Supply-chain recovery in coronavirus times—plan for now and the future

Actions taken now to mitigate impacts on supply chains from coronavirus can also build resilience against future shocks.

 

Even as the immediate toll on human health from the spread of coronavirus (SARS-CoV-2), which causes the COVID-19 disease, mounts, the economic effects of the crisis—and the livelihoods at stake—are coming into sharp focus. Businesses must respond on multiple fronts at once: at the same time that they work to protect their workers’ safety, they must also safeguard their operational viability, now increasingly under strain from a historic supply-chain shock.

Many businesses are able to mobilize rapidly and set up crisis-management mechanisms, ideally in the form of a nerve center. The typical focus is naturally short term. How can supply-chain leaders also prepare for the medium and long terms—and build the resilience that will see them through the other side?

What to do today

In the current landscape, we see that a complete short-term response means tackling six sets of issues that require quick action across the end-to-end supply chain (Exhibit 1). These actions should be taken in parallel with steps to support the workforce and comply with the latest policy requirements:

  1. Create transparency on multitier supply chains, establishing a list of critical components, determining the origin of supply, and identifying alternative sources.

  2. Estimate available inventory along the value chain—including spare parts and after-sales stock—for use as a bridge to keep production running and enable delivery to customers.

  3. Assess realistic final-customer demand and respond to (or, where possible, contain) shortage-buying behavior of customers.

  4. Optimize production and distribution capacity to ensure employee safety, such as by supplying personal protective equipment (PPE) and engaging with communication teams to share infection-risk levels and work-from-home options. These steps will enable leaders to understand current and projected capacity levels in both workforce and materials.

  5. Identify and secure logistics capacity, estimating capacity and accelerating, where possible, and being flexible on transportation mode, when required.

  6. Manage cash and net working capital by running stress tests to understand where supply-chain issues will start to cause a financial impact.

 

Create transparency

Creating a transparent view of a multitier supply chain begins with determining the critical components for your operations. Working with operations and production teams to review your bills of materials (BOMs) and catalog components will identify the ones that are sourced from high-risk areas and lack ready substitutes. A risk index for each BOM commodity, based on uniqueness and location of suppliers, will help identify those parts at highest risk.

 

Once the critical components have been identified, companies can then assess the risk of interruption from tier-two and onward suppliers. This stage of planning should include asking direct questions of tier-one organizations about who and where their suppliers are and creating information-sharing agreements to determine any disruption being faced in tier-two and beyond organizations. Manufacturers should engage with all of their suppliers, across all tiers, to form a series of joint agreements to monitor lead times and inventory levels as an early-warning system for interruption and establish a recovery plan for critical suppliers by commodity.

In situations in which tier-one suppliers do not have visibility into their own supply chains or are not forthcoming with data on them, companies can form a hypothesis on this risk by triangulating from a range of information sources, including facility exposure by industry and parts category, shipment impacts, and export levels across countries and regions. Business-data providers have databases that can be purchased and used to perform this triangulation. Advanced-analytics approaches and network mapping can be used to cull useful information from these databases rapidly and highlight the most critical lower-tier suppliers.

Combining these hypotheses with the knowledge of where components are traditionally sourced will create a supplier-risk assessment, which can shape discussions with tier-one suppliers. This can be supplemented with the described outside-in analysis, using various data sources, to identify possible tier-two and onward suppliers in affected regions.

 

For risks that could stop or significantly slow production lines—or significantly increase cost of operations—businesses can identify alternative suppliers, where possible, in terms of qualifications outside severely affected regions. Companies will need to recognize that differences in local policy (for example, changing travel restrictions and government guidance on distancing requirements) can have a major impact on the need for (and availability of) other options. If alternative suppliers are unavailable, businesses can work closely with affected tier-one organizations to address the risk collaboratively. Understanding the specific exposure across the multitier supply chain should allow for a faster restart after the crisis.

Estimate available inventory

Most businesses would be surprised by how much inventory sits in their value chains and should estimate how much of it, including spare parts and remanufactured stock, is available. Additionally, after-sales stock should be used as a bridge to keep production running (Exhibit 2).

