Four ways manufacturers can grow post COVID-19
Manufacturers remain resilient and strong in the wake of the pandemic, but there are steps they can take to be better prepared for the latest anomalous event.
2020 was unlike any other year in recent history; the world felt the seismic effects from the pandemic including production declines, forced shutdowns and bankruptcies.
While the effects of the pandemic will be with us for the foreseeable future, the manufacturing industry looks ahead as vaccine rollouts and economic results gain momentum. In a recent survey from The National Association of Manufacturers (NAM), optimism among manufacturers hit its highest point in two years and increased investments in manufacturing are likely on the horizon. Economic activity in the manufacturing sector grew in February with the overall economy notching a ninth consecutive month of growth.
As companies prepare for a state of normalcy, let’s discuss a few ways to grow during the recovery and take advantage of what we have learned during the pandemic. These lessons can help manufacturers “future-proof” operations through diversification and flexibility.
1. Don’t let existing lender limit your ability to pursue capital projects that were placed on hold due to the pandemic.
As we emerge from the pandemic, capital projects – whether maintenance- or growth-oriented – will be scrutinized by prospective lenders in light of a company’s 2020 performance and many companies will be penalized for under-performance during the pandemic. This may seem unfair, but due to regulatory oversight, many bank lenders have no choice but to “average down” the last three years earnings when making their credit decision resulting in lower loan amounts.
The double-whammy of pandemic-fueled underperformance and the inability to borrow as much from bank lenders will leave many manufacturers capital-starved and unable to pursue their desired capital expenditure programs. Under this scenario, companies should consider unregulated or alternative lenders, such as private credit funds, as a source of capital. This lender group has the flexibility to advance more aggressively against receivables, inventory and equipment and look through and normalize performance anomalies resulting from COVID-19 or other extraordinary events such as ice storms, malware attacks or labor strikes.
Many alternative credit providers are adept at reconstructing historical financial performance, absent a disrupting event. Identifying the immediate to medium-term financial impact of an extraordinary event allows a lender the ability to look back and evaluate what the financial performance would, or could, have been if the anomalous event never occurred. Further, taking any investments or adjustments that have been made gives the lender a clearer picture of what to expect going forward.
Imagine an established industrial services company that served the petrochemical and refining sectors for decades. During the pandemic, it may have faced certain limitations such as not being able to deploy workers on-site for an extended period of time. When crews were allowed back to the plant, work continued and the various projects were completed, albeit under a delayed timeline. Under this situation, an alternative lender would be able to re-construct the financial performance as if the work stoppage had not occurred. Regulated commercial banks are often not permitted or inclined to make such adjustments in credit analysis which can result in a lower amount of borrowings for the company.
2. Identify vulnerabilities and implement strategies to protect the supply chain.
What we have learned from the pandemic, as well as other recent events including ice storms and labor strikes is everyone is vulnerable, whether it is through raw material price spikes, transportation gridlocks, or employee attraction and retention. Every manager needs to ask themselves, what could or should they have done differently?
From the outside looking in, it appears much of this disruption could have been somewhat mitigated through diversification in the supply chain, facility location and distribution channels. Diversification provides a number of benefits that protect existing operations and provide capacity to meet increased product demand.
Another hypothetical situation to consider would be if there is a second production facility in a state that had different COVID-19 restrictions than another. If workers were allowed back to work in one state while the other was under complete lockdown, how easy would it have been to shift production from one facility to another or vice versa? Having the flexibility to manage production from multiple locations protects companies from events that may impact one facility and not another.
Similar to having multiple facility locations, a diversified supply chain allows companies to shift between vendors when a preferred supplier introduces an unexpected price increase in an attempt to pass on increased operational costs they are encountering. Shifting to an alternative supplier and applying a bit of competitive pressure might help keep costs down and ensure continued supply of key materials.
3. Develop a benefit program for employees for future disruptions.
Whether it’s a pandemic, extreme weather or a malware attack that shuts down a facility, management should think beyond the initial financial impacts to the stakeholders and ask themselves, “How would such a disruptive event impact employees?” As the broader manufacturing industry gains more momentum and unemployment figures decline, it is going to become more important to attract and retain qualified employees.
To do that, it is crucial to understand the emphasis the company placed on employees and their families along with new measures and policies surrounding job safety, employee security and the general well-being of their families. Current and future employees will look for companies that have invested in future-proofing against unforeseen disruptions along with those that keep benefits or compensation enhancements as a part of the recruitment and retention process.
4. Reevaluate financing options.
Traditional sources of capital such as regulated commercial banks are getting more difficult to turn to as a reliable financing source, especially if performance has been negatively impacted by the pandemic or other disruptive events. It is crucial for companies to think creatively and strategically for fast and flexible funding sources. Non-bank lenders are an attractive alternative as many banks are pulling back from lending in the current COVID-19 environment.
Broadly speaking, investments fall into either protective/defensive or growth/offensive categories. As companies now focus on a recovery period, it would seem intuitive that management would look to protect the supply chain, production/operations, as well as distribution channels to ensure if another major disruption occurs, the risks are somewhat mitigated or hedged. Further, as with many periods of economic uncertainty, investment in facility expansion or upgrades and/or M&A activities can lead to increased opportunity. Such investments require capital and tailor-made solutions from creative lenders that provide a flexible capital structure that lets companies better navigate the unexpected.