Managing the new normal: Financial and operational considerations for manufacturers post COVID-19
Managing the new normal: Financial and operational considerations for manufacturers post C
According to the Office of Industrial Economics (OIE), manufacturing output in Thailand dipped to the lowest level in almost nine years in April due to the suspension of operations in some industries because of the global COVID-19 pandemic. In the industrial and manufacturing sectors, the capacity utilization rate was at 51.87% in April 2020 and 66.7% for the first quarter of 2020, which is down from 71.3% during the same period last year.
“As the Thai government eases lockdown measures, manufacturers will need to start adapting to the ‘new normal’, including new safety, sanitation and hygiene procedures,” says Charoen Phosamritlert, Chief Executive Officer, KPMG in Thailand, Myanmar and Laos. “These necessary changes bring added expenses, coupled with lower anticipated volumes which can result in tight liquidity even if sales demand strengthens. Manufacturers need to not only focus on operational improvement but also look at their balance sheet to find ways improve their cash flow despite the challenging operating environment.”
Tight liquidity during this time can be a result of reduced demand and sales volumes as customers lose confidence and the economic recession begins to be felt. Moreover, manufacturers may also face higher costs to manufacture as a result of production efficiency reductions due to social distancing measures; cost of quality increases because of increased part handling, higher turnover and process changes needed; increased overhead costs because of maintenance, repair and operations expenditures; and higher one-time costs supporting the purchase of additional materials, quality detection requirements and creating revised process flows. Therefore, it is critical to effectively balance these production dynamics while simultaneously managing liquidity.
Entering the restart phase with a weakened balance sheet and lower cash reserves, the higher costs and lower volumes present a challenge for management teams and even more so with many working remotely. As a result of this, there is a need for significant capital management and resources to support critical product relaunches, which have increased risk of delay or cancellation.
Manufacturers are going to operate differently, and employees will need to learn new processes in order to adapt to the new normal. A flawless startup is necessary, and a sustained focus is critical for keeping the plant open and averting a shutdown. Understanding the increased cost structure, and the impact on future production and liquidity needs to be supported with real time insights and KPIs. Some key considerations include:
Cost reduction efforts: The focus on cost cutting and short-term cash conservation will need to continue well past the initial start-up until a new stable baseline operating model is achieved.
Cash and liquidity forecasting: A focus on detailed cash flow and liquidity forecasting under varying scenarios considering the higher, new normal operating cost structure will be critical to ensure enough liquidity to balance production and safety.
Focus on problem solving: KPIs and data should be utilized to prioritize improvement activities and minimize performance degradation.
Supply chain resilience: Re-examine supply chains and restructure flows and networks to build resilience and seek to avoid over-dependency on a particular supply base.
“While operation and changes needed to manage the new normal is costly, getting it wrong will be even more detrimental,” continues Charoen. “Just one case of COVID-19 could force a plant to shut down. An approach that creates the safest environment for employees while finding ways to innovate and improve processes can create an environment that sets your plant up for success today and into the new normal.”
Find out more in KPMG’s publication: Managing in the new normal: Financial and operation considerations for manufacturers post COVID-19.
KPMG in Thailand, offering Audit, Tax, Legal and Advisory services, is a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative. With strong market insights and expertise, As one of the leading industrial markets teams, KPMG provides advice on supply chains and operations resilience, liquidity management, business continuity management, mergers and acquisitions, restructuring, organization transformation, corporate strategy, digital transformation, cyber security, compliance and risk management, legal, tax advisory, and audit.
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