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10 Key Actions for Enterprises in An Epidemic

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At this moment, with China fighting an epidemic, many enterprises are actively fulfilling their social responsibilities. As key contributors to the country’s economy, the basic social responsibility is to conduct business well and organize employees properly. In the face of the current epidemic, MWC believes that the greater the urgency, the more rules need to be in place to face challenges calmly.

The ongoing development of the new coronavirus has prompted the World Health Organization (WHO) to discuss whether the epidemic is a Public Health Emergency of International Concern. (PHEIC). Meanwhile, enterprises could face various strategic and operational risks, such as delayed or interrupted supplies of raw materials, changes in customer demand, cost increases, logistics shortages leading to delays in delivery, employee health and safety protection issues, insufficient manpower, and logistics and settlement challenges related to import and export trade.

Based on our analysis of the leading practices of multinational companies in Business Continuity Planning (BCP), emergency and major emergency management of infectious atypical pneumonia, H1N1 influenza, Ebola hemorrhagic fever and other major infectious diseases, we recommend Chinese companies take the following 10 actions to address future uncertainty:

1. Establish emergency decision-making teams.
  • An enterprise should immediately set up decision-making teams for temporary major issues, such an “Emergency Response Team” or “Major Emergency Management Committee”, to build the whole objectives and emergent plan and ensure the fastest possible decisions can be made in various situations.
  • For committee members, enterprise should evaluate its own professional strengths and, if necessary, bring in professionals to match its business and regional characteristics.
2. Assess the risks and clarify emergency response mechanisms, plans and division of labor.
  • Many multinational companies have established “emergency contingency plans” or “business sustainability plans”, usually implementing these immediately in the event of a major emergency.
  • If a company has no such plan, it should conduct a comprehensive assessment of all risks straight away, including employee, outsourcing, government, public and supply chain issues. According to risk assessment, the company should respond to issues around office space, production plans, procurement, supply and logistics, personnel safety and financial capital, as well as arrange other major matters related to emergency plans and division of labor.
3. Establish a positive information communication mechanism for employees, customers and suppliers, and create standardized communication documents.
  • It is important to stabilize supply chains and the mindsets of internal employees and external partners, as well as strengthen the management of publicity and customer services to avoid negative public opinion caused by negligence or inconsistency.
  • At the same time, a company’s existing information system should be used to collect, transmit, and analyze epidemic information and issue prompt risk warnings.
4. Maintain the physical and mental wellbeing of employees, and analyze the nature of different businesses and jobs to ensure appropriate resumption of work.
  • According to MWC’s latest human resources survey on epidemic responses, 82% of companies believe “flexible work arrangements” are now the most important means of employee management. We recommend companies immediately establish flexible vacation and work mechanism, using technical means to establish non-face-to-face or off-site work parameters during special periods.
  • Besides enterprise should establish a staff health monitoring system and keep employees’ personal health information confidential.
  • Enterprise should ensure the safety of working environments by strictly cleaning and disinfecting workplaces in accordance with national and regional public health authorities’ hygiene management requirements for periods of major infectious diseases.
  • Enterprise should strengthen epidemic safety education, establish fact-based employee self-protection guidelines, and increase awareness of safety and risk prevention.
5. Focus on supply chain risk response plans.
  • Multinational companies usually arrange to utilize “redundant” office facilities, production capacity plans, and raw material procurement channels in multiple countries or regions in advance, so the work in the “infected area” can be quickly undertaken or production will not be stopped due to lack of capacity or raw materials.
  • In inventory management, organizations must consider the prolonged inventory digestion cycle caused by blocked consumption, the corresponding increase in financial costs, and pressure on cash flow. At the same time, in industries with long production cycles, organizations must prepare in advance for a rebound in consumption once an epidemic has eased to prevent the risk of insufficient inventory.
6. Develop solutions to compliance and customer relationship maintenance risks arising from the inability to resume production in the short term.
  • After an outbreak, organizations should cooperate with downstream customers to understand changes in client and market conditions, and confirm the impact of resumption, order delivery, demand, and market changes.
  • Laws around the performance of civil and commercial contracts may come into play, as not all non-performance during an epidemic can have no legal consequences.
  • Enterprises should identify and evaluate those contracts whose performance could be affected, and promptly notify the related party to mitigate possible losses, as well as assess whether it is necessary to sign a new contract, and retain evidence to use in possible civil lawsuits.
7. Practice social responsibility and stakeholder management, and incorporate sustainable development strategies into decision making.
  • Enterprises should obey the unified planning and arrangements of the government.
  • Proper corporate information disclosures can enhance an enterprise’s public image.
  • For Chinese companies, the most important leading practice is being able to implement corporate social responsibility from the perspectives of the environment, society, economy and employee stability, as well as coordinate relationships with the community and supplies. They should assess the possible impact and duration of the epidemic, adjust plans, and, at the shareholder or board level, communicate proposed measures and assessment results.
8. Build management plan of employee master data, information security and privacy.
  • Enterprises should establish good employee master data management mechanisms, and register internal and outsourced personnel, suppliers, partners, and other personnel with whom they have contact.
  • They should also formulate timely information security emergency response plans to ensure the security, stable operation. To arrange remote and on-site staff to carry out their duties, establish 7*24 hours remote and on-site support to ensure the monitor on computer rooms, networks, systems, applications and resources.
  • Companies should also protect personal privacy and clinical trial data, especially to those patients (whether customers or employees), strictly control access to, transmission and usage. For clinical and medical data, access control and protection level should be set up.
9. Companies need to consider adjusting their budgets and implementation plans, cash flow plans, and early warning mechanisms for international trade.
  • According to MWC data, 46% of companies plan to lower their performance hurdles for 2020. At the same time, we would advise companies to pay attention to cash flow, arrange cash scheduling to ensure the safety of funds according to the rhythm of upstream and downstream suppliers and employees’ work plans.
  • In addition, they should pay close attention to the international import and export trade situation, particularly sudden changes or disasters in locations from which major products originate, which will impact trade and potentially give rise to huge losses at the company itself. To prevent such incidents, companies should establish emergency “scenario plan” responses for basic providers as soon as possible, which can include plans for hedging using futures, international trade and transportation, and alternative suppliers.
10. Upgrade enterprise’s risk management mechanisms.
  • MWC’s Enterprise Risk Management Survey report for global entrepreneurs shows that 76% of risk managers believe their company could respond effectively if a major emergency occurred tomorrow. Yet only 49% of enterprises have developed relevant manuals and conducted pre-tests based on emergency scenarios, and only 32% of enterprises have conducted “major emergency simulation exercises” or training.
  • We believe most enterprises could face unexpected risk events at any moment —it’s a question of when, not whether. Enterprises should establish or upgrade their risk management systems to identify the key risks and build risk mitigation plan. Strengthening risk management system is just as important as dealing with negative events when they arise.

