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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BUSINESS UNUSUAL IN A TIME OF CORONAVIRUS (PART 1) - WHERE AND HOW DID THIS CRISIS ORIGINATE?

Doing business in a time of Coronavirus/Covid-19, Supply Chain disruption and Business interruption - Where and How did this crisis originate?

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 will be posted into 3 parts:

• 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? (Word count: ±1675)

PART 1 – What happened and how did we get here?

2020 is fast turning into a watershed year. In early January the global economy was chugging along nicely, with some international Indexes peaking around record highs. However, New Year euphoria was cut short as news gradually broke about a virus spreading in Wuhan, China.

Figure 1 - Wuhan Map

Wuhan is a hi-tech hub and China’s “motor city”. It is the biggest city in Hubei province, known as the “thoroughfare of China” by virtue of being a transport and industrial hub for central China and the region’s political, economic and commercial centre. More than 300 of the world’s top 500 companies have a presence here. 

By 13 January, the first case was identified in nearby Thailand. By 22 January 2020, the novel coronavirus (subsequently referred to as Covid-19) had spread to major cities and provinces in China, with 571 confirmed cases and 17 deaths reported. On 23 January 2020 (2 days before Chinese New Year), authorities informed residents of Wuhan of an imminent lockdown from 10 am. An estimated 300 000 citizens left the city immediately. The lockdown spread as quarantine was imposed in various cities and regions. On this same day that the lockdown occurred, the first case of Corona was identified in Singapore. From early February, Chinese authorities began shutting down factories in a desperate attempt to halt the spread of the virus.

This plan did not work, and virus contagion spread to the rest of the world. And economic contagion followed – the following is a summary: 

• China is the world's manufacturer and is also the world’s largest container cargo handler and home to seven of the world's 10 busiest container ports – processing around 30% of global traffic or around 715,000 containers a day in 2019

• The lockdowns meant that factories could not get stock shipped out that was already manufactured and simultaneously stopped manufacturing altogether. China’s manufacturing activity plunged to an all-time low in February, with the official manufacturing purchasing managers’ index (PMI) slowing to 35.7, according to the National Bureau of Statistics (NBS). Comparatively, during 2008’s Financial Crisis the manufacturing PMI only dropped to 38.8 in November 2008. Services were similarly affected, and the services index almost halved last month to just 26.5 from 51.8 in January (and first time lower than 50 since the index was started 15 years ago in late 2005.

• Ports had insufficient capacity to load and offload ships. The Ningbo-Zhoushan Port Authority, in the city of Ningbo, typically has 24,000 registered container truck drivers. By Feb 12 only 800 truck drivers were working. Ships could not get into Chinese ports, as the loading and discharging of goods slowed down and shipping traffic dropped 19.8% in February from a year earlier.

• Incoming cargo clogged ports and shipping lines started charging surge fees for refrigerated containers importing food. Some cargo ships left China carrying as little as 10% of TEU capacity, others cancelled trips. 
• Overall China’s exports and imports plunged. Exports fell by 17.2% in January and February combined compared to the same period a year earlier, according to the General Administration of Customs
• A survey by Beijing-based think tank the Shanghai International Shipping Institute shows that capacity utilisation at the main Chinese ports fell by 20-50%, while more than one-third of ports said storage facilities were more than 90% full.

International impact

This lowered throughput had a knock-on effect on the other side of the Supply Chain in receiving countries:

• LA handled 705 000 containers in Feb 2019. The same period Feb 2020 was down to 544 000 or 22.87%. By 18 March Los Angeles ports have seen 40 + “blank sailings” - ships scheduled to arrive that didn’t, numbers previously unheard of. 
• On the Asia-Europe trade route, at least 61 cancelled sailings have been announced, representing a 151,000 TEU capacity reduction. China typically represents about 30% of Hamburg's container throughput and about 25% of Rotterdam's. Rotterdam Port Authority estimated that a 1% drop in its annual volume, which after recording throughput of 14.8 million TEU would amount to 148,000 TEU. Hamburg harbour reported a 40% plunge in trade volumes.

