For manufacturers of every size in every industry, it’s no exaggeration to say that the coronavirus crisis has changed everything. Demand for products has been upended, relationships with suppliers and customers are being tested and liquidity issues have multiplied.
Some manufacturers are pivoting to create essential gear to help combat the pandemic, while others are retooling in advance of future needs, and all are trying to keep their workers safe. Abhijit Bhide, managing director, Bank of America Global Banking and Markets, answers questions about this unprecedented upheaval and how businesses can respond now and in the months ahead.
What are the greatest challenges manufacturers face right now?
For manufacturers, as for society as a whole, the biggest impact is on the health and well-being of people. Manufacturers are trying to find a balance between keeping factories running and not subjecting employees to unnecessary risks. They’re leaving longer periods between shifts and switching to remote handoffs between shift foremen where possible. Some are setting up temporary health centers and checking the temperatures and conditions of employees as they come in, to help protect everyone’s health.
There are a host of challenges for specific areas, from plunging demand in the aerospace, automotive and energy sectors, to a surge in demand for cleaning chemicals as well as medical and protective equipment. In most areas business is down. Low demand, supply chain breakdowns and sharply reduced production and revenue have made liquidity a major challenge. Even factories working at reduced capacity are building inventory they can’t distribute, using up capital. In addition, many manufacturers’ customers have changed payment terms—paying in 90 days instead of 30, for example. Smaller companies that don’t want to lose business may have to accept those terms, which can strain the working capital cycle.
What key external and internal indicators should companies monitor?
Manufacturers can gauge future demand by looking at the PMI (purchasing managers index) from the Institute for Supply Management to get industry by industry insights about inventory levels, new orders and production. Manufacturers that supply the building industry can track housing stocks, building permits and consumer confidence. National retail sales numbers may also be revealing. But the situation for manufacturers is changing so quickly now that the shelf life of these data points has been dramatically reduced.
It’s also essential to track orders, inventory and other internal numbers. In some industries, demand could rebound later in the year—products may not be selling now, but they may be needed when the health crisis eases. Those manufacturers might continue to build inventory with the idea that demand could surge later in the year.
Treasurers and CFOs are also running sensitivity models and stress tests to project how long their cash will last and when they might reach their loan covenants. They may not need relief immediately, but they are setting markers for themselves—when the cash gets to a certain level, that’s when they’ll call their bank.
What steps should business owners consider taking now?
Some manufacturers are pivoting to help meet the demand for personal protective equipment—hockey mask companies are making face shields, fashion designers are sewing gowns and masks.1 That can work well for companies already in related fields, who may be able to retool existing facilities. It may be more of a challenge in cases where gearing up to make new products could take more time and future demand is uncertain.
What’s really great to see is the ways manufacturers are working together to get through this crisis. Many I’ve spoken with are sharing best practices: How frequently do we need to check the health of our employees? How should we manage health on the factory floor? These employee-centric concerns are vital, and working with industry colleagues can be helpful.
Other key steps are credit checks to make sure customers are going to be able to pay for orders, and protecting liquidity by asking for advance payment terms—particularly at a time when suppliers are likely asking for the same terms.
Companies with liquidity concerns may want to check with banking partners for information about tapping government stimulus resources, or perhaps take loans to get through the next six to nine months. Banking partners can also share best practices in terms of customer credit management, working capital, cash management and other banking services.
Perhaps the biggest step manufacturers can take is to think, again, about their employees and about how they want to be positioned when this crisis ends. Many factories have worked hard in a competitive employment market to acquire good talent, and they’re now looking at how to retain these people by freezing or cutting pay rather than laying off employees, for example. That can build loyalty, and as conditions improve, if you have kept your best talent and maintained a good dialogue with your customers and supported them, you can be prepared to take advantage when the crisis passes and demand rebounds.