 

We are here to help you navigate so schedule a call to discuss your specific business goals

Addressing the financial impact of COVID-19

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Navigating Volatility & Distress

The number of new infections and deaths continues to rise rapidly and, as yet, there are no signs of
COVID-19 being brought under control. While the vast majority of infections and deaths have thus far
occurred in China, concern is rising across the world that a global pandemic is upon us.
Business in China has been severely impacted. Shopping malls and restaurants are deserted, while
travel and tourism revenues in China have collapsed. The return to work after the Chinese New Year
has been slow and people are being encouraged, where possible, to work from home. Moreover, as the
outbreak and growth of COVID-19 has been centered around the key manufacturing hub of Wuhan,
global supply chains are being severely affected. Automotive plants in Japan and Korea have already
closed due to a lack of parts. You can’t assemble a car with 99% of the parts.

It is possible that COVID-19 may burn out as temperatures start to rise during spring and
into summer in the northern hemisphere, but at this point nobody knows. It is therefore
important that businesses are proactive in assessing their capability to withstand disruption
from both an operational and a financial standpoint, and that they act decisively to mitigate
actual or potential issues.

Liquidity forecasting and headroom

• Reforecast trading and cash flows. Test and challenge all assumptions. Ensure trading and cash flow
forecasts are integrated. Model a downside scenario to understand actual/potential needs.

• Review cash flow forecasts. Some businesses’ cash flows are already being devastated as revenue
evaporates. Review in detail cash flows for the next 3 months, and identify what mitigating actions can be taken
to preserve cash in the short/medium term.

• Review your lending documents. Understand the key terms, covenants, baskets of headroom and flexibility
in your banking and finance documents.

• Remain in contact with key stakeholders. Businesses should communicate regularly with key stakeholders
including their lenders and investors in order to retain their confidence and support.

