Five Steps for Manufacturing Companies Resuming Work amid COVID-19
When a Guangdong optoelectronic materials manufacturing company resumed work in mid-February, it faced insufficient raw materials supply. Because its downstream suppliers were mainly in areas where the epidemic was relatively severe, logistics and transportation bottlenecks in chemical raw materials became a serious problem. The optoelectronic materials industry has a special production process that must be uninterrupted. At that time, the manufacturer's raw material inventory was extremely limited.
At about the same time, a textile fabric manufacturer in Zhejiang was receiving very few orders. At this medium-sized company, more than 60 percent of employees had returned to work, yet it only had enough orders for a month. Without upcoming orders, it could only manufacture some finished products and stock them in its warehouses, which meant cash flow was severely damaged by slow sales. At the same time, it still needed to cover expenses such as wages, bank interest, utility bills and rent.
Such cases have not been uncommon during the COVID-19 outbreak. Since the resumption of work across China, many manufacturing companies have faced serious challenges. They may have had to disrupt their production plans because of blocked supply chains, or borne huge capital costs and operating pressure because of a lack of orders. A survey released on 27 February found that the top 500 manufacturing companies in China's work resumption rate had reached 97.08 percent, yet the average utilization rate of production capacity was only 58.98 percent during 18-20 February.
Transportation and logistics disruption, product delivery difficulties in the upstream and downstream industrial chain, heavy financial burdens, difficulties in order fulfilment and a lack of orders are all problems enterprises face when they resume work and production. What’s worse, this new situation is intertwined with existing problems, such as the reduction in China's manufacturing labour force, the development of digital technology, and the search for alternative supply chains by companies outside China. In this situation, we expect the epidemic to bring about the following changes in the manufacturing industry:
- An overall delay in market demand and changes to demand structure;
- Business models changing from solely offline orders to an online-offline mix;
- Global supply chain adjustments; and
- Accelerated deployment of intelligent production.
Enterprises can take the following five measures to deal with the abovementioned changes:
Evaluate changes in market demand. Under the influence of the COVID-19 pandemic, everything has changed. Will market demand continue shrinking? Or will it first decrease then increase eventually? Will the impact of the pandemic be controlled in the second quarter? Or will it continue into the second half? Enterprises should establish outbreak responses models according to basic data such as product output and type, market sales and distribution, enterprise size, and number of employees, and assess the impact of the outbreak on their production and operations, including risks associated with employees, outsourcing, government, the public, and their supply chains. On this basis, companies need to evaluate orders and production lines that could be affected by the pandemic, and form corresponding plans for funds, materials and personnel. If project order delays raise production pressure in the second half of 2020, companies will need to be prepared. They must also pay attention to key markets and core user needs. On one hand, they should adjust their product offerings to better meet current consumer demand; and on the other they should prepare for a market recovery.
Some home appliance companies have started to mainly produce health-related home appliances since resuming work, such as high-temperature sterilization air washing machines and disinfection cabinets with higher anti-virus rates. Enterprises should not rely on short-term retaliatory consumption, because after an initial period of retaliatory consumption, they often face another period of consumption stagnation.
Quickly adjust organization and talent structure. With new insights into their situations and market demand, companies need to adjust their organizational structures accordingly. First, to solve the problem of short-term labour shortages, enterprises can resume production through recruiting local labour, optimizing employees’ work schedules, and participating in online recruitment organized by the government, thereby avoiding delayed delivery due to staff and production capacity shortfalls.
In addition to finding ways to reduce short-term labour shortages, companies need to adopt to the new market environment by adopting long-term approaches that drive organizational change. Some are already building new business teams, drawing sales, operation, and product talent from within, and forming complete workshops to efficiently develop new projects. Moreover, some companies are starting to expand the capabilities of their sales teams, encouraging offline sales personnel to make sales and solve problems online. In this way, sales personnel can improve their sales, operation and product capabilities.
Pay close attention to financial management. Affected by decreases in cash income and interruptions to upstream and downstream capital chains, manufacturing companies are suffering financial pressure. The situation is particularly bad for SMEs. The cash flow pressure they face is constantly increasing. In addition to fully understanding and utilizing the government's supportive policies, enterprises need to pay close attention to financial management. For example, establishing 100-day cash flow assessments and monitoring mechanisms to continuously assess the financial impact of the pandemic is good practice. Paying attention to accounts receivable and payable, communicating and negotiating with upstream and downstream suppliers, minimizing the time accounts receivable are outstanding, and striving for longer payment periods are all good practices to implement. When it is very difficult to increase demand, companies should implement more prudent cost control measures, reduce variable costs, and control capital expenditure. To improve cash flow as soon as possible, some companies can encourage customers to make payments more quickly by reducing prices. Although their profit will be reduced, cash flow will improve.
Improve supply chain resilience. Manufacturing companies have always focused on supply chain optimization, but mostly to reduce costs and increase efficiency. The COVID-19 pandemic has exposed a the lack of resilience and mobility of the manufacturing supply chain. Their lack of defense capabilities has led to the disruption of supply chains. Moreover, since the resumption of work, their inability to send supplies quickly to where they are needed has slowed supply chain recoveries. In future, the frequency and intensity of natural disasters, geopolitical crises, and public health events will continue to increase. Enterprises need to improve their resilience and the mobility of supply chains, as well as reduce risks' interference in and destruction of supply chains. For example, they can shift from centralized supply to a combination of centralized main supply and decentralized network backup supply to ensure normal supply levels can be restored as quickly as possible in an emergency. Alternatively, they can increase the commonality of parts and components through research and development, and make parts deployment easier.
Strengthen digital technology applications. With the resumption of work, enterprises should strengthen their use of digital technology around customers, employees and business operations. On the customer side, digital technology can be used for digital marketing, online services and e-commerce, as well as acquiring new customers and opening new businesses. At the employee level, use of digital applications for remote work, online recruitment, and employee physical condition monitoring should be increased. In operations, such as financial sharing, e-procurement and smart logistics, enterprises ought to strengthen smart manufacturing deployment and improve remote collaboration in task, project and workflow management. Businesses must have confidence in their ability to cope with the pandemic and allocate resources to learning and planning for digital transformation.
In March, more enterprises and production lines are resuming production. For companies that have survived the most severe period of the pandemic, now it is the best time to learn and practice.