Coping with coronavirus
This article was created by the Business & Management Faculty, the voice of ICAEW on all matters related to financial management. The Faculty creates a mix of practical resources to equip finance professionals to help the performance of the businesses they work in and also help them meet their personal CPD requirements.
Service disruptions can be very damaging, both to consumers and businesses. As a new coronavirus spreads rapidly across the world, Alison Coleman explains that it is imperative for organisations to have robust and rigorous continuity plans in place in order to mitigate disaster.
After being declared a global health pandemic, a new strain of coronavirus (COVID-19) continues to reach new milestones, having now claimed more lives than the 2003 SARS and 2012 MERS epidemics combined. The crisis has extended to the business arena too, with organisations all over the world now experiencing extreme disruption to their operations.
Major business events, including Facebook F8 in San Jose, California and Mobile World Congress in Barcelona, have been cancelled due to concerns over viral transmission. Airlines are cutting services as the outbreak disrupts travel, while manufacturers, particularly those reliant on parts made in China, face production slowdowns and longer-term delays in product shipping if factories remain offline.
There are also implications for financial reporting. Following the publication of Financial Reporting Council guidance for companies on coronavirus risk disclosures, ICAEW announced that it was exploring the effect of coronavirus on audits with a Chinese element to understand any potential impacts.
The business world is no stranger to health emergency events, with outbreaks of SARS, bird flu and MERS in recent years, and should therefore be adept at building contingency plans into their operations to protect their supply chains, operations and workforces. But the coronavirus outbreak is on a different level, exposing weaknesses in these plans, with the potential to devastate many enterprises.
“While the MERS virus caused a short-term disruption to the tourist industries of a number Middle Eastern countries in 2012, the impact of the coronavirus on supply chains worldwide is already shaping up to be many times worse than in the 2002 SARS virus,” says Jeremy Hammant, Senior Business Adviser at independent management and technology consultancy BearingPoint. “The SARS outbreak had repercussions that lasted for as long as two years and the financial impact has been estimated at over $400bn of increased costs and lost revenue.”
Supply chains: The weakest links
Almost two decades on since SARS, the dependency of global businesses on production in China has increased enormously and, as the current outbreak spreads to other countries, more supply chains will be disrupted. As well as the loss of production capacity, supply chains will be affected by a loss of logistics capacity as ports and airports try to cope with employee absences.
The growing complexity of supply chain networks presents enormous challenges for contingency planning, so this should be at the top of every business agenda. However, while the development of global supply chains has grown exponentially over the past decades, the inherent supply chain risks have been largely ignored.
Hammant says: “Many supply chain management strategies have focused on streamlining, efficiency and cost control to achieve competitive advantage, but how do these initiatives support a robust supply chain? While lean supply chain initiatives promise the means to achieve major savings through just-in-time systems and processes, focusing on lean can have unforeseen consequences as supply chains become increasingly vulnerable to disruption.”
Every supply chain is a complex ecosystem of suppliers and suppliers’ suppliers connected to a business’s customers and to their customers. Each may be connected not only to this specific multi-supplier-to-multi-customer community but also to other supply chain ecosystems. The physical logistics operations; road, rail, air or ship, that connect the nodes in these chains are also an integral part of the ecosystem.
“Under normal circumstances each node and connection in the supply chain ecosystem is subject to a statistically low incidence of unexpected and undesired shocks,” explains Hammant. “But when a black swan shock on the scale of the coronavirus occurs it has the potential to upset the workings of myriad ecosystems.
“While such shocks are rare, they highlight a key role of supply chain management to identify and manage to mitigate structural risk within extended supply chains. This role is often overlooked, and very few organisations have visibility of their supply chain ecosystem let alone the tools to identify, assess and manage risk.”
Risks for consumer-facing businesses
The implications of the current epidemic are far-reaching and becoming increasingly evident. Many of the goods that people use every day, from kitchen appliances to personal care products, are manufactured in China. Therefore, a significant proportion of consumer-facing industries dependent on the country are likely to be hit. Delays to just one specialist small component sourced from China could potentially delay production of goods by several months if the country remains unable to return to work.
Phil Reuben, Executive Director at supply chain and logistics consultancy SCALA Consulting, says: “The implications will stretch from potential price increases because of stock shortages, through to a complete lack of product availability. There is also a real possibility that staff could be laid off because the UK importers that rely heavily on China essentially have nothing left to check, stock and sell, significantly damaging their bottom line.”
The full impact of coronavirus on supply chains may not become clear for many months, as the ramifications extend beyond reduced freight capacity and restricted routes in and out of China. For the international automotive supply chain, for example, the impact will potentially be twofold. Not only is China one of the most important manufacturers and largest exporters of car parts in the world, it is also one of the most important regions for new car sales, and both channels are likely to be significantly affected.
“All the evidence we currently have points to a significant slowdown in consumer demand across China for new vehicles,” says Graham Little, Managing Director of Evolution Time Critical, a supplier to the global automotive industry. “So those original equipment manufacturers (OEMs) producing in China have quickly found themselves with finished vehicles stacking up at the factory, rather than being sent out to dealers and sold to new owners. As a result, OEMs are likely to cut production further, which will ripple deep into the supply chain.”
Component manufacturers face a similar proposition, a surplus of components waiting for shipping and no immediate incentive to manufacture more. “The impact on automotive supply chains will be complex, with a reduced demand for vehicles exported to China, balanced with the need to get the most critical components from China to global manufacturing plants at the right time to ensure seamless production,” says Little. “The effect of one of the largest players in the global automotive market effectively becoming quarantined has certainly created a unique situation, and one that will take some time and clever thinking to resolve.”
