In the Face of COVID-19, are Profit Downgrades Predicting Supply Chain Distress?

By Scott Baker, Secretary at Cumberland Business Chamber and Senior Associate, Trade & Supply Chain at ANZ.

With all the scarcity stories in the media recently on  bushfires, floods and now the spread of the Coronavirus disease to countries other than China, Western Sydney’s industrial business owners can forgiven for feeling like its time to grab a shovel and start digging the bomb shelter. But that would be underrating their resilience & ingenuity, having prevailed through decades of globalisation and constant changes requiring adaptation to their business model.

Since the Coronavirus disease (COVID-19) was first reported in Wuhan, China on 31st December, there have been an extraordinary number of ASX200 companies reporting downgrades in expected performance or seeing a significant contraction in their market value.

Only 10 in the ASX 200 were left in the black as at end of February trading!

It has been widely reported that Blackmores are anticipating at least 2-3 months of China sales & supply challenges due to the virus, and Treasury Wine Estates are already seeing are already seeing a significant impact on sales in the same market.

For others, irrespective of any official announcements from management, the market is reacting to what they perceive as significant risks.

Examples, Flight Centre’s share price has taken a hit due to concerns about the effect of travel restrictions in to and out of Australia and consumers future travel plans if restrictions are lifted; as has Coles, Scentre and Vicinity Centres over concerns about the flow on effects of supply chain disruptions & the aforementioned travel restrictions on the retail sector.

It’s not the end of the world as we know it, as all these high profile profile ASX names will have fairly sophisticated supply chain risk management systems and processes in place that enable them to plan for and mitigate various risk scenarios, and  access to other sources of liquidity outside the ASX (banks, related parties, etc.) however it’s a fairly safe assumption that even the ‘big guys’ didn’t fully anticipate the likelihood and consequences of the events that are the reality today.

Issues that are having an impact on both their supply chain and consumer markets concurrently, the full impact of which is not yet known, and so cannot be fully anticipated even now.

What Can Manufacturers, Wholesalers, Transport & Logistics Operators in Western Sydney Learn from The Downgrades?

  1. If you don’t already have a supply chain risk management plan, map out your supply chain, the participants and their locations, put together your plan and regularly review it.
  2. No plan is perfect, you can’t have a rule for everything but if you understand the consequences you can build resilience into your supply chain and, by extension, your business model.
  3. The solutions to macro level problems such as those uncovered by the spread of Coronavirus are not necessarily going to be solved from within your existing circle of influence, by your employees, suppliers, consumers, or with your existing technologies. If they were, it would be Business as Usual for the companies we discussed earlier.

Step One – Map Your Supply Chain

First up, understand the participants in your supply chain, who they are, where they are, how they operate, how your raw materials, inventory and finished goods are transported, and in the case of your customers & end consumers, the things that influence purchasing behaviour.

Points to note:

  • For a manufacturer, your supplier could be performing some form of value-add in one country but the raw materials could be shipped from a third country. This has the potential to compound delays in sourcing and production.
  • Online retailers with their own distribution operations are becoming more prevalent these days, often squeezing out the pure wholesalers and ‘bricks and mortar’ retailers on price and stock availability. So the business model itself can also impact the timeframe for returning to normal operations. More on this point later.

Step Two – Understand your Risks, their Consequences and Develop your Plan to Respond.

So, what goes into a Supply Chain Risk Management Plan? Put simply, there’s four steps:

  1. Identify – What are the risk types and locations in our supply chain? Risks could be political, credit default, marine, air, strikes, riots, war, terrorism, force majeure related across multiple countries and locations (list is not exhaustive)
  2. Quantify – What are the financial impacts on sales and profitability? If you can assess the likelihood, duration & consequence of each risk event, you should be able to estimate the cost on terms of lost sales and/or contraction in gross and net margins. Certain  events may occur concurrently.
  3. Mitigate – What strategies and tactics do we have to minimise disruptions?
  4. Respond – What timeframe do we need to return to normal operations? This will be dependent on the event that caused the disruption, and what’s affected your operations could also be affecting your suppliers, distributors and consumers up and down the supply chain (as we’re seeing in China and now South Korea & Japan)

Step Three – Test Your Assumptions Outside your Regular Circle of Influence

Consult widely!

As with 9/11, the GFC and the spread of the SARS and Ebola viruses, the Coronavirus is almost certainly a Black Swan event, is teaching us new lessons every day as the situation evolves. 

As anyone who has been affected by the recent bushfires will tell you, planning to “stay put and wait and see what happens” is no plan at all.

With this purpose in mind CBC are getting local industry together to nut out how to deal supply chain risks arising from Coronavirus.

Join us on March 24, 2020 for this important event.