In the event COVID-19 extends into medium term

• Seek out additional sources of capital early. Should cash flow forecasts suggest that liquidity will become an
issue, assess options for raising funds including asset based financing, RCF, alternative debt funds and also
equity markets and M&A.

• Keep plans and options actively under review. Sustainable financing is an iterative process.

 

Working capital and supply chains

• Working capital: Working capital management is
likely to be challenging:
– Businesses impacted by lower Chinese demand
may experience overstocking that could persist
until production reduces or demand picks up.

– Chinese customers are likely to delay payments
to preserve cash, while Chinese suppliers may
be desperate to be paid for shipped/ordered
goods.

– Non-impacted counterparties may offer early
payment discounts or factoring opportunities.

• Affected operations: Assess ability of own
affected operations in China to continue production
and supply. Make contingency plans for alternative
supply as required.

• Engage with critical suppliers. Assess key
trading terms and communicate regularly with
critical suppliers to understand their ability to
maintain and/or negotiate for continuity of supply.

• Alternative suppliers. Identify which of your key
suppliers may be exposed. Make contingency plans
for alternative supply as appropriate.

• Customers: Frequent engagement with customers
at an executive level is key to manage
expectations.

 

We are here to help you navigate so schedule a call to discuss your specific business goals

COVID-19: Navigating volatility and distress

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Addressing the financial impact of COVID-19

This piece from MWC  provides guidance for companies experiencing significant operational disruption due to public policy measures put in place to contain the spread of COVID-19.

The number of new infections and deaths continues to rise rapidly and, as yet, there are no signs of Covid-19 being brought under control. Whilst the vast majority of infections and deaths have thus far occurred in China, concern is rising across the world that a global pandemic is upon us.

Business in China has been severely impacted. Shopping malls and restaurants are deserted, whilst travel and tourism revenues in China have collapsed. The return to work after the Chinese New Year has been slow and people are being encouraged, where possible, to work from home. Moreover, as the outbreak and growth of Covid-19 has been centered around the key manufacturing hub of Wuhan, global supply chains are being severely affected. Automotive plants in Japan and Korea have already closed due to a lack of parts. You can’t assemble a car with 99% of the parts.

It is possible that Covid-19 may burn out as temperatures start to rise during Spring and into Summer in the northern hemisphere, but at this point nobody knows. It is therefore important that businesses are proactive in assessing their capability to withstand disruption from both an operational and a financial standpoint, and that they act decisively to mitigate actual or potential issues.

Liquidity forecasting and headroom

  • Reforecast trading and cash flows. Test and challenge all assumptions. Ensure trading and cash flow forecasts are integrated. Model a downside scenario to understand actual/potential needs.
  • Review cash flow forecasts. Some businesses’ cash flows are already being devastated as revenue evaporates. Review in detail cash flows for the next 3 months and identify what mitigating actions can be taken to preserve cash in the short/medium term.
  • Review your lending documents. Understand the key terms, covenants, baskets of headroom and flexibility in your banking and finance documents.
  • Remain in contact with key stakeholders. Businesses should communicate regularly with key stakeholders including their lenders and investors in order to retain their confidence and support.

In the event Covid-19 extends into medium term

  • Seek out additional sources of capital early. Should cash flow forecasts suggest that liquidity is or will become an issue, assess options for raising funds including asset based financing, RCF, distressed M&A and alternative financing options (through our funds network) and also tapping the equity markets.
  • Keep plans and options actively under review. Sustainable financing is an iterative process.

Working capital and supply chain

  • Working capital:Working capital management is likely to be challenging:
    – Businesses impacted by lower Chinese demand may experience overstocking that could persist until production reduced or demand picks up.
    – Chinese customers likely to delay payments to preserve cash, whilst Chinese suppliers may be desperate to be paid for shipped/ordered goods.
    – Non-impacted counterparties may offer early payment discounts or factoring opportunities.
  • Affected operations:Assess ability of own affected operations in China to continue production and supply. Make contingency plans for alternative supply in short and medium term as required.
  • Engage with critical suppliers.Assess key trading terms and communicate regularly with critical suppliers to understand their ability to maintain and/or negotiate for continuity of supply.
  • Alternative suppliers.Identify which of your key suppliers may be exposed and consider scenarios for supply being partly/fully restored. Make contingency plans for alternative suppliers as appropriate.
  • Customers:Frequent engagement with customers at an executive level is key to manage expectations.

