COVID-19: An Unforeseen Enemy of the Manufacturing and Distribution Industry

March 23, 2020

By Travis Epp and Neal Godt

What a difference a few months or even a few weeks makes!  As we turned the calendar into 2020 the economy was strong, the financial markets were performing well and while there were issues with respect to sourcing out of China, in general the global supply chain that was supporting the manufacturing and distribution (“M&D”) industry was strong – something that most individuals took for granted.

Companies engaged in the M&D industry are no strangers to challenges and are able to address issues with strong leadership and management teams.  For example, the implementation of tariffs was an issue for many companies and industries in just the past year or two, forcing companies to re-examine their sourcing of materials and their supply chain to minimize the impact on product costs.  M&D companies also engaged in communications with their customers to determine where increased input costs could be passed along.  Fortunately, some industry participants have benefited from claw backs of certain tariffs as a result of the successful filing of a Protest with U.S. Customs.

Seemingly overnight, the business processes and supply chain created have been attacked.  Management teams are working around the clock to address issues that were likely never contemplated in their disaster recovery plan (which is a separate discussion). Key challenges that management teams are scrambling to address vary by entity as some companies have opportunities while others have liquidity and going concern issues.  For those companies whose products are in demand -- and who are allowed to manufacture (subject to government-imposed restrictions) -- matters to address include:

  • Do I have raw materials to continue production?
  • Will I be able to continue to source materials?
  • Do I have the labor force to produce products?
  • If I am producing product, how do I maximize the safety of my employees?
  • Should I create separate teams within both manufacturing and administration to minimize risk?
  • What is the result of an employee testing positive?
  • Were the distribution channels impacted or do changes have to be made?
  • Will I be able to invoice customers and will they have the ability to pay their bills?
  • What steps are required to be implemented to maintain liquidity?
  • What work can be performed remotely -- and what steps need to be taken to ensure remote productivity?
  • How do I manage cybersecurity risk if employees are communicating outside normal protocols?
  • Are there other alternatives for my product or my plant? (For example, a company with a facility that does bottling of its product line is now bottling hand sanitizer.)

For those companies who are less fortunate, the issues are significantly different:

  • What is the expected cash flow and how long do I need to look out?
  • How do I maximize liquidity? Factors to address include:
    • Am I able to draw on existing credit facilities?
    • Are my customers able to pay for open orders?
    • Are workforce adjustments required (see below)
    • Do I qualify for government aid such as the SBA’s Coronavirus Disaster Relief Lending?
    • What policies do I initiate to protect my cash?
    • Should I cease automatic ACH payments?
  • How (and how often) do I communicate with my lender?
  • Will lenders accept payment deferrals?
  • If workforce adjustments are required, how do I proceed legally and within government requirements?
  • What programs have the government implemented to address the expected recession – and help me save my business?
  • Is business interruption insurance applicable?
  • Is survival an option?
  • What steps are required to enhance the chances of survival?

The above comments are only a sample of issues to be addressed.  In this incredibly tumultuous time, many businesses are only able to focus on the immediate future which creates risk for the mid- to longer-term. Decisions made under duress and without careful consideration can result in dire consequences -- this is the reality for many businesses, but please speak with your trusted advisors before you act. 

The globalization of the M&D industry has created significant economic benefits to participants and the consumer for many years.  As we work through these significant challenges, many lessons will be learned.  Changes will be coming to the M&D industry!  

About Travis Epp

Travis Epp is EisnerAmper’s Partner-in-Charge of the Manufacturing and Distribution Group, with nearly 30 years of experience in public practice and private industry. Travis focuses on private companies in the middle market.

About Neal Godt

Neal Godt CPA is an Audit Partner is co-leader of EisnerAmper's Audit and Assurance Services Practice, serving the technology, manufacturing and distribution, and software sectors, and service related companies.

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