Transparency and Preparedness Keys for Success in Industrials During Crises

Written By & Victoria Sivrais, Partner

March 13, 2020

While new cases of COVID-19 have been dissipating and factories are back up and running in China, we most likely have not experienced the full extent to which this pandemic – combined with a variety of other economic factors – will disrupt production. According to an IMS survey conducted over the last several weeks, a whopping 75% of U.S. companies believe COVID-19 has or will negatively impact their distribution systems.

The reality is that supply chain disruptions, to some degree, can be anticipated. We have experienced epidemics in the past, as well as other impactful events such as earthquakes and hurricanes. There have been opportunities for companies to make meaningful changes to their supply chains in order to head off challenges such as lack of inventory, delayed shipments, etc. The question is whether your company has made the necessary adjustments to thrive during times of international turmoil.

In Industrials, production is king. If you are not pushing product, you are not succeeding, so it is critical that you maintain clear and open communication – internally and externally – on any foreseeable issues.

Here are actionable tips on how to communicate with investors during times of supply chain disruption:

  • Highlight diversification of suppliers – showing your investor base that you are prepared and can continue production under extraordinary circumstances will improve their confidence in your decision-making abilities and overall business strategy.
  • Be transparent and set realistic production expectations – if production is going to be impacted and in turn, your financials will be impacted, communicate that as soon as possible. Make sure your employees feel empowered to speak up if they anticipate delays, and that management is prepared to react appropriately. Clear communication coupled with an employee-empowerment mindset will go a long way with investors.
  • Have a contingency plan should your supply chain break down – what are you going to do if you cannot meet expectations? Given the future of this situation is relatively unknown, it is important to come up with alternative options should you be unable to continue production at current levels. Show your investors that you are aware of potential issues, and are actively problem-solving.

So, given how supply chain disruptions can ultimately impact your relationships with investors, should you preemptively change your guidance? If you feel confident in your supply chain’s ability to respond to potential disruption, then no. You can, however, get ahead of the game and address top investor questions without changing guidance. For example, Honda touched on potential sales and supply chain concerns, but was able to remind investors of the company’s strong credit profile and positive long-term outlook:

“The disruption to sales and supply chains due to the COVID-19 novel coronavirus outbreak in China could depress results for the two companies’ results for the financial year ending March 2020 (FYE20). However, both issuers maintain strong business and credit profiles and have sufficient ratings headroom to navigate the increasingly difficult operating environment.”

Other compelling examples of this proactive approach come from Skyworks and Delta. Skyworks addressed the impact demand is having on the company’s ability to meet production goals, while also emphasizing the importance of its employees, customers, and business partners during the pandemic:

“Although COVID-19 has caused no significant disruption within Skyworks’ manufacturing operations to date, the current demand environment for our products has been negatively impacted by interruptions in global supply chains,” said Liam K. Griffin, president and chief executive officer of Skyworks. “Despite this, we remain upbeat about our design win momentum and our ability to deliver strong profitability and cash flow. As we navigate these challenges, we continue to focus on the health and safety of all our employees, customers and partners worldwide.”

Delta, representing the hard-hit airline industry, clearly outlines the company’s near-term remediation plan on its website:

“In the weeks since COVID-19 emerged, Delta people have risen to the challenge, taking every possible action to take care of and protect our customers during a stressful time,” said Delta CEO Ed Bastian. “As the virus has spread, we have seen a decline in demand across all entities, and we are taking decisive action to also protect Delta’s financial position. As a result, we have made the difficult, but necessary decision to immediately reduce capacity and are implementing cost reductions and cash flow initiatives across the organization.”

Bastian added, “Over the last 10 years, we’ve transformed Delta by strengthening the balance sheet, diversifying our revenue streams and enhancing operational and financial flexibility. The environment is fluid and trends are changing quickly, but we are well positioned to manage this challenge and are taking actions to ensure that Delta maintains its leadership position and strong financial foundation.”

The company then goes on to explain in detail how it plans to manage capacity, expenses, and balance sheet and cash flow, with firm numbers to back up its position.

These companies are instilling confidence in their respective investor bases by addressing problem areas head-on, consistently communicating, and being transparent in their decision-making. They are confident in their ability to recover from disruption and therefore feel comfortable tackling the toughest of investor questions. We should all take note.

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