Insights & Publications, ISCA
DISRUPTIONS AND POSSIBLE SOLUTIONS
The World Health Organization (WHO) China Country Office was first notified of the appearance of a pneumonia of unknown origin on 31 December 2019. Since then, the scientific community has determined that the cause is due to a novel coronavirus – SARS-CoV2 – which has now become a pandemic. Governments around the world have enacted lockdowns on virtually every sector of their economies and ordered their citizens to remain at home as part of efforts to contain the virus. Singapore was no different – a “circuit breaker” of stringent measures was put in place from 7 April to 4 May 2020, which was later extended to June 1. Residents were instructed to stay home, while non-essential businesses had to shut down and rely on remote working. These regulations were relaxed for some businesses in the second week of May. The tough measures imposed have repercussions for businesses and the economy at large.
UNPRECEDENTED ECONOMIC DEVASTATION
The spread of the coronavirus disease (Covid-19) created both a demand and supply shock. Panic buying of essentials such as rice and canned food, and personal care products such as hand sanitisers and face masks, created a sharp spike in demand, but manufacturers and logistics providers could not keep pace to stock the shelves. With demand and supply severely affected across most sectors, the situation triggered a rapid contraction in economic activity both internationally and domestically, which remains the case today.
Across the globe, businesses are also severely affected. Retail giants such as Neiman Marcus, Sears and JC Penney are now confronting the possibility of bankruptcy; airlines such as Singapore Airlines have to secure lifelines while Virgin Australia has since gone under administration. The tourism industry is essentially at a standstill, with visitor arrivals to Singapore falling 51.2% in February 2020 year-on-year. But alongside the dismal outlook for many business sectors is the steep increase in demand for Covid-19-related items like face masks, ventilators, nasal swabs and medical supplies. It is clear that in the medium to longer term, the business environment will continue to evolve, with wide-ranging changes.
The duration and severity of the economic downturn will depend largely on the success of the government policies and intervention, such as the public health measures which were introduced to minimise the spread of the virus. In the short term, we are currently experiencing drastic declines across all sectors. The International Monetary Fund expects the global economy to shrink 3%, with cumulative output loss over 2020 and 2021 estimated to be US$ 9 trillion. Singapore is no different. Before the announcement of the circuit breaker and its subsequent extension, the Ministry of Trade and Industry had already downgraded the nation’s 2020 GDP growth forecast twice – first to -0.5 to -1.5%, and later to -4.0 to -1.0%. Based on the latest estimates by financial institutions (which take into account the effect of the circuit breaker extension), the decline is expected to be worse – DBS has predicted that Singapore’s economy will dip by 5.7% while OCBC has forecasted a deeper contraction of between 6 and 10%. In the first week of May 2020, the Monetary Authority of Singapore warned of “significant downside risks to Singapore’s growth outlook”. With the situation still highly fluid at the time of writing this article (early May), it is almost impossible to point to a forecast with any level of certainty.
Though governments across the globe have rolled out stimulus and assistance packages to prop up their respective economies and businesses, it is too early to tell if these packages are adequate or effective. The resulting budget deficits are also poised to be harsh obstacles to full economic recovery, and it remains to be seen how governments are going to finance these rescue packages. We know that Singapore is tapping on its past reserves, but others will probably have to incur huge debts which could drive up interest rates and inflation. It is also unclear how long these governments can continue pumping in the monies to save companies as it is unsustainable in the long term.
Businesses should watch this space closely for any major developments which could affect the recovery of economies. Accountancy and finance professionals should also keep themselves updated on the economic developments in Singapore and beyond, to get a general understanding of the potential impact on their employers and the sectors they work in. This will provide them with the right context when they are undertaking business and financial analysis, participating in internal discussions, and offering insights and suggestions, to help their organisations.
TECHNOLOGY TO THE RESCUE
In addition to monitoring the macro-economic trends, businesses should also explore potential changes at the organisational level, such as increased adoption of technology. Paradoxically, Covid-19 could drive greater digitalisation among businesses. Many businesses had quickly turned to technology to cope with the lockdowns as governments around the world introduced stringent safe distancing measures to limit the spread of the virus in their countries. Telecommuting software such as Zoom, Webex and Gotomeeting have seen their user numbers skyrocket as people began to work from home. For instance, it was reported that from the week of February 23 to the week of April 12, Zoom experienced a significant rise in lunchtime meetings of 500% and an even larger surge in calls between 5 pm and 9 pm on weekdays of 700%. For many businesses, particularly small and medium-sized enterprises (SMEs), this may be their first big foray into the digital realm.