 

This exercise should be completed during the supply-chain-transparency exercise previously described. Estimating all inventory along the value chain aids capacity planning during a ramp-up period. Specific categories to consider include the following:

  • finished goods held in warehouses and blocked inventory held for sales, quality control, and testing

  • spare-parts inventory that could be repurposed for new-product production, bearing in mind the trade-off of reducing existing customer support versus maintaining new-product sales

  • parts with lower-grade ratings or quality issues, which should be assessed to determine whether the rework effort would be justified to solve quality issues or whether remanufacture with used stock could address supply issues

  • parts in transit should be evaluated to see what steps can be taken to accelerate their arrival—particularly those in customs or quarantine

  • supply currently with customers or dealers should be considered to see if stock could be bought back or transparency could be created for cross-delivery

 

Assess realistic final-customer demand

A crisis may increase or decrease demand for particular products, making the estimation of realistic final-customer demand harder and more important. Businesses should question whether demand signals they are receiving from their immediate customers, both short and medium term, are realistic and reflect underlying uncertainties in the forecast. The demand-planning team, using its industry experience and available analytical tools, should be able to find a reliable demand signal to determine necessary supply—the result of which should be discussed and agreed upon in the integrated sales- and operations-planning (S&OP) process.

Additionally, direct-to-consumer communication channels, market insights, and internal and external databases can provide invaluable information in assessing the current state of demand among your customers’ customers. When data sources are limited, open communication with direct customers can fill in at least some gaps. With these factors in mind, forecasting demand requires a strict process to navigate uncertain and ever-evolving conditions successfully. To prepare for such instances effectively, organizations should take the following actions:

  • Develop a demand-forecast strategy, which includes defining the granularity and time horizon for the forecast to make risk-informed decisions in the S&OP process.

  • Use advanced statistical forecasting tools to generate a realistic forecast for base demand.

  • Integrate market intelligence into product-specific demand-forecasting models.

  • Ensure dynamic monitoring of forecasts in order to react quickly to inaccuracies.

With many end customers engaging in shortage buying to ensure that they can claim a higher fraction of whatever is in short supply, businesses can reasonably question whether the demand signals they are receiving from their immediate customers, both short and medium term, are realistic and reflect underlying uncertainties in the forecast. Making orders smaller and more frequent and adding flexibility to contract terms can improve outcomes both for suppliers and their customers by smoothing the peaks and valleys that raise cost and waste. A triaging process that prioritizes customers by strategic importance, margin, and revenue will also help in safeguarding the continuity of commercial relationships.

Optimize production and distribution capacity

Armed with a demand forecast, the S&OP process should next optimize production and distribution capacity. Scenario analysis can be used to test different capacity and production scenarios to understand their financial and operational implications.

Optimizing production begins with ensuring employee safety. This includes sourcing and engaging with crisis-communication teams to communicate clearly with employees about infection-risk concerns and options for remote and home working.

 

The next step is to conduct scenario planning to project the financial and operational implications of a prolonged shutdown, assessing impact based on available capacity (including inventory already in the system). To plan on how to use available capacity, the S&OP process should determine which products offer the highest strategic value, considering the importance to health and human safety and the earnings potential, both today and during the future recovery. The analysis will draw on a cross-functional team that includes marketing and sales, operations, and strategy staff, including individuals who can tailor updated macroeconomic forecasts to the expected impact on the business. Where possible, a digital, end-to-end S&OP platform can better match production and supply-chain planning with the expected demand in a variety of circumstances.

Identify and secure logistics capacity

In a time of crisis, understanding current and future logistics capacity by mode—and their associated trade-offs—will be even more essential than usual, as will prioritizing logistics needs in required capacity and time sensitivity of product delivery. Consequently, even as companies look to ramp up production and make up time in their value chains, they should prebook logistics capacity to minimize exposure to potential cost increases. Collaborating with partners can be an effective strategy to gain priority and increase capacity on more favorable terms.

To improve contingency planning under rapidly evolving circumstances, real-time visibility will depend not only on tracking the on-time status of freight in transit but also on monitoring broader changes, such as airport congestion and border closings. Maintaining a nimble approach to logistics management will be imperative in rapidly adapting to any situational or environmental changes.

Manage cash and net working capital

As the crisis takes its course, constrained supply chains, slow sales, and reduced margins will combine to add even more pressure on earnings and liquidity. Businesses have a habit of projecting optimism; now they will need a strong dose of realism so that they can free up cash. Companies will need all available internal forecasting capabilities to stress test their capital requirements on weekly and monthly bases.