Impacted sectors

  • China
    – Heavily impacted (almost all sectors impacted): Airlines, Hotels, Restaurants, Hospitality, Retail, Manufacturers – particularly those with complex supply chains: Automotive, Technology etc.
  • Rest of Asia Pacific
    – Exporters, specifically from Japan & Korea, with a significant exposure to the Chinese market.
    – Business dependent on Chinese tourists: Hotels, luxury goods retailers.
    – Transportation: Airlines, Cruise operators, Shipping companies.
    – Manufacturers dependent on parts from China, notably Automotive and Technology.
    – Oil & Gas and Mining & Metals due to fall in both demand and commodity prices.
    – Agriculture and related businesses, including Ports and Shipping and their working capital Financiers.
    – Education: Dependent on Chinese students.
  • EMEA and Americas
    – Business dependent on Chinese tourists: Hotels, some Airlines, luxury goods Traders & Retailers.
    – Manufacturers dependent on parts from China, notably Automotive and Technology.
    – Oil & Gas and Mining & Metals due to fall in both demand and commodity prices.

 

We are here to help you navigate so schedule a call to discuss your specific business goals

What It Takes to Run a Great Virtual Meeting

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As companies scramble to protect employees from the spreading coronavirus with travel restrictions and remote work arrangements, there’s a distinct possibility that in-person meetings with teams, customers, or suppliers may be canceled for days — or potentially weeks.

Under the best of circumstances, as soon as one or two attendees “dial in” to any meeting, productivity starts to suffer.  There’s a long list of reasons. Attendees often interpret virtual meetings as a license to multi-task. Meeting organizers tend to be less careful with the purpose and design of the conversation. And it’s not uncommon for one or two attendees to dominate the discussion while others sit back and “tune out.”

But it doesn’t have to be this way. Virtual meetings — even impromptu one’s sparked by fears of a contagion — can be run more effectively, using basic meeting best practices and easy-to-use, inexpensive technology.

Here are 12 steps you can take to make that happen:

1. Use video. To make people feel like they’re all at the “same” meeting, use video conferencing rather than traditional conference dial-ins. Technology — such as Zoom, Skype, and GoToMeeting — helps to personalize the conversation and to keep participants engaged.

2. That said, always provide an audio dial-in option. Video conferencing can work very well, but it relies on a strong internet connection that may not always be available. People need the ability to participate via audio, but make it clear that video-first is the new norm.

3. Test the technology ahead of time. Nothing kills momentum at the start of a meeting like a 15-minute delay because people need to download software, can’t get the video to work, etc. Prior to a virtual meeting, all participants should test the technology and make sure they are comfortable with the major features.  And remember, supplier or customer conversations may require your team to familiarize themselves with different software packages.

4. Make sure faces are visible. Video conferences are more effective when people can see each other’s facial expressions and body language. Ask individuals to sit close to their webcam to help to recreate the intimacy of an in-person meeting.

5. Stick to meeting basics. Prior to the conversation, set clear objectives, and send a pre-read if appropriate. During the session, use an agenda, set meeting ground rules, take breaks, and clearly outline next steps (including timing and accountabilities) after each section and at the end of the meeting.

6. Minimize presentation length. The only thing worse than a long presentation in person is a long presentation during a virtual meeting.  Meetings should be discussions. Background information should be provided beforehand. If someone needs to present, use screen sharing to guide the conversation, so attendees can literally “be on the same page.” But prioritize conversation to maximize the time people are looking at each other.

7. Use an icebreaker. Although we’re not big fans of them, it’s important to use every tool to reinforce interpersonal relationships when people may be feeling isolated.  Also, it’s important to know if a participant may have a close friend or relative fighting the virus, so some type of “check in” is in order.

8. Assign a facilitator. It’s usually harder to manage a virtual discussion than an in-person one. It can be helpful to assign one individual to guide the conversation, allowing the other participants to focus on the content. The facilitator can also use a polling system to “take the pulse” of the group on certain questions and ensure that all voices are heard.  The facilitator should also be able to resolve basic questions on the technology being used.