It appears unlikely that the trend towards telecommuting would disappear soon. WHO has warned that the lockdown measures should only be lifted gradually, and telecommuting is slowly but surely becoming a viable option for many businesses. For all their imperfections, remote working solutions are gaining widespread acceptance among businesses and individuals. This natural experiment of enforced remote working is a clear opportunity for leaders and managers to explore incorporating telecommuting as a permanent fixture in their operations.
The current climate clearly favours businesses that have already embarked on their digital transformation journey. These entities could now conceivably have a significant head start and competitive advantage over traditional brick-and-mortar or non-digital operations.
It is better late than never for businesses to start embracing technology, and the Singapore government has rolled out support schemes to help businesses take their first step towards digital transformation. For example, Enterprise Singapore (ESG) has launched an E-Commerce Booster Package for SME retailers to sell online, which covers 90% of costs. On other fronts, the Ministry of Manpower’s Work-Life Grant supports businesses that implement flexible work arrangements.
Despite the widespread havoc caused by the pandemic, it inadvertently brought about renewed or accelerated efforts in the digital transformation of many organisations. Aside from commercial entities, other sectors are also exploring the use of different technologies to deliver content. For example, schools across the globe are now conducting lessons over the Internet, while many restaurants are focusing on food delivery platforms to garner sales.
A new reality regarding work is almost certain to emerge after the crisis. Businesses can no longer turn their backs on technology if they hope to operate and survive in the digital world. The question then will be what to digitalise and how to digitalise. The Kantar SPADES framework, from Kantar Consulting, suggests a six-step approach which senior leaders and those in the accounting and finance functions can consider. In a nutshell, it encompasses the following:
1) S for Spot – Spot the right opportunities within the business for digitalisation which will reap the most benefits.
2) P for Plot – Plot the possible options to implement digitalisation.
3) A for Assess – Assess the costs and benefits of each option.
4) D for Design – Design the details to make the digitalisation work; they should include both the technology and human aspects.
5) E for Execute – Execute the chosen option, with special focus on the development and deployment phases.
6) S for Sustain – Sustain the digitalisation for the long term
The Infocomm Media Development Authority (IMDA) has launched a Start Digital Pack for SMEs looking to kickstart their digital journey. The Pack allows SMEs to explore adopting digital solutions from a variety of categories such as accounting, digital marketing and HR management for no cost for a period of time. Apart from IMDA, ESG provides advisory services for Singapore businesses looking to explore digital solutions.
DISRUPTIONS TO THE SUPPLY CHAIN
When countries shut down business operations and residents were directed to stay home in a bid to slow the spread of the virus, it led to massive disruptions in the supply chains. For example, China ordered its citizens who had returned home, many in rural areas, not to return to the cities where the factories and logistics services were located. During Singapore’s circuit breaker period, non-essential factories and shops had to close. Around the world, components for medical equipment such as ventilators were in short supply, while everyone from medical personnel to the man on the street found themselves desperately searching for face masks.
Although disruptions in the supply chains are to be expected, the rapid pace at which the public health measures took effect gave businesses scant opportunity to react. Supply chains had also shifted to a just-in-time model which emphasises lean inventories. There was no inventory to fall back on, and no one knew which part of their supply chain was agile enough to cope with the disruptions.
What can organisations do to cope with the disruptions to their supply chains?
As part of supply chain risk management, a key strategy for businesses is to better understand their supply chains. A World Economic Forum survey of supply chain professionals showed that greater visibility, that is, more information, was the key to reducing supply chain vulnerabilities. Supply chains have become extremely complex that monitoring them manually is literally impossible. New technologies, such as logistics solutions that incorporate artificial intelligence, may be able to revolutionise supply chain and logistics operations. These technologies provide more real-time data points at a finer resolution, giving a clearer picture, and enhance the decision-making process.
From this episode, businesses will need to critically relook at their supply chains to build resilience. KPMG suggests some tough but vital questions which businesses should consider:
- Do businesses know where their input goods are being manufactured? This entails finding out from their immediate suppliers from where and whom they get their raw materials.
- Have all of the businesses’ main suppliers carried out similar assessments to know where their inputs are sourced from? This will be useful in assessing any indirect exposure.
