Manufacturing and Distribution Industry and the Impact of Various Current and Potential Crises

Manufacturing and Distribution Industry and the Impact of Various Current and Potential Crises

This report provides an overview of the manufacturing and distribution industry and the impact of various current and potential crises. Part (A) consists of insights related to the coronavirus and how companies can respond to it and prepare for similar crises in the future, with some examples coming from the continuing recovery in China. Part (B) consists of insights into the impact of climate change on the industry, including challenges to supply chains. Part (C) consists of insights on the impact of a recession and preparations that can be taken, including implementing agile supply chains. Full details are provided below.
Part (A): This section provides insights on how the coronavirus has impacted the manufacturing and distribution sector and how thought leaders are suggesting businesses should prepare for the future.

Virus-Based Supply Chain Disruption

The coronavirus is causing widespread disruption to the global supply chain.

  • A survey of 558 manufacturing companies taken from February 28 to March 9 found that 35.5 percent were facing supply chain disruptions as a result of the virus.
  • A Dun & Bradstreet report from February found that 938 of the Fortune 100 companies have either a Tier 1 or Tier 2 supplier that is affected by the virus.
  • In late 2019, the World Economic Forum (WEF), in collaboration with various industry and academic partners, brought together C-Suite executives from the manufacturing sector to plot a path forward for minimizing supply chain risk resulting from a crisis like the coronavirus.
  • A report was produced as a result of the WEF conference titled Reshaping Global Value. Its authors came forward in February and advocated it as a viable solution to disruptions such as those caused by the coronavirus. The report recommends developing visibility in the supply chain by identifying primary, secondary, and tertiary suppliers, including:
    • identifying makers of critical parts;
    • identifying any alternate sources ;
    • cataloging suppliers’ inventories;
    • dual-sourcing critical parts of the value change;
    • and increasing inventory buffers to add to resilience.
  • Francisco Betti, Head of Shaping the Future of Advanced Manufacturing and Production for the World Economic Forum, recommends companies “aggressively evaluate” methods of shortening the supply chain and increase proximity to consumers, such as by finding near-shore options.
  • Swift adaption is key. Chinese instant noodle company Master Kong successfully adapted its supply chain in response to the coronavirus by tilting its focus away from larger offline retail channels to online, e-commerce, and smaller retail stores. As a result, it was able to recover its supply chain by more than 50 percent a few weeks after the outbreak started.

Managing Financial Impact

  • A survey of 558 manufacturing companies taken from February 28 to March 9 found that 78.3 percent were anticipating a financial impact as a result of the coronavirus.
  • Companies that actively shift their sales channel mix fare better during times of pandemic. Cosmetics company Lin Qingxuan had to close all of its locations in Wuhan during the virus outbreak. It redeployed its staff of over 100 beauty advisors as Instagram influencers to drive online sales. Its sales in Wuhan had 200 percent more growth than those from last year.
  • Large companies with multiple divisions should expect their divisions to recover at different speeds, and to deploy different strategies appropriately.
  • As an example of a large company with multiple divisions using an approach of flexibility to reduce future losses from sales in China, a large global food and beverage conglomerate accelerated its long-term shifts to focus on health-relevant and imported products and the online sales channel as a result of the virus.
  • To understand how and when supply chain issues will cause a financial impact, McKinsey & Company recommend running a stress test against major suppliers’ balance sheets. Doing so enables better management of cash and networking capital moving forward.

Change in Operations

The majority of manufacturers are anticipating a change in operations as a result of the coronavirus. In China, some manufacturers have already adapted.

  • A survey of 558 manufacturing companies taken from February 28 to March 9 found that 53.1 percent were anticipating a change to their operations in the coming months.
  • Better safety practices: As a result of the crisis, some companies in China have adopted proactive, supportive guidance practices to provide operational guidelines and procedures moving forward to ensure that every employee understands best practices for safety and is aware of emergency plans.
  • Opportunistic service expansion: Kuaishou, a social media platform in China, began promoting online education offerings in the face of school closures. The company soon partnered with the Ministry of Education to begin planning a national online cloud classroom.
  • New product line: A major restaurant chain in China advanced a new line of take-and-bake dishes in response to the coronavirus and the increased need for families to cook at home.
  • New technologies: Companies are increasingly moving toward the digitization of supply-chain management to be able to access a single platform that enables the management of issues arising from increasing product complexity. A medtech company recently expanded its supplier base by 600 percent by running an estimate of its degree of connectiveness, as an example.

Part (B): This section provides insights into how climate change or natural disasters could impact the manufacturing and distribution sector and how thought leaders are suggesting businesses should prepare.

Climate-Based Supply Chain Disruptions

  • Productivity losses resulting from climate-change-related workplace disruption in the United States alone could rise to more than $2 trillion by 2030, according to the United Nations Development Programme.
  • Investing in emerging technologies such as additive manufacturing, AI, robotics, and the Internet of Things will enable companies to bring their manufacturing to their home areas rather than leaning on multiple stakeholders located across the globe in regions that are potentially vulnerable to climate change, provides the WEF.
  • As an example of additive manufacturing, GE now produces a fuel nozzle using additive manufacturing that once required 20 separate parts to create.
  • Another example of how emerging technology mitigates climate-based supply chain risk comes from Adidas, which is now 3D printing sneakers in the United States rather than relying entirely on low-cost labor countries that are more vulnerable to climate change.
  • The cotton, smartphone, and automobile industries are identified by the WEF as being most vulnerable to supply chain disruption. The WEF produced an interactive tool that allows the user to see the impact of climate change and the risk to the supply chain in those industries over a three-year period.

