Disrupted global supply chains are compounding distress

Phahlani Mkhombo
MD Genesis Corporate Solutions

In a round table discussion last year, a fellow BRP (Robin Nicholson) made a comment that we are seeing a different dynamic when it comes to distress. He said: in the past, companies found themselves in distress because of mismanagement or financial irregularities. These were essentially poorly run companies. What we are seeing now are well run companies going into distress because the external environment is having a significant impact on their companies.  I will finish the quote at the end of the article in my concluding thoughts.

One of the major external factors that is causing (and in some cases compounding) this distress is the global supply chain crisis. A knock-on effect of the world being in lockdown for most of 2020 and 2021 is that there are significant backlogs and congestion at the world’s biggest ports. The worlds manufacturing powerhouse, China, is facing new lockdown measures which stagnating any recovery from the crisis. The war in the Ukraine is also a contributing factor.

When it comes to distress, the global supply chain crisis shows us some important challenges that need to be addressed. These were discussed in a recent interview between brinknews.com and Mark Millar, Author of Global Supply Chain Ecosystems.

A nail in the coffin of over-globalized supply chains
The article points out that the war in the Ukraine is another massive disruption for today’s globalized supply chains, on top of two years of Covid-induced supply chain chaos, from which many businesses (and economies) have still not recovered.

There is enormous uncertainty as to whether this crisis could be over by the end of the month, whether it could drag on for years, or worst-case scenario, could trigger a direct military conflict between the North Atlantic Treaty Organization (NATO) and Russia.

The article adds that whichever the outcome, this is another nail in the coffin of our modern-day over-globalized supply chains.

The cumulative disruptions over the last five years from ever-increasing costs in Asia, geopolitical tensions and trade tariffs, the pandemic’s turbulence in global shipping and now the military conflict in Europe have exposed the profound interdependencies and inherent vulnerabilities in globalized supply chains.

Brink asked if there any critical products that come from Russia and Ukraine (besides oil and gas) that will be disrupted? Millar replied that in addition to gas and oil, Russia’s top exports include coal, iron, platinum, raw aluminium, sawn wood and copper. So many global commodities markets will be squeezed, and we can foresee some shortages of raw materials.

Over globalized supply chains will be a thing of the past
Photo By: Canva

Today’s supply chains cannot easily be moved
According to the Brink article, Today’s global supply chain ecosystems have been built and fine-tuned over many years. They cannot easily be untangled, unpacked and moved elsewhere. Whether near-shoring or re-shoring, this is a major undertaking. And, of course, you can’t stop your business whilst you’re reconfiguring your supply chain.

The entire ecosystem needs to be reviewed from end to end, considering potential future sources — both the suppliers and their locations — for essential inputs, such as materials and components. Ideally, the new supplier network will be within the same vicinity as the newly relocated manufacturing operations.

The article adds that, for finished goods distribution, new channels and business partners may need to be established — and alternative logistics service providers evaluated and appointed.

Companies must undertake any supply chain reconfiguration initiative as a parallel project, alongside the business-as-usual activities of day-to-day supply chain execution. In terms of resources, the project will consume plenty of management bandwidth and demands the full attention of your A-team. It will incur considerable costs, some inevitable disruption, as well as sizable risk. The timeline to complete the relocation would be measured in years, not months.

So, reconfiguring your supply chain is not for the fainthearted.

The Brink article points out that this Ukraine crisis, on top of two years of Covid disruptions, has surely brought many companies to a tipping point that will result in real action during the coming years on near-shoring and reshoring initiatives. Supply chain 2025 will undoubtedly look significantly different for many companies.

The end of just in time?
Brink asked: how should companies build greater resilience into their overseas supply chains to avoid being impacted by this kind of crisis?

Millar replied that supply chain resilience has become the key strategic priority for this decade. Multiple initiatives need to be undertaken, including revisiting the supply base to identify sources closer-to-home and adopting wider deployment of dual- or multi-sourcing strategies, featuring multiple suppliers in multiple locations.

The article points out that many of the finely tuned just-in-time and lean systems will be replaced or supplemented with business models incorporating buffer inventories and safety stocks. In many scenarios, just-in-time will become replaced by just-in-case.

Over the medium term, I foresee some large-scale near-shoring activity with many companies adopting a more regional approach — e.g., producing in Latin America for the USA, and serving developed EU markets with products made in lower-cost European nations such as Poland, Hungary or Turkey, potentially also in some north African countries.

The article adds that the technological advancements and reducing costs in robotics and automation will also enable some businesses to re-shore their production activities back into high labour cost markets, further empowered by increasing availability of Robotics as a Service (RaaS) solutions, which eliminate the need for upfront capital costs, which hitherto proved prohibitively expensive, especially for small- and medium-enterprise businesses.

Disruption will need to be managed properly in the future
Photo By: Canva

Different conversations
As you can see, the global supply chain crisis is a significant external risk factor that is playing a significant role in placing companies in financial distress or is compounding the distress of companies who have already entered into business rescue/turnaround.

Nicholson’s concluding remark on the current business rescue environment is: because we are seeing well run companies facing business rescue (because of external environmental factors) we need to have different discussions when implementing rescues.

The global supply chain crisis has a significant impact on cash flow. Companies need to diversify their cashflow but also need to invest in technologies that will automate their business. They also need to utilise their current cashflow to float the business while they localise their supply chain.

Companies will need to be open and honest with company stakeholders and clients. Creditors may need to re-evaluate their payment terms and clients will need to make peace with the fact that they will face longer lead times when it comes to the delivery of their product. Heineken and SAB recently faced a situation where there was such a demand for glass bottles that they could not deliver product on promised delivery schedules. This impacted one tavern in KwaZulu-Natal so significantly that it had to close down. This was a tavern that had been in existence for 25 years.

What will drive the business rescue/turnaround profession forward in the future? Change management. Companies need to diversify their operating models to respond to challenges such as the global supply chain crisis.

Phahlani Mkhombo is the MD of Genesis Corporate Solutions and is a Senior Business Rescue Practitioner.

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