Companies can all do a far better job in the communications department.
If there’s one key lesson learned from the impact of the coronavirus on the supply chain going forward, it’s that parties throughout the network need to do a better job talking with one another.
That was a key theme at a panel discussion Wednesday at the Sourcing Journal Summit 2020 on R/Evolution, the “New Rules of Supply Chain Finance Post Covid-19.” Not only was communication—or rather, the lack of it—key to what went wrong a few months ago when panic set in after the coronavirus pandemic hit globally, but it will also play a major role for companies preparing to talk with their lenders next year.
The lesson from Covid-19
Looking back at events earlier this year, poor communication was cited as a key reason why business relationships broke down. Instead of working together to figure out a solution, retailers began canceling orders, fracturing the relationship between factories and retailers.
“In living through the situation, panic [had set] in with all the parties. There was a lack of communication. Nobody knew what was going on,” Stuart Kessler, founder of consultancy Clear Thinking Group, said. The lack of cooperation led to an inaccurate picture of what was happening, he added.
As for what could have been done better, Kessler said companies should have made plans for strategies for goods produced, but not yet delivered, for example. They could have allowed for goods to be paid when shipped, which would have then provided some payments to factories for a portion of their direct costs. Factories and their retail partners could also have worked out arrangements where they received payment for some costs, and then begin to receive payment for the remainder as retailers sell the merchandise.
“Everything broke down. It was almost survival of the fittest,” Kessler said.
Communication also seems to have been an issue concerning the government backstopping of loans.
The German government backstopped lending, for example. “This created confidence in the credit ecosystem,” said John Stillwaggon, CEO of Americas at Tradewind. Backstopping provided companies with enough confidence to get everyone back to normal trading, he added. Many European countries provided that assurance to get their economies moving forward again.
While some U.S. officials seemed interested in doing something similar, a lack of clear communication apparently tripped up the process and prevented it from moving along.
“The mistake was they added the word insurance instead of backstop,” Munir Mashooqullah, founder and chairman of supply chain management firm Syngergies Worldwide, said, explaining that the insurance sector got involved and the process hit a snag. “What happened in Europe was that money was lent to some of these companies and it just kept their business going,” Mashooqullah said, adding that if a company had bad credit or was on thin ice, whether in Germany or Spain, it wouldn’t have received funding because of strict loan requirements.
Evaluating future working relationships
Looking ahead, Mashooqullah said communication will continue to be important as companies try to move projects forward. Speaking from personal experience, Mashooqullah provided one example where he needed to “elevate the conversation to a higher level” with someone at the executive vice president or president level to get certain assurances before moving to the next step of the project. It’s that little detail and extra effort that if not done will mean companies won’t be able to get new orders completed, which translates to not getting paid.
Stillwaggon added that companies can evaluate risk in choosing which firms to work with by taking a close look at all the data they have, whether it’s the other firm’s credit insurance partners, how long parties have worked together and even how important they are to each other in terms of operations and supply-chain connections.
Post-Covid-19 supply-chain financing
“The lending community lost sight of a big part of its evaluation [process because they] took the supply chain for granted,” Paul D. Schuldiner, executive vice president and division manager at Rosenthal Trade Capital, said.
Schuldiner said that has now changed with the pandemic as lenders, as part of their due diligence, are taking a closer look at a supply chain’s characteristics.
“Lenders don’t like concentration,” he said, explaining that now they are asking questions about both numbers and geography. “The reliability of the supply chain has become very important.”
Clear Thinking Group’s Kessler also noted that venture capitalists are looking at different metrics for digitally native brands. These online brands need to partner with their supply chain a great deal more than in the past, and maybe even review their customer acquisition costs.
But Kessler also said all companies, digitally native or not, need to pay close attention to inventory levels, new inventory receivables, bringing in goods closer to need, and take a really hard look at expense items, even to the point of having executives in charge of line items justify the expenditures.
He’s also advocating that all companies over communicate with their lenders. “We are encouraging our clients to schedule weekly calls with their lenders [and] present time and action plans related to key initiatives. Finally, we encourage clients to prepare a contingency plan including a 13-week cash flow,” Kessler said. Companies should presume they are working in crisis mode and articulate having a plan in place that will give lenders a level of confidence that the company can pivot and shift gears as needed. “Companies should [provide] the communications that they need to on a timely basis,” he emphasized.
All the session’s from this year’s Sourcing Journal Summit, R/Evolution, are available on-demand for the first time. Follow this link for more information.