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Supply Chain News: As with 2008 Financial Crisis, Cash will be King in Coronavirus Survival and Recovery, MIT's Yossi Sheffi Says

 

Suppliers May Need Financial Help, Customers Want Perceived Fairness

March 24, 2020
SCDigest Editorial Staff

The term "cash is king" has been around for a long time, but it was used broadly during the Great Recession in 2008 and 2009, as companies struggled to survive in the face of plunging demand.

It should be no surprise that cash may again be king right now in the face of demand that in some cases has fallen to near zero outside of consumer staples.

Supply Chain Digest Says...

Reserving the bulk of inventory for the largest or most profitable customers can be a mistake, however, Sheffi says.

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In a guest column this week in the Wall Street Journal, MIT's Dr. Yossi Sheffi says that it's already time to start planning for recovery – and that will involve using the supply chain to manage cash flow right now.

"To do that companies must look deep into how they manage the most basic mechanisms of their supply chains and operations," Sheffi wrotes.

For supply-chain managers, Sheffi says focusing on cash involves four basic actions:

Increase days payable outstanding: This is the average time that a company takes to pay its bills.

Reduce days sales outstanding: This is the average time that receivables remain outstanding before they are collected. In simple terms these two initiatives mean longer payment terms for suppliers so the company can keep its cash longer, and collecting money owed from customers as early as possible. Companies should strive to balance DSO with DPO on every project.

Of course, SCDigest notes, when a company tries to accelerate its own payments from customers, it likely will be doing so with a company trying to stretch out its own payments to suppliers, in what is a zero-sum game in the end.

 

Reduce days of inventory on hand: Inventory ties up cash. "Even in today's just-in-time inventory management systems, most companies accumulate too much inventory," Sheffi says. "The favorable business environment over the last decade encouraged companies to focus on customer service and use large inventories to reduce out-of-stock situations."

Defer capital expenditures: Consider using force majeure clauses to get out of contracts with long-term paybacks.


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What else should companies do now to come out of the current crisis in better shape than others?

One recommendation from Sheffi is to not lose track of the criticality of human resources – even, SCDigest notes, if there is sure to be major downsizings by many companies in the weeks and months ahead.

Sheffi notes that during the 2008-2009 financial crisis, Toyota used downtime to extend the training of its employees. And the German government changed its labor laws to allow employees to collect partial unemployment to help German industry rebound quickly from that downturn. Under that program, a worker might be put to half-time work and the government would pay 70% of the other half of his or her salary.

It's an interesting thought, but no real precedent in the US. SCdigest notes that during the Great Recession, Limited Brands reduced worker pay be 20% in order to avoid big layoffs, but paired that with an additional day off per week.

Supplier are failures are a major risk in this type of crisis, Sheffi adds, recommending as SCDigest has down for many years that companies map their extended supply chains.

"Business managers should assess if there are problems in specific areas by mapping all the manufacturing facilities of each supplier and record what is made in each location and which products and customers depend on parts and material made at that location," Sheffi says.

He adds that after that analysis, companies should consider supporting suppliers that are struggling, especially those that provide unique and/or critical materials and parts.

"Tell-tale signs include late or incomplete deliveries, late or restated filings, changes in bank covenants and the departure of key personnel," Sheffi notes, adding the support can take many forms, including firm commitments for orders, guaranteeing loans, applying the company's credit to loans and lending against future production.

But most of all, companies need to have deep discussions with customers.

"The way a company treats customers during a crisis can determine whether or not they retain them when the dust settles," Sheffi says.

One issue is likely to be the need to allocate production across multiple customers if not all orders can be filled due to supplier constraints.

Reserving the bulk of inventory for the largest or most profitable customers can be a mistake, however, Sheffi says.

"This may turn out to be a myopic strategy if it jeopardizes future growth with a new customer or causes a small company that depends on your products to collapse," Sheffi writes.

Alternative, Sheffi say, approaches include "fair allocation," where every customer experiences restrictions such as receiving only a given percentage of their orders. To avoid over-ordering in this case, some companies may base their allocations on customers' average ordering history.

He adds that "In general, it is most important to be seen as fair and responsible during a crisis."

Sheffi concludes by saying "These and other actions taken now can make or break a company's ability to survive the current Covid-19 emergency and the inevitable upheaval in business that will come in a recovery. For supply-chain managers, the task is to keep critical suppliers viable and to treat customers in ways that do not create resentment."


Any reaction to Sheffi's recommendations? Let us know your thoughts at the Feedback section below.

 

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