 

As the finance function works on accounts payable and receivable, supply-chain leaders can focus on freeing up cash locked in other parts of the value chain. Reducing finished-goods inventory, with thoughtful, ambitious targets supported by strong governance, can contribute substantial savings. Likewise, improved logistics, such as through smarter fleet management, can allow companies to defer significant capital costs at no impact on customer service.

 

Pressure testing each supplier’s purchase order and minimizing or eliminating purchases of nonessential supplies can yield immediate cash infusions. Supply-chain leaders should analyze the root causes of suppliers’ nonessential purchases, mitigating them through adherence to consumption-based stock and manufacturing models and through negotiations of supplier contracts to seek more favorable terms.

Building resilience for the future

 

Once the immediate risks to a supply chain have been identified, leaders must then design a resilient supply chain for the future. This begins with establishing a supply-chain-risk function tasked with assessing risk, continually updating risk-impact estimates and remediation strategies, and overseeing risk governance. Processes and tools created during the crisis-management period should be codified into formal documentation, and the nerve center should become a permanent fixture to monitor supply-chain vulnerabilities continuously and reliably.

 

Over time, stronger supplier collaboration can likewise reinforce an entire supplier ecosystem for greater resilience.

During this process, digitizing supply-chain management improves the speed, accuracy, and flexibility of supply-risk management. By building and reinforcing a single source of truth, a digitized supply chain strengthens capabilities in anticipating risk, achieving greater visibility and coordination across the supply chain, and managing issues that arise from growing product complexity. For example, Exhibit 3 shows how a digitally enabled clustering of potential suppliers shows the capabilities they have in common. Estimating a medtech company’s degree of connectiveness helped it expand its supplier base by 600 percent, while an industrial-tools maker identified request-for-qualifications-ready suppliers for highly complex parts that it had been previously unable to source.

Finally, when coming out of the crisis, companies and governments should take a complete look at their supply-chain vulnerabilities and the shocks that could expose them much as the coronavirus has. Exhibit 4 describes the major sources of vulnerability. The detailed responses can reveal major opportunities—for example, using scenario analyses to review the structural resilience of critical logistics nodes, routes, and transportation modes can reveal weakness even when individual components, such as important airports or rail hubs, may appear resilient.

Organizations should build financial models that size the impact of various shock scenarios and decide how much “insurance” to buy through the mitigation of specific gaps, such as by establishing dual supply sources or relocating production. The analytical underpinnings of this risk analysis are well understood in other domains, such as the financial sector—now is the time to apply them to supply chains.

Triaging the human issues facing companies and governments today and addressing them must be the number-one priority, especially for goods that are critical to maintain health and safety during the crisis. As the coronavirus pandemic subsides, the tasks will center on improving and strengthening supply-chain capabilities to prepare for the inevitable next shock. By acting intentionally today and over the next several months, companies and governments can emerge from this crisis better prepared for the next one.

COVID-19: Implications for law firms

The COVID-19 challenge is unprecedented, both for the economy and for aspects of the legal system. Law-firm leaders must prepare for a wide range of scenarios, the likelihood of which will depend on the effectiveness of both public-health- and economic-policy interventions.

This article highlights five lessons from previous downturns, outlines potential implications for client demand across practice areas and sectors, and suggests priority areas of focus for law-firm leaders. The most effective firms will manage with a “through-cycle” mindset, giving appropriate attention to near-term pressures while laying the groundwork for long-term success.

Five lessons from previous downturns

Looking at past downturns provides lessons for law-firm leaders to consider:

1. Law firms weather downturns better than the overall economy does. Of the past three downturns, only the global financial crisis of 2008–09 resulted in a decline in aggregate Am Law 100 revenue (Exhibit 1), in part because of countercyclical practice areas and prices continuing to advance (see lessons two and four). But the current downturn may turn out to be unprecedented in the postwar era, so law firms must prepare for a wide range of scenarios.

2. There will be a wide spectrum of demand responses across legal sectors and practice areas. It is natural to expect that litigation and restructuring practice areas will do well while other transactional practices will suffer, but the reality will be more nuanced. While there are unprecedented near-term slowdowns in some court systems, over time, dispute and investigation practices are indeed less correlated with the rest of the economy than transactional practices are (Exhibit 2).