- Do businesses know the logistics route? If the primary route is inaccessible, are there any alternative routes available and what are the costs involved? This is important to ensure that deliveries from suppliers are not unduly delayed.
- Do businesses have any contingency suppliers on hand? How quickly can these alternative suppliers be activated and what are their charges? It is important to have a backup plan in case anything goes amiss with the main suppliers.
- Have those contingency options reached capacity or been contractually secured by other businesses? More critically, do they have similar supply chain issues coming from a different source? It is pointless to have alternatives which do not work when businesses need them the most.
By now, some businesses will have realised the risk of over-reliance on a limited number of suppliers. Intuitively, sourcing for more suppliers to diversify supply chains is the response to address this risk. But it may not be so straightforward. There are factors which businesses will need to consider, such as the geographical locations of these new suppliers, their proximity to where the final product will be put together, quality of their materials and incremental costs that may be incurred. On a broader scale, depending on how businesses address their key inputs issues, we could see globalisation in trade gradually diminishing in importance if the trend moving forward favours localisation or regionalisation of suppliers.
Ultimately, businesses will need to have a very good understanding of their supply chains to make the right decisions, which will enhance their resilience.
MANAGING COST STRUCTURES
It is no surprise that some businesses may be in a panicky, cost-cutting mode right now. According to consulting firm Oliver Wyman, short-term measures like cost-cutting are not sufficient. Managing costs with an eye on recovery is more useful. Deloitte also stresses the recalibration of costs of businesses to keep them afloat. Essentially, this means managing the cost structure of businesses, that is, the various types of expenses a business incurs, typically composed of fixed and variable costs.
There are some strategies that businesses could employ to reduce their costs, such as reducing discretionary expenses or ceasing non-essential hires. These will be discussed in detail in the June issue of this IS Chartered Accountant Journal. The article will highlight how businesses can respond to the crisis now, such as improving their liquidity. Do look out for the article.
While exploring ways to reduce costs is both understandable and necessary, businesses may now need to ponder and deliberate more instead of making a beeline for the option with the lowest cost. Using the diversification of supply chains as an example, businesses probably used to go with the suppliers which offered the most competitive quotes. This will likely change after the Covid-19 period. As discussed in the preceding section, businesses will have more considerations in deciding where to source for their suppliers in the future. It will be a more holistic assessment with costs as just one of the points of consideration. As a result, costs may go up for businesses which prioritise other factors over cost, leading to a change in the cost structure.
The less-than-desirable living conditions of the foreign worker community in Singapore were put under the spotlight as a result of the large number of Covid-19 infections. Any corrective policy/regulatory measures will have an impact on the cost structure of businesses which are reliant on these workers. Notwithstanding that the dormitories are operated by third parties, relevant authorities and support groups are likely to lobby for better living conditions to be provided by the employers for their migrant workers. The resulting cost increases will likely be borne by the employers. For businesses which hire many workers, such as those in the construction sector, the cost structures will change. These companies will need to address questions such as whether they should absorb the additional costs to remain competitive, or pass on the costs to their end-customers, who may not be too happy with the elevated prices. They may also have to think about reducing their reliance on migrant workers to better manage their cost structures over the longer term.
Hence, businesses have to pay close attention to their cost structures which would ultimately impact their profitability. Accountancy and finance professionals have an important role to play here, to help their employers analyse and manage their costs. They will need to work closely with other departments to reprioritise the spending of resources. This is a great opportunity for accountancy and finance professionals to add value to their employers.
Covid-19 did more than just close factories and force everyone into lockdown mode. Public health measures to slow the spread of the virus created an economic crisis unseen since the Great Depression, and many countries are struggling to cope with the fallout. It also brutally exposed the fragility of supply chains which must now be patched and ultimately strengthened. Be it obtaining timely and relevant information about supply chains or sourcing for alternative suppliers, businesses must rethink how they manage their supply chains as they move forward.
Perhaps a silver lining in the midst of all the gloom is that it has forced many businesses to take their first step towards digitalisation. Technology, particularly teleconferencing software, has helped to replace some routine operations. Whether this trend of adopting technological solutions will continue depends on many factors, including overcoming conservative corporate mindsets and also cost considerations.
This article was written by Insights & Publications, ISCA and first published in ISCA Journal. You can read the original version here.