply chain pressures

Gateley Legal

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Today saw JLR announcing that they are being forced to ship car parts in suitcases from China, due to the pressures being placed on their supply chain by the coronavirus epidemic. 

Without wanting to over-hype the impact of the coronavirus, I am hearing more and more anecdotal evidence of this nature, of the severe impact on the supply chain for many businesses. We have made China the new workshop of the World and at the moment, the workshop is closed. Many businesses operate to a lean, "just in time" delivery system and do not have a lot of redundancy or spare capacity built into their systems. Many retailers and wholesalers rely on an agile supply chain to be able to respond effectively to rapidly changing consumer demand for new or trending products.

Impact on business

One impact of the coronavirus is that these businesses cannot move their representatives around the country to place orders, inspect stock, or negotiate contracts. This will inevitably cause an immediate shortage, followed by a subsequent bulge in the supply chain as the crisis eases and businesses scramble to make up lost time. The immediate impact will be short-term cash flow problems as sales drop, coupled with logistical uncertainty about whether and when a new product will be received, due to backlog in factories and heavily disrupted production schedules. Businesses may need to place larger than usual orders to try and recover the lost revenue caused by the delay but this represents both an additional drain on available capital and something of a gamble for the buyer- if the product is seasonal, the window to sell that product is reduced, potentially leaving the Seller with large volumes of redundant or discount stock. For the retailer, this will inevitably have knock-on consequences for the traditional autumn and winter sales.

Impact on the public 

These issues could be compounded if public health concerns escalate and we see the UK following China’s lead, in terms of more aggressive restrictions being placed upon movement - we could see (for example) store closures for retailers and damage to any business that operates in public spaces – restaurants, cinemas, theatres, public attractions and so on. Again, this sort of disruption would have a significant negative impact on retailers and other businesses that are dependent upon footfall for revenue. A further consideration, particularly in London, will be the loss of tourist revenue caused by the restrictions on travel from China. All of these factors taken collectively start to build a very negative picture for the impact of the coronavirus on the UK economy.

So, what can businesses do to counteract some of these short-term issues?

First, as always, cash is king. Businesses should look to their short term cashflow forecasts and examine these forensically to ensure they are robust. If serious cashflow dips are anticipated, it is better to identify these as early as possible, to give sufficient time to explore alternative funding options: shareholder loan/investment, short term financing, asset-based lending, increased overdraft facilities and so on. Where cash is tight, there are two simple steps that any business should take to alleviate the position: first, ensuring that debtors/customers are paying to agreed terms (i.e. a focus on prompt debt collection) and negotiating extended or more flexible payment terms with its own creditors (sometimes referred to as “creditor stretch”). Obvious places to start are HMRC, landlords, trade suppliers and lenders.

Businesses may also need to consider implementing cost reduction measures. If a redundancy programme looks unavoidable, it is always better to start the consultation process sooner rather than later, to minimise the potential costs involved and to reduce the impact on the affected employees. It may be that parts of a business need to be “mothballed” for a period, or perhaps now is the time to divest non-core parts of the business and focus on the more profitable or strategically important elements of the business.

Our advice

The medium-term outcome of this latest virus outbreak is difficult to predict but the likelihood of adverse short-term consequences for many UK businesses that rely upon China for products are easier to foresee. The important thing is to take action now to minimise the impact – apathy is a deadly virus for any business.

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