Financial Risks in Manufacturing and Logistics
One of the key learnings from the pandemic is the domino effect of disruption. Beyond the early phases of supply chain disturbances, manufacturing and logistics companies are now feeling the lasting effects of disruption in core sectors - and this is increasing their financial risk.
A better understanding of the interconnectedness between manufacturing and logistics and the core sectors could help to build resilience against possible major events in the future.
Manufacturing and Logistics in the Middle East
Over the past two decades, countries within the region have invested significantly in industrial activity such as manufacturing and logistics, but this activity is largely linked to the main revenue drivers within the region.
The three sectors most key to the Middle East - oil and gas, hospitality, and construction - have been badly affected by the pandemic. Oil and gas has seen a drop in domestic and external demand, and there has been a reduction in tourism, trade and investments. This turmoil has inflicted deep financial impact on organisational spend. As these major sectors are disrupted in such a massive way, we see other related industries also suffer in the larger economy.
Companies across the region have resorted to organisational restructuring and redundancies. The current outlook, posed by both health concerns relating to the virus and the related economic challenges, has made consumers more reluctant to venture out and less willing to spend.
The pandemic caused severe disruption to supply chains and logistics of imported goods. As well as international borders being closed, in some countries borders between cities have also been closed, such as between Dubai and Abu Dhabi in the UAE. This delay in movement has led to overstocked warehouses and blank sailing on shipping lines - all at a time when uncertainty has caused organisational and consumer confidence to stall.
After several months of lockdown, companies are now reopening. They still, however, are not operating at pre-COVID levels, with many businesses operating at 20% - 50% capacity. These restrictions have been imposed by the local governments and need to be strictly complied with in order to avoid any penalties & fines.
Along with these restrictions of capacity, there also are health and safety requirements that need to be implemented, such as social distancing and additional processes relating to hygiene for the wellbeing of the workforce.
For sectors like manufacturing, these requirements and capacity thresholds apply significant pressure. A shortage of labour in factories will likely impact productivity, which could alter the viability of various businesses and will tighten margins. Limited or intermittent access to suppliers could also impact the viability of the production of certain goods. These circumstances could be damaging to a company’s bottom line.
Companies need to develop a strict risk management process to assess these risks and embed this into the company’s culture.
Managing Financial Risks
It is common within the region for businesses to operate on credit. Despite substantial stimulus packages from countries like UAE, KSA, and Qatar, the lack of liquidity in the market is a growing concern for businesses, particularly in the short to medium term, which could lead to defaults & might have a long lasting impact on businesses.
The pandemic has not only affected bottom lines of companies, but has also severely affected cash management and credit control. For many companies, trade credit has long been an afterthought. A mindful approach to trade credit would benefit companies by helping to build resilience and protect their balance sheet.
It is important that businesses learn to adapt and safeguard against big changes. As manufacturing and logistics companies reset their alliances with suppliers, manage their workforce, and review their working capital, they should remember that embedding risk management and resilience into the day-to-day functions of an organisation is essential for weathering future storms.