9. Call on people. Getting everyone to participate without talking over each other is one of the more challenging aspects of running a virtual meeting. To forestall this, we recommend periodically calling on individuals to speak, even by virtually “going around the table” before a decision is finalized. Some software packages even allow attendees to “raise a hand” if they want to. This can help the facilitator drive closure without the risk of excluding an introverted participant’s views.

10. Capture real-time feedback. Gathering and processing high-quality input during a virtual meeting can be challenging, especially since visual cues are harder to read.  Use a phone-based survey tool like Poll Everywhere to collect on-demand feedback from attendees on specific topics in real time. Keep the polling open, separate from the videoconference to avoid disrupting the conversation. Participants will need clear instructions on how to use the system and practices, but groups get the hang of it very quickly and it’s well worth the effort.

11. Don’t be afraid to tackle tough issues. Meeting virtually is a learned behavior, and you’ll be amazed how much you can get out of it once you and your team begin to be comfortable working this way. It may seem natural to wait to discuss tough issues until everyone is in person, but that may not be an option. So don’t shy away from controversial topics.

12. Practice once or twice while you’re still together. Hold your next staff meeting virtually, with each executive sitting in their office and hooking into the meeting with no assistance. After the meeting concludes, gather and debrief about the experience.  What went well, and what didn’t?  How can you evolve your virtual meetings to make them as productive as when you meet in person?

Not being able to work together in the same room with colleagues may become a major challenge in the next few weeks. To make virtual meetings work, you might need to adjust how your team conducts them.  But a small investment in preparedness now could have a huge impact if that time comes.

We are here to help you navigate so schedule a call to discuss your specific business goals

COVID-19: Managing cash flow during a period of crisis

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Coronavirus cash flow implications across extended supply chain

This piece suggests ways organizations can mitigate damages to their business during this volatile event.

As a typical “black swan” event, COVID-19 took the world by complete surprise. This newly identified coronavirus was first seen in Wuhan, the capital of Hubei province in central China, on December 31, 2019. As of March 2020, the virus has infected over 90,000 people, and led to more than 3,000 deaths. More importantly, more than 75 countries are now reporting positive cases of COVID-19 as the virus spreads globally, impacting communities, ecosystems, and supply chains far beyond China.

The focus of most businesses is now on protecting employees, understanding the risks to their business, and managing the supply chain disruptions caused by the efforts to contain the spread of COVID-19. The full impact of this epidemic on businesses and supply chains is still unknown, with the most optimistic forecasts predicting that normalcy in China may return by April,1 with a full global recovery lagging depending on how other geographies are ultimately affected by the virus. However, one thing is certain: this event will have global economic and financial ramifications that will be felt throughout global supply chains, from raw materials to finished products.

Responding to the immediate challenge

Borrowing from the lessons learned from the SARS outbreak in 2003, the 2008 recession and credit crunch, and the last black swan event to significantly impact global supply chains–the Japanese earthquake of 2011–we offer the following practices and strategies for consideration:

  • Ensure you have a robust framework for managing supply chain risk
  • Ensure your own financing remains viable
  • Focus on the cash-to-cash conversion cycle
  • Think like a CFO, across the organization
  • Revisit your variable costs
  • Revisit capital investment plans
  • Focus on inventory management
  • Extend payables, intelligently
  • Manage and expedite recievables
  • Consider alternative supply chain financing options
  • Audit payables and recievables transactions
  • Understand your business interruption insurance
  • Consider alternative or non-traditional revenue streams
  • Covert fixed to variable costs, where possible
  • Think beyond your four walls

What’s next: Recovering and returning to normal business operations

Cash flow management needs to be an integral element of a company’s overall COVID-19 risk assessment and action planning in the near term. Even for companies that have not yet been adversely affected, we recommend management teams with concerns about COVID-19 actively evaluate their cash flow requirements, develop appropriate actions under various scenarios, and assess potential risks in and to their customer base and supplier network.

 

We are here to help you navigate so schedule a call to discuss your specific business goals

Willing and able – Building a crisis resilient workforce

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Most crisis response planning assumes that people will turn up for work when they are needed, even during some of the most extreme events. But will this fundamental assumption really hold true? This is the question MWC, in association with King’s College London and Public Health England explored to suggest a model and recommendations for organizations to develop a more crisis resilient workforce.

 

Most existing crisis response plans focus on structures, protocols and processes of an organization’s response whilst leaving the human aspect of response to chance assuming that people will turn up for work even during the most extreme events.

