Big manufacturing industries are expected to tide over the crisis due to their strong financial standing and access to stable credit lines. A number of measures have been announced by the Finance Ministry and RBI to ensure liquidity in the system. Tax reliefs have also been announced including increasing the financial ceiling for classifying an asset as Non-Performing Asset.
The MSME sector is also expected to benefit from the measure but the hardships imposed by the disruption in the functioning and operation of manufacturing units is expected to outweigh the benefits,
The financial implications are expected to accrue mostly due to increased logistics costs, payment of fixed costs without production during the lockdown, reduced manpower & payables for raw materials to produce finished goods. Manufacturing industry shall be able to restart production with the already available raw material inventory and with the delivery of in-transit inventory. Manpower shortage is expected to hit hard at the MSME sector, as most of the migratory trained manpower has headed home in this crisis.
As the manufacturing sector tries to fight its way to resume its functioning to a sustainable capacity in the first quarter of FY2020-21, there will be a severe strain on procurement function. There will be a sudden surge to procure from suppliers by the manufacturing industries, expecting to quench the sudden demand from consumers after the lockdown.
Many industries will resort to ‘phantom orders’ and we will see the ‘Bull-Whip Effect’ in full force. This increased demand means the Industries may have to procure at increased costs which will need additional financial resources. Small manufacturers will remain at the mercy of International Suppliers who will now supply raw materials based on the criticality of the procurers and their market/financial standing. This may lead to loss of revenue on finished products/services for MSME using raw materials supplied by International Suppliers, as customers switch to the alternative source.
Suppliers will also play a very critical role. There are expected to be too many orders and too few goods to be supplied. They now have to identify their critical customers for supplying the goods. Hence some of the buyers will suffer and look for local or alternative sources of supply. Suppliers would have to follow a balanced approach so as their other customers do not switch to other suppliers when the crisis is over.
As the logistics & supply chains normalize, the distributors/retailers will be moving the existing inventories to the end customers. This will quench the immediate demand to a certain level. However, when the orders are placed for the next batch, the distributors/retailers can expect late or no demand fulfillment. This is expected to put strain on their financial standing. By the time the new distributor demand is met and goods reach the end customer, we will see a demand-side depression as the initial frenzy for over-compensating dies in consumer demand.
Shipping & logistics rates are expected to remain high due to manpower and capacity constraints. The logistics players will have to battle the lack of manpower such as truck-drivers and capacity reduction due to stranded trucks.
Risk Mitigation Strategies:
Supply Chain Mapping
Supply Chain Mapping is a very resource intensive operation for any industry. It helps in identifying tier1/tier2 suppliers, their factory locations, raw material source etc. It remains one of the most important tools to mitigate the global supply chain risks in case of force majeure events such as COVID-19.
Reduction in inventories
Industries should use the POS data wisely in the coming months factoring in the Bull-Whip effect and refraining from Phantom Ordering. They should focus on reducing inventories and thus to reduce tied-up capital. Finished Goods Inventories shall have to be closely monitored for conversion to cash as soon as possible.
Manage cash payable & cash receivable
The Industries have to vigilantly monitor cash payable and receivable to increase cash at hand. Increase the Supplier Payment cycle and decrease the cash receipt payment cycle for stabilising the working capital requirement.
Make use of government policies
The Government has announced a number of policies to decrease payment burden on the Industries and to increase access to credit lines with reduced interest rates , delayed tax payments & no fines on late payment of certain taxes. Apart from the previously announced measures, new fiscal measures are expected to be announced by the Hon’ble Finance Minister in the coming weeks.
Identifying critical products/customers
With severe shortages and high demands, the industries have to identify the important customers and products that should be produced/served to give the industries much-needed access to financial resources in a short time. The industry can resort to ranking their products/services which can lead to financial realization in a very short term.
This article has been authored by Mr Ankur Kumar, CEO & Founder, Nuo Logistics Services Pvt Ltd.
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