Oil Price War

Then, on 8 March 2020, after a potential oil production cut agreement with Russia fell flat, Saudi Arabia initiated a price war with Russia. This triggered an immediate international fall in the price of oil, with US oil prices falling by 34%, crude oil falling by 26%, and Brent oil falling by 24%.  Oil prices dropped to 18-year lows. For more info see here and here 

CONCLUSION

The fallout and contagion (both medically and financially speaking) spread nearly globally in the space of 3 months. This caught many off-guard, as global supply chains and financial markets were disrupted. In the next post, we will consider the potential and combined impact of the virus, supply chain interruptions and business disruption on commerce and industry, and potentially on your own business or organisation where you work.

If you like this post, please Like, Share and Comment

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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UNDERSTANDING BUSINESS RISK - AN INTRODUCTION

In this introductory blog post, we will delve into the topic of business risks - a topic which perhaps not as close to the hearts of many business owners and directors/managers as it should be. Understanding Risk and, importantly risk management, should underlay the strategy, management ethos and daily business operations to ensure the highest likelihood of business success (and survival). 

This article aims to create awareness of risk management and the impact of risks on the business operations, finance, supply chain and procurement operations of a business.

Time to read: Approx 7 min

Introduction

Running a company or any type of business venture comes with different types of risks.  Anything that threatens a business or more specifically, impacts the ability of that business to reach its goals or targets or even threatens its continued existence, is in effect a risk to that business.  Business risks are associated with the operations of the business and how the internal or external environment might impact on the ability of the business to generate an acceptable (financial) return to its shareholders and investors.

What is Business Risk?

Investopedia defines Business Risk as "Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail", which is a very broad definition.

This definition will be further explained by way of examples in the following sections.

Types of Business Risk

Before merely jumping into a list of different business risk examples, it is important to understand the following:

• Certain Business risks (such as macro-economic risks or strategic industry & competitive risks) can and do exist independently, whether your business exists or not. These risks are brought about by causal factors in the world economy, country economy and in the industry and can impact on all businesses operating in a specific country, industry or geography.

Fig1 - IT risks are on the increase due to higher dependency on technology supported business processes (Image by Pete Linforth from Pixabay )

• Not all business risks are due to factors external to the business. Risks could originate:
• Externally meaning from the outside of the business (e.g. inflation, legislation, natural disasters - i.e. these risks are affected or precipitated by external causes, which, in most cases cannot be controlled by management or staff and occasionally not even by the government),
• Internally meaning from the inside - risks which could arguably fall within the ambit of management control e.g. 
• process risk due to the type of processes used,
• technology risk due to technologies used,
• operational risk to the nature of business operations, 
• inherent risk due to business type, 
• theft by employees, 
• the type of customers accepted, etc.
• Both Externally and Internally: Sometimes an external risk can influence or lead to internal risks - e.g. higher than expected inflation could hypothetically lead to unpopular food price increases that could, in turn, result in labour unrest and strikes which in turn cause business interruptions and impacts on productivity.

• Risk varies from one country to the next, between industries or business types and from one business to the next. Even when 2 or more businesses compete directly in the same industry and on the same market for the same product,  e.g.: 
• A business that is fully funded by equity is not as exposed to the impact of changing interest rates as a business entity funded by local bank loans or off-shore bank loans (which could be impacted by both interest and foreign exchange riks),
• Similarly, a business that manufactures its own stock with local raw materials will be less affected by shipping delays and strikes at the harbour compared to a company importing its stock or raw materials. 

• Some businesses or industries are inherently riskier than others - The risk profile in industries with heavy equipment or industrial operations will be significantly different compared to risk profile in industries not mechanised. 
• A cash-in-transit delivery company faces significant additional risks which are not applicable to most other delivery companies delivering more traditional products. 
• A metal smelter or mine has a completely different risk profile compared to say an IT company providing cloud storage. In saying that, we are not implying that Cloud storage has no risk - the risk profile will be very different, comparatively speaking. However, the risk of e.g. staff death in a workplace accident should statistically be significantly lower in a Cloud storage environment than in heavy industry such as mining or a smelter. 

Fig 2  - Mining accident at a SA-based Coal mine. Source.

Fig 2  - Mining accident at a SA-based Coal mine. Source.

Fig 3 - The results of a workplace accident could be severe in some industries. Source.

Business Risks include, but are not necessarily limited to:

• Competitive Risk - the risk that other businesses competing against yours gain a competitive advantage. This could include:
• New competitors entering the market,
• Competitors finding more cost-effective suppliers, which would result in a cost-benefit, or
• Sourcing more technologically advanced products which have more market appeal, or
• Time-to-market risk when it takes a company too long to get a product ready for launch and as a result, it loses first-to-market competitive benefit it could have enjoyed, or competing products launch first.