But our research uncovered that in certain more severe scenarios, this assumption may not hold true and organizations need to find ways to improve the situation.

To do so they should consider the following points to build a crisis resilient workforce:

Human factors – understand how people may respond and why

Organizations should remove any assumptions about employees’ willingness to come to work in a time of crisis and recognize that risk perception is a key determinant of willingness. To palliate this issue organizations should make sure that people understand the importance of their role and adopt an inclusive approach when developing the crisis response plan to embed and address employees’ concerns.

Information and communication – tell them what they need to know

Organizations should ensure they educate their employees on the actual risk presented by different crisis. When a crisis does occur it becomes important to provide accurate and authoritative information about the situation. Organizations should consider what the authoritative sources of information might be and where or how they can be accessed and used as part of their planning considerations. Also, they should provide staff with recommendations and give clear reasons for those recommendations.

Organizational interventions – provide practical support

In order to increase employees’ willingness to come to work during a crisis organizations need to consider remote access availability, logistical support that could make it easier for employees to get into work as well as provide incentive such as psychological care or medicine to help them cope with the crisis.

 

We are here to help you navigate so schedule a call to discuss your specific business goals

Responsible retail—Being great means doing good

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MARCH 3, 2020 RESEARCH REPORT

In brief

  • People today are hyper-aware of social, cultural and environmental issues—what retailers do matters more than what they say.
  • Brands with consistently high responsibility performance beat their peers in operating margin, profit and total shareholder returns.
  • Responsibility to all stakeholders—consumers, employees, partners and investors and the planet—is no longer optional.
  • Making responsible retail happen is an enterprise-wide commitment—strong leadership, collaboration and excellent communication are all essential.

It’s time for retailers to execute on their purpose

Retail has been in the throes of massive transformation for more than a decade. Omnichannel, personalization and social media are all now business as usual. One of the most profound changes? Retail with purpose: Who a retailer is, why it exists and how it runs through consumers’ lives.

Having a purpose is only half the story. Retailers need to execute on that purpose responsibly.

Brands with high responsibility performance don’t just win consumers’ confidence. Our research shows they outperform their peers too—across operating margin, operating profit and total shareholder returns.

From now on, relevancy, differentiation and growth will all hinge on delivering something truly meaningful through responsible retailing.

This demands an enterprise-wide commitment. Responsibility to all stakeholders—consumers, employees, partners and investors, and our planet—is critical.

 

Responsible to consumers

How well do you know your customers? What do they truly care about? What makes a product or service relevant to them in the moments that matter?

It’s a fine line to tread. Many consumers feel brands don’t know them well enough. But brands quickly forfeit trust when they overstep the mark by appearing to know too much.

The priorities? Understand consumers, their concerns, values and preferences. Build long-lasting trust, provide transparency and use data to humanize consumer relationships inventively—not invasively.

Responsible to employees

How do you unlock your employees’ potential so they feel empowered and motivated to bring the best of themselves to work every day—enabling your organization to deliver the most relevant experiences to your consumers?

Through your responsibility to think “human first”. Understand how machines enable more purpose for your employees. Incorporate technology to support employee growth. And create and nurture an equitable, inclusive culture from top to bottom.

Responsible retail is designing every aspect of the business around responsible initiatives.

Responsible to partners and investors

Keeping pace with consumer and employee demands—while sustaining profitability—means retailers must reinvent themselves, at speed and scale. It’s where partners play a vital role.

These partnerships bring new opportunities. But they can also create risks in a world where vendor and supplier relationships are closely scrutinized by consumers.

It’s why retailers have to be sure they have a common purpose across all partners that share their values.

Responsible to our planet

Environmental consciousness and consumerism matter more than ever to consumers and employees.

It’s why being responsible to them means being responsible to the planet. It’s not just ethical sense, it’s practical sense too. In a world with finite resources, business continuity has to be grounded in sustainability—right across the value chain.

 

We are here to help you navigate so schedule a call to discuss your specific business goals

COVID-19: Managing supply chain risk and disruption

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Coronavirus highlights the need to transform traditional supply chain models

 

Could COVID-19 be the black swan event that finally forces many companies, and entire industries, to rethink and transform their global supply chain model? One fact is beyond doubt: It has already exposed the vulnerabilities of many organizations, especially those who have a high dependence on China to fulfill their need for raw materials or finished products.