Decreasing Resource Availability

  • Extreme weather events, including flooding, will limit the ability to extract, utilize, and/or transport resources as a result of climate change.
  • Natural disasters caused by climate change can damage infrastructure that provides necessary production resources such as electricity and water.
  • As a result of climate-based scarcity of resources, companies will turn to recycling and alternative materials if they are an option for their particular business.
  • Dr. Michela Coppola, Thomas Krick, and Dr. Julian Blohmke recommend that companies improve their existing resource production capacity (such as by increasing their energy efficiency).
  • Dr. Michela Coppola, Thomas Krick, and Dr. Julian Blohmke also recommend that companies reduce their reliance on potentially volatile resources (such as fossil fuels) by seeking alternative sources where possible.

Governmental Response to Climate Change

  • Climate change and its resulting effects are widely acknowledged as the greatest single threat to sustainable development, prompting individual governments to respond.
  • National governments will vary in how they respond to climate change, including establishing different regulations for production and products, thus impacting manufacturing.
  • Regulations such as clean air taxes, carbon-trading schemes, and recycling enforcement will increase the cost of long-distance and multi-echelon linear supply chains.
  • Trade is already affected by increasing restrictions related to climate change action policies. According to the WTO and others, there was a sharp rise in the application of restrictive measures from 2017-2019. The amount of trade affected by these measures is now 2.5 times more than the amount affected in 2012.
  • Businesses can respond to such increased costs imposed by regulations by preemptively adopting shorter supply chains and moving the sources of their supply closer to their sources of demand, per the WEF.
  • Business leaders can and should impress on the need for international cooperation on climate action to encourage a unified response (leading to unified regulations), according to the WEF.

Part (C): This section provides insights on how a recession could impact the manufacturing and distribution sector and how thought leaders are suggesting businesses should prepare.

Overall Financial Impact

  • A recession is typically preceded by an inverted yield curve in the stock market roughly 14 months prior. The most recent inverted yield curve occurred in August 2019, placing the next anticipated recession in October 2020 (though the coronavirus impact may affect that projection).
  • During a recession, customer orders and payments slow or cease, greatly affecting financial operations for manufacturers and distributors.
  • According to Dr. Bruce Arntzen and Dr. Nima Kazemi at the MIT Center for Transportation & Logistics, companies can prepare against lower orders by introducing risk-aware contracts that allow for long lead-times, thus enabling collaboration with customers that minimizes direct risk.
  • To prepare for a recession, companies should be prepared to be diligent with collections when customer payments start to slow. Companies will need to counter tactics such as customers attempting to change payment terms, for example.
  • To minimize financial impact during a recession, switch to lower-quality materials to avoid paying premiums for ones that are more exclusive or expensive.
  • Switching to contract manufacturers and letting employees go is another method of reducing financial impact during a recession.
  • Embracing digital platforms will enable companies to collaborate, communicate, and conduct business without the need for physical proximity, provides the WEF. This reduces the risk stemming from local or regional recessions.

Supply Chain Issues

  • Issues across the supply chain can emerge when multiple countries are facing a global recession.
  • The longer a company’s planning cycle, the longer it will be forced to contend with excessive or obsolete inventory during a recession.
  • Companies that adopt an agile supply chain (meaning one that is capable of rapidly adapting to match supply with demand) will fare much better during a recession, according to Steve Banker with Forbes.
  • Becoming accustomed to weekly or daily Integrated Business Planning (IBP) sessions is an excellent way to adopt an agile supply chain model.
  • During the 2008 recession, one company that had previously integrated agile supply chains told all of its suppliers to stop shipments for four weeks when the recession started to have time to understand new demand patterns. It then resized the company by slowing production, laying off workers, and shutting down less critical factories. Because of the company’s IBP usage, it was able to take these steps quickly. The company was able to come within 5 percent of its annual plan each quarter during the recession as a result.

Responding to Obsolete Business Models

  • During the 2008 recession, companies that faced the most significant losses did so in part because of poorly-researched forays into unfamiliar sectors or because they waited to invest in product innovation and instead relied on their existing business models.
  • Companies that quickly act to identify the short list of projects that will become the fundamental part of the next business model are able to adapt more successfully in a recession, according to Tom Holland (a partner in Bain’s Accelerated Transformation business) and Jeff Katzin (a partner in Bain’s Performance Improvement practice).
  • Companies that successfully managed their business during the 2008 recession invested heavily into R&D as soon as the recession was evident. Their research targeted distribution realignment, next-generation formats of products, and improving the customer experience through digital capabilities.
  • Samsung increased its R&D investments in 2009 in response to the recession and increased its number of patents fourfold. The same year, it released the first Galaxy smartphone. Since the recession, it has steadily improved in brand value according to Interbrand’s global list.
  • Companies did well during the 2008 recession when they carefully utilized the mergers and acquisitions process to acquire new product lines and exit ones that didn’t fit in with the company’s future following an assessment of legacy product lines.

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