• Compliance Risk - the risk that the business might contravene laws or regulations or have to incur additional costs to comply with such new legal or updated requirements. Examples include:
• Occupational Health & Safety compliance, 
• Environmental Compliance and 
• Protection of Personal Information Act (POPIA) Compliance requirements (which is broadly similar in nature to the EU General Data Protection Regulations (GDPR).

• Country Risk - the risk of operating a business in a specific country, which is uniquely tied to that country. E.g. in Zimbabwe and Venezuela some or all of the following symptoms:
• Currency fluctuations,
• Hyper-inflation, 
• Currency devaluations,
• Currency shortages. 

Fig 4 -  Currency Risk in real-life - 100 trillion Zimbabwe note from 2008

• Demand Risk - changes in market/customer demand from one reporting period to the next can result in inventory fluctuations, cash flow issues and assorted logistical challenges (excess stock-keeping from one period to the next, finding additional warehouse space to build up reserves, etc). 

• Economic Risk - the risk that changes to economic conditions could impact on the business e.g.:
• Exchange Rate Risk - The risk that high degree of variability (also called volatility) impacts on the value of business transactions and assets.
• Interest Rate Risk - the risk that interest rates can increase (or decrease) contrary to expectation and lead to higher costs or expenses.

• Environmental Risk - the risk that the activities of the business negatively impact on the immediate surrounds or broader environment (such as toxic spills, air or water pollution).  

Fig 5 ArcelorMittal charged for releasing chemicals into the air and contravening license conditions

• Financial Risk - the risk that financial factors could impact on the business e.g.:
• Credit Risk - the risk that debtors fail to pay or settle their accounts.
• Liquidity Risk - the risk that a company is unable to settle obligations or to meet short term financial demands as these come due.

• Health risks - such as bird flue, swine flue, ebola, work-place smoking etc.

• Human Risk - the risk that employees or management:
• disrupt business operations due to absenteeism, 
• do not comply with requirements or legislation,
• are not sufficiently trained or incompetent, 
• abuse alcohol or drugs which impacts on operations, 
• cause financial losses through fraud, theft, riots or protests,
• cause reputational damage through their deliberate or accidental actions.


• This could include directors and officers liability, where directors or officers cause damage or claims against the organisation (whether willful or not).

• Innovation Risk - the risk that applies to the innovative areas of your business, resulting in the business not staying up to date with technological developments. 

• Intellectual property risk - the risk that your intellectual property is infringed or blatantly stolen by competitors (industrial espionage) or not properly protected by means of copyrights, patents, and trademarks or that your business infringes on the intellectual property of another that owns the copyright or patents. 

• Legal Risk - the risk that changes in legal requirements or lawsuits impact or disrupts the business or results in claims or losses. 

• Market Risk - the risk that consumer preferences might change and that demand for products or service wane, 

• Natural Disasters - the risk of storms, floods, earthquakes, climate change and other similar natural events (so-called Force Majeure / Acts of God) causing damage or business interruptions.

Fig 6 Inside an Airport hangar destroyed by Cyclone Idai

Fig 7 Significant damage to assets and business operations in Beira, Mozambique due to Cyclone Idai in March 2019

• Operational Risk - the risk that the internal business processes and day-to-day business operations negatively impact on the ability to service clients optimally.
• Business Interruption Risk - the risk that events occur that interferes with a company’s ability to function.
• Process Risk - the risk associated with business processes in use. This could include process inefficiencies such as operational bottlenecks, or the "collateral damage" as a result of the nature of the process - e.g. working with heavy equipment or in a metal smeltery could result in injury or death if anything goes wrong.
• Utility risk - the risk that water, electricity, gas or other services provided by the state or external service providers should fail or be interrupted. South Africa has experienced a wave of electrical loadshedding that has had a severe impact on the economy.

Fig 8  Astral forced to halve production because of water interruptions at the Lekwa municipality in Mpumalanga.

• Physical Risk - the risk of damage to assets or property from fire, theft or other events such as burst or leaking water pipes.

• Political Risk - the risk that political events or developments could impact on the business operations. This could include the risk of terrorism or war.