China’s dominant role as the “world’s factory” means that any major disruption puts global supply chains at risk. Highlighting this is the fact that more than 200 of the Fortune Global 500 firms have a presence in Wuhan, the highly industrialized province where the outbreak originated, and which has been hardest hit. Companies whose supply chain is reliant on Tier 1 (direct) or Tier 2 (secondary) suppliers in China are likely to experience significant disruption, even if, according to the most optimistic reports, conditions approach normalcy in China by April.

How can organizations respond to the immediate change?

As the COVID-19 threat spreads, here are measures companies can take to protect their supply chain operations:

For companies that operate or have business relationships in China and other impacted countries, steps may include:
• Educate employees on COVID-19 symptoms and prevention
• Reinforce screening protocols
• Prepare for increased absenteeism
• Restrict non-essential travel and promote flexible working arrangements
• Align IT systems and support to evolving work requirements
• Prepare succession plans for key executive positions
• Focus on cash flow

For companies that produce, distribute, or source from suppliers in China and other impacted countries, steps may include:
• Enhance focus on workforce/labor planning
• Focus on Tier 1 supplier risk
• Illuminate the extended supply network
• Understand and activate alternate sources of supply
• Update inventory policy and planning parameters
• Enhance inbound materials visibility
• Prepare for plant closures
• Focus on production scheduling agility
• Evaluate alternative outbound logistics options and secure capacity
• Conduct global scenario planning

For companies that sell products or commodities to China and other impacted countries, steps may include:
• Understand the demand impact specific to your business
• Confirm short-term demand-supply synchronization strategy
• Prepare for potential channel shifts
• Evaluate alternative inbound logistics options
• Enhance allocated available to promise capability
• Open channels of communication with key customers
• Prepare for the rebound
• Conduct global scenario planning

Looking ahead: the imperative for a new supply chain model

A decades-long focus on supply chain optimization to minimize costs, reduce inventories, and drive up asset utilization has removed buffers and flexibility to absorb disruptions─and COVID-19 illustrates that many companies are not fully aware of the vulnerability of their supply chain relationships to global shocks.

Fortunately, new supply chain technologies are emerging that dramatically improve visibility across the end-to-end supply chain, and support companies’ ability to resist such shocks. The traditional linear supply chain model is transforming into digital supply networks (DSNs), where functional silos are broken down and organizations become connected to their complete supply network to enable end-to-end visibility, collaboration, agility, and optimization.

Leveraging advanced technologies such as the Internet of Things, artificial intelligence, robotics, and 5G, DSNs are designed to anticipate and meet future challenges. Whether it is a “black swan” event like COVID-19, trade war, act of war or terrorism, regulatory change, labor dispute, sudden spikes in demand, or supplier bankruptcy, organizations that deploy DSNs will be ready to deal with the unexpected.

*We are here to help you navigate so schedule a call to discuss your specific business goals

The coronavirus and its consequences

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Legal impact on supply and production relationships

 

The (legal) impact of the coronavirus

Starting first from the Wuhan region, the coronavirus epidemic is in its spreading already now exceeding the 2002/2003 SARS-crisis. The consequences are dramatic. The Chinese government’s quarantine-related counter-measures have caused significant restrictions to public life in large parts of the country. In light of this, the epidemic’s economic consequences are increasingly getting into focus. The crisis affects a huge number of China-based companies, which either had to cease or move their production. European companies producing in China or purchasing goods from there see themselves confronted with supply chain disruptions.

Moreover, there are plenty legal implications arising from the epidemic such as the handling of affected employment relationships, insurance coverage of epidemic-related damages or consequences in the field of travel law. However, given the enormous volumes the Chinese-European trade has meanwhile reached, it is of highest relevance how epidemic-related disruptions may affect the legal side of existing supply and production-related relationships. Keywords being often repeated in this context are the terms “Acts of God” and “Force Majeure-clauses”. Taking a closer look could be beneficial.

What does “Force Majeure”  mean?