However, economic downturns do not directly translate into a decline for transactional practices, as market difficulties, regulatory responses, stimulus programs, changes in employment, and other stressors provide potential sources of demand for legal services. In response to the COVID-19 crisis, there has been wide variation in impact across the global economy to date (Exhibit 3). While most sectors are facing challenges, some sectors directly affected by physical-distancing measures (such as airline, hotel, and storefront retail) are experiencing unprecedented declines in demand.

 

Other sectors (such as medical supply, sanitation, grocery, and in-home entertainment) are experiencing sharp increases in demand. A third set of sectors that are not directly affected by COVID-19 but feel the impact of a general slowdown or a moderate uptick as people’s lives change at work and at home (such as home improvement, landscaping, and consumer electronics) are experiencing muted or lumpy demand.

3. Regional exposure matters. In 2008–09, market weaknesses were felt most acutely by New York, national, and international law firms. Firms headquartered in Texas and Washington experienced both revenue and profit gains, while other regional firms experienced, on average, flat revenue and a slight decline in profits (–3 percent). In the current downturn, law firms less tied to global financial markets may feel less of an impact because of the nature of their businesses (such as less exposure to a decline in cross-border activity) and because virus mitigation may be more disruptive in densely populated cities or transit hubs.

4. Downturns accelerate long-term secular trends. Plan for continued pressure on pricing and on shifts to alternative delivery models. In the last downturn, standard rates continued to rise by 3 percent per year, on average, but pressure on collections did too. From 2007 to 2012, the fraction of standard rates not collected more than doubled (to 16.4 percent, from 8 percent) because of increases in discounts, write-downs, and write-offs, which left net prices relatively flat. This time around, expect that procurement teams will play an even larger role and that there will be a greater focus on commercial arrangements that provide clients with greater cost certainty, either through a fixed or capped arrangement or through one that more closely aligns fees to the outcomes achieved. Client demands and competition from alternative legal-service providers will also likely pressure high-cost real estate, staffing pyramids, and other elements of the traditional service-delivery model.

5. Some law firms handle downturns much better than others do. Grouping Am Law 100 firms into quintiles based on where they entered the 2008 financial crisis in and where they exited in 2012 shows the magnitude of the dynamics involved (Exhibit 4). Measured by profits per equity partner, only about half of those firms stayed in the same relative position over the period. The remainder of this article outlines an early view of the demand considerations and leadership priorities that may determine which law firms most successfully navigate the current COVID-19 situation.

Potential implications for client demand

In line with the lessons from past downturns, Exhibit 5 outlines an early view on potential demand implications across both select practice areas and sectors over the remainder of 2020. Although some practice areas, such as labor and employment, will likely see consistent demand shifts across sectors, transactional practices, in particular, are likely to be focused on very different situations in more distressed sectors such as travel, transportation, and leisure than in areas such as healthcare. Every firm should develop a perspective on the demand outlook for the sectors, client types, and practices to which they have greatest exposure.

Priorities for law-firm leaders

Based on the lessons learned from previous downturns, current demand outlook, and our experience in a professional-service firm, we suggest six themes for law-firm leadership to consider. These through-cycle priorities aim to sustain value in the near term and build value over the long term.

Focus on clients, clients, clients

This is the time to be there, truly, for your clients. Their business context has shifted dramatically, presenting unprecedented challenges. Law-firm partners should proactively connect with and really listen to clients and their needs. Even a two-line personalized email can send the right message. As client agendas and priorities shift, be ready to pivot your client-service agenda to match them—for example, by introducing new partners or expertise in a pertinent area. Invest significantly in relevant knowledge (see next section), crisis advisory, and other services that deepen trust.

Operate at pace on relevance

Clients are looking for sound information, hard data, and impartial advice. They are flooded with information. What will be your law firm’s relevance agenda on the topics for which you have distinctive capabilities (such as implications of Federal Reserve Board and Department of Treasury facilities and tech acceleration)? What innovative channels, beyond the standard articles or emails, can you use to get your perspectives to clients? If it is taking longer than a week from idea to publication or a client discussion, that is too long in this fluid time.