Problems for people-driven industries
Industries such as travel and hospitality have already been badly affected, as airline ticket sales plummet and holiday plans are put on hold. The recent collapse of regional airline Flybe could be the start of many. Meanwhile, hotels worldwide are already feeling the pinch.
Jane Pendlebury, CEO of UK hospitality professionals association HOSPA, says: “Coronavirus, as we saw with SARS and bird flu before it, is affecting travel and therefore hotels. Any reduction in consumer confidence quickly knocks on to the hospitality industry. It’s not just the threat of pandemics; international incidents such as the Gulf War and 9/11 resulted in a fall in occupancy rates across both international and national travellers. Coronavirus will be having a similar effect on these models.”
Hoteliers’ purchasing decisions are being affected. Anything large scale – for example, hotel property management systems and other hotel infrastructure projects – will often be deferred due to fears of instability, and will therefore affect suppliers and auxiliary businesses.
“Revenue managers need to be quick to adapt to hedge off falls in revenue,” adds Pendlebury. “For instance, rather than selling 80% of rooms at a good rate, they could sell more at a reduced rate – hopefully maintaining the bottom line. Other options can be to put restrictions in place, such as prepayment required and no option to cancel, helping to guarantee revenues. Agility in the face of any crisis is essential.”
Planning ahead
The most worrying aspect of the current crisis is the fact that most businesses will not have properly planned for or even thought about a healthcare emergency event on this level. Some organisations are encouraging staff to work from home to reduce risk of infection, in the complacent belief that their existing business continuity plans will be adequate to continue operations as normal.
Andy Jane, CTO at Olive Communications, says: “Some of the larger FTSE-governed organisations, where there is an element of compliance, will be required by law to have a business continuity plan in place to remain compliant. But with large privately owned enterprises it is likely to be a case of best endeavour, unless there is deemed to be a high risk within the business.”
Organisations need to have a robust, rigorous and disciplined business continuity plan in place to enable the entire workforce, where possible, to work remotely and securely, while ensuring that business continuity is maintained, entirely independent of the office. The plan must then be regularly tested and effectively communicated to the workforce.
In Olive’s case, a real-life scenario forced it to invoke its business continuity plan. “During very heavy snow two years ago we shut down the office for three days and the entire workforce worked remotely,” says Jane. “This was an opportunity to ensure that our secure working off-site policy was robust and effective, and I would recommend organisations harnessing situations such as these to check that their policies are effective and fit for purpose in a real-life setting.”
Viral outbreaks can lead to changes in customer behaviour and demand for certain products and services. Being prepared means anticipating disruption before it happens. Some companies, for example the makers of surgical masks, are seeing product demand surge, while others, such as retailers, may see in-store traffic dry up. Banking customers might switch to using online transactions to reduce person-to-person interaction, leading to a dramatic escalation of calls to customer services.
John Beattie, Principal Consultant at disaster recovery and business continuity specialists Sungard Availability Services, says: “In anticipating these disruptions, businesses should consider what can be done in the present to continue meeting customer commitments in the future. Service disruptions can be very damaging to the experience of both consumers and businesses alike, therefore potential gaps in services need to be planned for. For example, manufacturing organisations could accelerate production early on to ensure the production meets demand when a pandemic causes disruption to critical supply chains.”
Good communication during a health emergency is also crucial to business continuity. Staff need to know which time-recurring updates will be available and how they can access them, whether it’s through a website or hotline number. And should the unfolding situation call for immediate notification, a means to communicate time-sensitive urgent messages is essential.
Beattie says: “A comprehensive risk assessment conducted at regular intervals is key to gaining access to the information organisations need to avoid the potential disruption that a viral outbreak can create. Assessments help protect staff, workplaces, third parties and anyone else who comes into contact with an organisation.
“At the end of the day, having protections put in place ahead of the fact is a far more effective approach than ad-hoc recovery efforts, the consequences of which can be devastating.”
Dealing with the sudden impact of supply chain disruption
For businesses that have been unexpectedly and severely affected by the recent events in China, BearingPoint recommends the following steps:
- Adopt as much of an end-to-end perspective as possible to enable an integrated understanding of risk across the supply chain ecosystem, with your suppliers and suppliers’ suppliers as well as with your customers and customers’ customers.
- Identify the effect of shocks in the chain and explore mitigation measures through both supply chain design – for example the balance between lean and agile – and decision execution over different time horizons relative to an event occurring.
- Monitor the performance of the supply chain end-to-end against plan in-order to quickly identify out of tolerance events for action to be taken.
Managing an overseas workforce
Health emergencies pose particular challenges for businesses that operate internationally or have employees who regularly travel overseas. Audit the key players in your workforce, says Vanessa Bell, Head of Employment Law at Prettys: “Are any of them located in high risk areas, and how would the business be affected if they were all infected with the virus at the same time?”
Consider whether business travel can be avoided by offering alternatives such as video-conferencing or Skype. Be mindful of current guidance advising workers returning from abroad to self-isolate if they display symptoms of the virus. “Clearly, if their symptoms are mild, they may be able to continue working remotely, as long as there are systems in place to enable them to do so,” says Bell. Put robust holiday policies in place that provide some control over when the holiday can be taken and avoid potentially damaging interruption to operations.