• Reputational Risk - the risk of losses (either quantifiable in cash or less easily quantifiable in the case of reputational damage) as a result of events or incidents which lead customers and or the public at large to perceive this business as unethical, incompetent or dishonest. These events or incidents could either be:
• accidental (e.g. where a new product is very similar to existing competing products) or
• intentional (where a conscious management decision was made to copy the design or performance features of a competing product).  

• Repeated occurrences (regardless of whether intentional or accidental) will definitely be damaging to the corporate reputation - e.g. Ford's clumsy bungling of the Kuga crisis when a number of its Kuga vehicles caught fire and burnt out.

Fig 9 - Woolworths, a large South African retailer, has repeatedly been in the news over the last couple of years for "similarities" in their new products when compared to competing products launched earlier.

• Seasonal Risk - also referred to as seasonality, which is the risk where a business sells products or services for which the demand fluctuates from one season to the other (ice cream) or for which the ability to deliver such a product or service is tied to a specific season (ski resort).  

• Security Risk - the risk of physical security of assets, resources or IP due to fraud, or theft.

• Strategic Risk - the risk associated with following a particular business strategy in a specific industry at a specific time.

• Supplier Risk also referred to as (Supplier) Performance risk - the risk that suppliers fail to perform to expected or contracted standard. Meaning suppliers are unable to deliver on their commitments to you (unable to perform on time, on budget or on required quality and quantity). This could negatively impact the entire supply chain and may necessitate the sourcing of alternative suppliers (which could mean more costs, further delays etc).

• Tax Risk - the risk that new taxes or higher taxes can impact on the business.

• Technology Risk - the risk that technology becomes obsolete, causes loss or corruption of data or causes a loss in productivity or time through systems and equipment not being in working order.  

• Technology Security Risks - such as software and/or hardware failure, cyber-attacks and malware. Research by IBM in 2018 indicated that the average cost of a data breach in South Africa was R36.5 million (although this number could have been influenced the number of participants willing to disclose actual breaches and losses).

The risks listed above do not form a complete listing of all types of business risk. It should be noted that some risks may be clustered or classified as sub-categories of others - such as liquidity risk falling under financial risk. It is also important to understand that not all business risks are due to factors external to the business. Risks could impact the entity from the outside (inflation or legislation) as well as from inside (process risk, operational risk).

Potential Impact of Business Risks

The impact of business risks can be felt across a wide area:

• External:

• On the Customers of any given business entity,

• On the Environment (in the event of spillage or environmental pollution),

• On the Community (loss of job opportunities, forced relocation e.g. Chernobyl),

• On the State (loss of taxes).

• Internal:

• On the business itself e.g. efficiency of business operations or operational procedures which have to be amended to adjust for compliance requirements, 

• On the shareholders and investors (lower profits and higher risk),

• On the management and employees (lower profitability, less bonus and smaller increases if any) 

• On suppliers (slow payment or loss of market share).

Fig 10 - The risk of Climate Change will impact many businesses in years to come (Pic credit Matthew henry burst.shopify.com)

The impact may vary significantly from one risk to the next, but could include any or a combination of the following:

• Loss of customers or business opportunities,

• Organised boycotts, 

• Reputational damages,

• Financial damage - e.g. catastrophic losses of stock, business assets or infrastructure after a natural disaster or public protest,

• Failure to grow and thrive - the business might not be able to achieve optimal growth,

• Delays, Stock-outages resulting in lost sales, or 

• Increases in working capital requirements because the business is now forced to incur more costs due to higher stock-keeping as result of unreliable delivery patterns,

• Additional costs incurred to:
• put additional security measures in place (such as video monitoring, vehicle tracking, incident response teams),
• Increase insurance cover (to the extent that the risks are insurable),
• employ additional or expert level staff e.g. Risk and Compliance Officer, IT security, Quality Control,
• Occupational Health & Safety systems, signage, equipment, training,
• Source substitute suppliers if original suppliers fail,

• Financial losses,

• Business closure, 

• Business disruption, low(er) productivity and lost efficiencies,

• Lawsuits, court cases and fines imposed by the Government or courts,

• Loss of operating licenses or permits,

• Directors' personal liability in terms of legislation which could include prison sentences for directors.

Conclusion

This post presented an introductory overview on the topic of business risks. Following posts will look at:

• Measuring risks
• Managing risks
• International vs South African perspectives of Bussiness Risk

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For more information, visit our website on www.cogniplex.co.za

All original artworks remain the property of their respective owners. Banner Firefighters training simulation - original photo courtesy of www.needpix.com