Embrace your people

Your people are your law firm. Acknowledge and deal with the humanitarian and personal elements of the COVID-19 crisis with empathy. Support employee flexibility, collaboration, and connectivity through technology and frequent communications from firm leaders. Look for opportunities to reallocate any excess capacity rapidly toward building new firm capabilities or pro bono activities—every firm member should see clearly how their work is meaningful through this period.

Be vigilant on pricing

It is easy in these times to let pricing discipline slip. Our research shows that in past downturns, law firms continued to increase their standard rates but then partially offset those actions through an uptick in client, matter, and one-time discounts; strategic investments; and work-in-progress and accounts-receivable write-offs. If done in a strategic and controlled fashion, those actions can be effective ways to meet clients’ needs while reinforcing a law firm’s value proposition and positioning the firm well for when the economy recovers. But leaders will be creative in providing pricing or volume relief.

 

Rather than reflexively locking into long-term, highly discounted arrangements, explore ways to offer strategic investments, flexible payment terms, credits toward future services, and the broader panoply of alternative fee arrangements. Strategically show strength through extending the firm balance sheet for clients rather than gradually losing ground through a lack of pricing discipline.

Use your bifocals: Be nearsighted, with a view to resilience

Set up a nerve center to coordinate law-firm activity across all the previously mentioned fronts and more. Try to move beyond the basics to the best practices of widespread and varied communication, weekly war-room reviews, impact tracking of initiatives, and rebalancing for short-term coordination and priorities as needed.

For law firms, near-term issues of cash management for liquidity and solvency are clearly paramount. They should build scenarios to understand their positions and near- and midterm imperatives. Prioritize initiatives based on time to release, typical size of financial impact, and risks to a firm’s long-term health and performance from pulling that lever. Two general principles apply if firm survival is not at stake: examine all levers first before turning to compensation and let partners “take the hit” before nonpartners do.

In general, law-firm leaders should think of the order of operations for near-term resilience as follows:

  1. Pull all noncompensation balance-sheet cash levers.

  2. Pull noncompensation midterm levers.

  3. Consider smoothing and elongating distributions to partners.

  4. Consider reducing partner bonuses and distributions.

  5. Consider smoothing and then reducing (in that order) partner salaries.

  6. As a last resort, enact nonpartner-compensation reduction, deferrals, or furlough or layoffs.

 

Use your bifocals: Be farsighted, with a through-cycle view

While this is an unprecedented time of public-health crisis with potentially severe adverse economic conditions, it is important to maintain a running multihorizon view. Resilience measures can fund priorities not just for the near term but also to help with acceleration out of the crisis. Now is the time to develop or sharpen a granular view on the sectors, clients, practice areas, and geographies you are prioritizing.

In-flight or established strategic initiatives, particularly those that link to immediate client needs, should be continued, perhaps even accelerated in some cases. Law firms can build capabilities in new areas likely to be busy in the midterm (such as restructuring and M&A) and should consider accelerating partnerships, digital and technology innovation, and inorganic growth plans in light of the changing environment.

Over time, law firms can capture growth from three sources: underlying market expansion, gaining share from competitors, and M&A. Our research across industries demonstrates that sustained growth from gaining share from competitors is extremely difficult, particularly in mature, highly competitive sectors (such as high-end legal services). Conversely, participating in underlying market expansion can be a source of sustainable growth, which makes it imperative that firms have or build capabilities in service lines that are seeing rapid expansion. M&A can also be a powerful tool; however, our research suggests that across industries, programmatic M&A—for example, a series of “lift outs” or acquiring boutiques—generates more value than “bet the firm” mergers.

Decisions made now may well shape a firm’s direction and culture for the long term. With that in mind, law firms should complement belt-tightening initiatives with plans to attract lateral talent with well-aligned practices and reforms to firm decision-making and people processes, such as placing greater emphasis on collaborative entrepreneurship in annual partner reviews.

 

In the current highly uncertain and rapidly evolving environment, no single course of action will be appropriate for all law firms. But given how much is at stake for them—client relationships, people and culture, near-term resilience, and the ability to accelerate out of a downturn—those that can maintain a long-term perspective while moving aggressively on near-term priorities will be best positioned to prosper in the next normal.

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