While 2019 was a year of reckoning for global manufacturing supply chains caused by the trade war between US and China, COVID-19 pandemic has again brought companies to a standstill in the last quarter.
As the global economy grapples with the economic shocks and uncertainties from COVID-19, we at Blume believe hope is not a strategy and inaction is definitely not an option in these novel times. 35+ Blumiers particularly from manufacturing portfolio companies came together on a Saturday evening to cross pollinate learnings across the board with important insights from Aniruddha of Carbon Clean Solutions, Sriram of Routematic, Zainul of Tricog, Gautam and Yash of BeatO, Chenthil of Stellapps and Karthik of Blume.
3 broad points emerged – managing cashflows, taking stock of the resetting of supply and demand and finally, keeping the business going. Here are the highlights.
1) CashFlows: handling the positives and negatives
Low cash reserves, unexpected cash flow reduction and stalled funding rounds are some of the few financial ramifications of the pandemic and in times when businesses are struggling for profitability this can leave them more vulnerable.
Karthik Reddy from Blume suggests taking a two-pronged approach to tackle this situation. One, to those who have money in the bank – they are in a market where there would be no outhiring, outselling and outpacing by their peers. It is a great place to be, in their startup journey; here they need to hunker down and think through the longer term where a 12-18 month runway should become 24-26 months. Two, to those who don’t have the luxury of cash – you are in trouble. You need to start cutting costs immediately and look for support from the customer and the supplier.
Some other learnings from the practices of our portfolio companies are listed below:
- It is a great time to renegotiate supply & payment terms, and prices. Discounts and more favourable payment terms for bulk commitments has helped some companies cut costs by over 20%
- Monetise or prompt new consumer behaviour; companies can move from payment through cheques to NEFT payments, NACH Mandates ensuring an inflow of cash. Companies in our portfolio have faced almost no resistance from customers to move in this new direction.
2) Economics of Supply and Demand
A: Demand – Planning is everything
In times of a global pandemic, many companies cannot rely on traditional demand signals due to a massive change in consumer behaviour and buying patterns. A stronger planning framework through first-principle thinking, and understanding customers as well as their customers’ customers needs is essential.
BeatO, a smart diabetes management company in our portfolio observed an increase in purchase of their devices/glucometers since their customers (diabetics) are at higher risks to contract COVID-19. Additionally, they also saw an uptick in the strips and a decrease in purchase of diabetes friendly snacks. Insights on discretionary vs essential spends helped them forecast demand efficiently for the coming weeks and plan accordingly.
Routematic, an employee transport management solutions company, planned their demand by going back to customers with the notice to terminate fleet operations and asking them to provide a guarantee for cab services if needed. This helped them mitigate any demand shocks in the future and optimise their supply costs.
We believe the following learnings are key to enhance demand forecasting:
- Short term, medium term and long term demand planning: Aggregate external data and gather insights from demand signals to plan demand for each SKU individually
- Scenario planning – Estimate demand by performing a What-If Analysis questioning every assumption.
- Communicate regularly with customers to inform them in advance about unserviceable demand
B: Production Lines and Procurement – When in doubt, order
While effective demand estimation would be the building block of the supply and logistics of the business, most companies with a multi-tiered supply chain would have to relook at their supply strategy due to the slowdown of raw material supply from China/EU combined with their skyrocketing prices.
Within our portfolio, Tricog, a medtech company, predicted a shutdown of their PCB supplier in China and placed a bulk order to safeguard themselves for 3 months. Furthermore, to minimize production disruption they isolated key personnel who do QA/QC in their own facilities from other employees to minimize risk, and installed workbenches and tools at their homes.
Another company in the healthcare space commissioned a vendor locally, to help maintain business continuity. Further, CCS, a carbon capture and storage company mapped multiple small distributors in order to stock inventory and also prioritized production orders over maintenance and trial orders.
Interestingly, Chinese vendors who got their manufacturing back on their feet split their entire labor force into shifts, and brought in a completely new shift when anyone within a shift contracted COVID-19.
A few best practices of our companies have been summarised below:
- Determine origin of supply across tiers of your supply chain and assess interruption risk
- Mitigate supply shocks by mapping alternate vendors in different regions to procure raw materials and stock inventory
- Estimate inventory across the value chain, and try to reclaim spare parts/after-sales stock across the value chain to keep production running
3) Keeping the business moving: Logistics, workforce, company morale
A: Logistics – The line between disorder and order
Transportation and logistics is the backbone of the supply chain, and unfortunately it is bound to be disrupted. Some of our portfolio companies have experienced delays and cancellations in airlifting consignments from China/EU, along with delays in custom clearance and a surge in freight rates. Interstate transportation is also badly impacted, with notices issued by logistics companies on SLAs not being upheld in Maharashtra, Kerala, UP, Karnataka, and Tamil Nadu. To keep the business moving however, the following best practices can be adopted:
- Identify, estimate and secure logistics capacity across all modes of transport; a switch to marine for international and rail for interstate deliveries can be considered
- Maintain a regular line of communication with stakeholders across the value chain, and collaborate with them to tap into their underutilized capacity
B. Workforce and company morale – Everyone is in this together
Needless to say, the economic impact of this crisis is unprecedented and the ripples of it would be felt by the workforce. The common thread in all discussions has been on how to manage OPEX in a downward spiralling economy and what happens when new hiring, bonuses, and in some cases paying out salaries isn’t feasible. Few measures that we have learned from our companies in these tough times are:
- Halt new hiring, delay appraisals and bonuses till there is more clarity on the situation.
- Compassion should be key, and there should be crystal clear communication through regular all hands video conferencing meets
- In dire situations, instead of layoffs, salary deferrals/cuts should be considered and senior management should lead by example
- Insurance policies for employees in lieu of deferrals should be assessed too.
- Engage with employees and keep the morale high through group activities and catch ups – Trivia challenges, online health & fitness, gaming sessions, music sessions, etc.
In summary from all the discussions, we believe we should prepare for the worst now. If the question is about how will the macro factors change lives and businesses, it is crucial to take them a few weeks at a time and review efforts accordingly – it is close to impossible to forecast anything prior. We believe together we will get to the other side to see the light at the end of the tunnel.