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MDA Training: Listen, Create, Deliver, Sustain
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Start and stop button on a conveyor belt

If all else fails close down and restart

Chinese manufacturing businesses have been closed for just over eight weeks now. The Chinese New Year has been extended. In reality the workforce has been in quarantine waiting for the Coronavirus infection rate to decline. The signs, according to official statistics, are good. The workforce can go back to work and fire up the productive boiler. But it will take time to restart and build up production. Perhaps another two to three weeks.

When Chinese manufacturers are ready to export more time is consumed. A container ship from China to US or Europe takes at least three weeks. Assuming weather and port checks all run smoothly. Therefore, it could be another two to three months before manufacturers get their hand on parts and components. The sectors that operate to LEAN principles, such as the automotive sector, often only carry 12 weeks buffer stocks. It will be touch and go if these businesses can maintain full production in the short term.

Meanwhile Coronavirus has broken out in Italy, South Korea and Iran. It is difficult to predict if these outbreaks will spread further across Europe. One consequence may be that border controls are tightened. Perhaps just as China comes back on-stream, Europe may find itself imposing more stringent controls. All of which is potential bad news for the European or American manufacturers.

Within this scenario it is likely that manufacturers will hit cash flow difficulty. No manufacturing activity, no sales and consequently no cash coming in. The knock-on effect will be felt further up the supply chain too. Distributors, wholesalers and retailers will feel the cash flow pinch. Many of these businesses will have debt facilities with banks, trade finance firms and asset finance specialists. How will the funders respond to a period of low activity, squeezed cash flows and perhaps and inability to meet debt commitments.

I can recall the 2001 outbreak of foot and mouth in the UK. Over six million cows and sheep were slaughtered in an attempt to control the disease. Many farmers, meat processors and food manufacturers found themselves in financial difficulty. Some banks wrote immediately to business’ involved in these sectors and confirmed that they would support customers. Debt would not be called in. This action provided much reassurance for the beleaguered sector.

The worst-case scenarios may prove to be over-hyped. Management teams, funders and investors need to consider how they will collectively steer the business through an extended period of inactivity and much reduced cash flow. Sometimes we are all too slow to react. The supply chain issue has been talked about for the past few weeks, but only now are the equity markets pricing in the impact. Management teams and funders should start planning, for the reduction in operating cash flow over the next few months.

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