BUSINESS UNUSUAL (PART 2) - HOW WILL CORONAVIRUS AFFECT BUSINESSES?

Doing business in a time of Coronavirus/Covid-19, Supply Chain disruption and Business interruption - Potential impact on Businesses and Organisations

NOTE:

• This is a developing situation. Accordingly, role players continue to react and markets continue to adjust to the emerging situation. The historical data, facts and figures contained in this article were accurate at the time of publication, but statistical figures and some facts can change over time (e.g. share prices, mortality figures, etc). References below for further reading.
• This article is part 2 in a 3-parts series:
• Part 1.   What happened and how did we get here? (Word count: ±852)
• Part 2.   How can the current crisis affect commerce and industry? (Word count: ±1080)
• Part 3.   What are the business priories – immediate and over the next few months? Coronavirus Business Continuity Planning(Word count: ±1675)

PART 2 – What is the potential impact on commerce and industry?

The combined effects of Corona and the pretty much simultaneous Oil war is severe for global industry and commerce:

• The fall-out happened so fast that it simply was not on the radar of most organisations. Even the BCI (Business Continuity Institute) Risk Ranking (based on a survey done at the end of 2019) ranked non-occupational disease (including Coronavirus) at position no 21 out of the top 22 risks on their “2020 Risk and Threat Assessments” for the next 12 months.
• The global supply chain was destabilised on a previously unanticipated scale. On the manufacturing side, being China, firstly by inability or delays in shipping stock out, and subsequent factory closures, leading to unplanned production stoppages and stock shortages.
• In China itself, the shutdown had a hugely detrimental effect on the economy, e.g. car sales for Feb 2020 fell by 81.7%. Manufacturers struggle to reopen – Apple’s manufacturer Foxconn anticipated to regain only 50% capacity by the end of February, and an estimated 80% capacity by the end of March. 
• Large international buyers who import from China usually buy enough stock to carry them through the Chinese New Year’s holidays, but as a result of delays in receiving stock, many factories are running out of stock due to unexpected shortages. This, combined with the Corona-impact on health-and-safety requirements force manufacturers to close temporarily (think e.g. VW, Porsche, BMW, Ford, Chrysler PSA, Airbus), causing further disruptions down the chain.

• International Travel is severely being curtailed, and big passenger aeroplanes are grounded. Airports typically were not built to offer long term storage as airport space is typically at a premium. As a result, airlines are desperately seeking affordable and safe long-term storage as thousands of trips are being cancelled.

• Lastly, on the consumer side, panic buying is putting further pressure on the system due to unexpected volumes.
• This all leading to hitherto unseen levels of interruption in the global supply chain (Bullwhip effect + the Reverse Bullwhip effect) which may continue for months to come before supply and demand stabilise again.
• Financial markets around the world were hit hard in the fall-out, e.g. Nasdaq experienced the biggest single-week drop since the 2008 financial crisis, and US equities suffered their worst fall since Black Monday in 1987. 

The disruption of day-to-day life and the very tragic human cost of the Corona/Covid-19 virus on families and communities is severe. The combined effect of the aforementioned factors is causing havoc on international financial markets on a global scale, and more so in emerging economies such as South Africa. This impact may continue for the foreseeable future. The World Economic Forum calls it an "economic earthquake", what some would say is a perfect storm, and what others refer to as a Black Swan event - an extremely rare event with severe consequences.

Consider the following cases:

• The public education system in SA feeds more than 9 million disadvantaged school children daily. Extended school closures mean no food for many children – a sad but direct impact on the most vulnerable in our society.

• SASOL – the SA petrochemical giant caught up in the Oil war as collateral damage. Dropping international oil prices as well as overspend on their Lake Charles project resulted in an initial one day drop of 46.5% in the share price. Followed by subsequent movements over the following days, this cumulated in a +- 95 % drop since last year and loss of shareholder value down from R450 billion to ± R23 billion.
• A South African wholesaler/distributor (who shall remain nameless), who identified early 2020 (or thereabouts) as the perfect time for migrating to a new operational IT system, as well as moving into new facilities. Both activities at more or less the same time - What could go wrong, right? Unforeseen issues with the system appear to have resulted in system driving picking glitches and order backlogs. This, in turn, caused significant business interruption, missed deadlines and furious customers, culminating in certain reputational damage. All this before Corona kicked in.

Potential Business Impacts 

These are but three real-life case-studies of what has happened is happening and may continue to happen to businesses, organisations and society in general in the foreseeable short-term. Effects (specifically on commerce and industry) could include the following (in no specific order):

• Panic buying
• Capacity constraints
• Inability to service clients
• Suppliers out of stock
• Unplanned delays in receiving stock
• The increased cost of operations
• Inability to project demand accurately
• Inability to project stock requirements
• Increased working capital requirements
• Delayed cashflow
• Increases in debt repayment
• Unavailability of spares
• 3rd party credit risk
• Production or service interruptions
• Customer complaints
• SLA breaches
• Contract breaches
• Missed deadlines
• Lost customers
• Reputational damage
• Inventory previously considered as low-risk now being targeted by criminals (e.g. Face masks) due to increased demand
• Security of assets and IT systems/stock shrinkage
• Unusual spikes in demand
• Stock-outs resulting in missed sales
• Short or incomplete deliveries
• Stock stuck in transit or ports
• Production stoppages
• Factory shutdowns
• Store closures
• Forced changes in suppliers
• Forced changes in raw materials
• Loss of productivity
• Loss of revenue
• Ineffective crisis management
• Inability to make executive decisions
• Inability to process transactions
• Loss of key staff
• Succession plan gaps
• Absence/illness/quarantine of Key Decision-Makers, Topic Matter Experts, General workforce, Contractors, Service providers, Supplier reps / Key Contact Persons
• Inaccessibility of facilities (e.g. Due to temporary area quarantine requirements)

While the business impacts vary from one company to the next and between industries, business and industry will generally feel in the impact of greater variability, increased uncertainty and more risk.

Potential Industries Affected 

Industries affected off the top of my head include (but are not necessarily limited to): Arts & Culture, Education, Entertainment, Events, Food & Beverage, Gambling and Casinos, Healthcare, Hospitality, Manufacturing, Retail, Finance, Banking, Transport, Logistics & Supply Chain, Health, Safety & Security, Sports, Tourism. And further sectors may be indirectly affected by a fall in consumer confidence or changing consumption patterns such as Building & Construction, Energy, Property, Investment, and Insurance. And possibly a couple of others too.

CONCLUSION

The fallout and contagion (both medically and financially speaking) is material and pervasive. Very few businesses or organisation will not be affected in some shape or form.

In the next post, we will consider potential steps management can take in order to limit the effect on business or organisations.

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For more information, visit our website on www.cogniplex.co.za. A copy of this article is also posted on Linkedin.com 

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