Quite often, contracts such as e.g. supply agreements include “Force Majeure“-clauses or provisions regarding “Vis Major” or – in the Anglo-American context (namely under Common Law or US law) – clauses with respect to “acts of god”. In general, respective clauses aim at governing the consequences of cases of default in performance being related to circumstances or events, which are beyond the control of the contracting parties. The term “Force Majeure” – at least under German law – is not defined by statutory law. Typically, respective clauses provide for an abstract definition of the term being further illustrated by a number of non-exhaustive examples (e.g. natural disasters as earthquakes or flood as well as events like terrorist attacks, armed conflicts or strikes). In standard cases, legal consequence of a “Force Majeure”-event is the (at least) temporary suspension of the contracting being affected by the respective event under exclusion of damage liability obligations vis-à-vis the other party. From a formal standpoint, it is often stipulated that the party being affected by a “Force Majeure”-event shall be subject to respective notification obligations towards the other contracting party. In some cases, “Force Majeure”-clauses provide for extraordinary termination rights in favor of either one or both parties. It is furthermore important to consider that “Force Majeure”-clauses regularly also provide for obligations and requirements, which must be observed by the other contracting party not directly being affected by the respective “Force Majeure”-event. Typically, the party not being directly affected by the event (in most cases: the recipient) shall be obliged to limit its own damages using its best reasonable efforts.

“2019-nCoV” as “Force Majeure”?

By way of a detailed analysis of the specific contract clause, it has to be determined in the individual case whether the new coronavirus (in science known under the preliminary denomination “2019-nCoV”) meets the applicable definition of a relevant “Force Majeure”-event. Although commonly used standard clauses seem to imply the occurrence of a “Force Majeure”-event, it is to be checked with utmost care, which law and legal understanding shall apply in connection with the respective agreement. Depending on which law shall apply in case of an agreement, this can be of material influence on the interpretation of the respective clause and can lead to rather contrary results. It is also advisable to consider conflict of laws-related requirements in connection of a related legal assessment. For the avoidance of unintendedly non-compliant conduct, a thorough review of the specific clause is essential.

With respect to agreements being subject to the laws of China, the PRC’s Supreme Court ordered in connection with the 2002/2003 SARS-epidemic that defaults either directly relating to the epidemic or to the government’s related counter-measures, would be considered as “Force Majeure”-constellations within the understanding of the legal definition of the term “Force Majeure” under Chinese civil law.

Also with respect to the current crisis, this legal assessment seems to be applied: It is now possible to obtain, upon application, so-called “Force Majeure-certificates” from CCPIT (China Council for the Promotion of International Trade) which can be utilized as proof in court proceedings vis-à-vis contracting partners. This could turn out as rather useful for companies having production plants in place in the affected regions of China and now not being able to comply with their supply obligations due to epidemic-related production disruptions, consequently, facing damage claims from the contracting partners.

Besides, there are efforts being undertaken in China to cover the consequences of the current crisis by way of special regulation. For instance, for the financial services sector, Chinese authorities are planning the implementation of sector-specific regulations.

However, what if there is no “Force Majeure”-clause included in the respective agreement? In case the agreement is subject to German law, then statutory provisions covering the respective default constellation (such as e.g. the German civil law concepts of the temporary impossibility (vorübergehende Unmöglichkeit) or frustration of contract (Störung der Geschäftsgrundlage)) apply. Also in such scenario, a thorough legal assessment of the individual case is required in order to determine which possible options either for an adjustment or termination of the respective agreement are the most suitable, especially from an economic standpoint.

Conclusion: What next?

The present coronavirus-epidemic has – from a medical point of view – still not reached its peak. Also from an economic perspective, the full picture of the epidemic’s consequences (particularly for China’s internationally closely interwoven supply and production relationships) is not foreseeable yet.

Parties being affected by epidemic-related supply or production disruptions can benefit from a precise assessment of the underlying contractual framework. Possible “Force Majeure”-clauses should be reviewed with particular care. Even though standardized versions of respective clauses are quite often being used, generalizing statements cannot be made. Considering which law applies in respect of the specific agreement, it is to be clarified in light of the wording of the respective “Force Majeure”-clause whether the current crisis meets the contractual definition of a “Force Majeure”-event and, if so, what the legal consequences deriving from this fact are. In case no “Force Majeure”-clause was provided for, the general statutory regulations under the respectively governing law would apply. In addition, it shall be carefully considered which options are available to achieve an economic reasonable result. Either party to an agreement should evaluate and comply with the legal frame for its own conduct (“Is my conduct in compliance with the agreement?”).

For companies producing in PRC (being affected by epidemic-related production defaults) it is advisable to check whether the obtainment of a “Force Majeure-certificate” from CCPIT would be useful. This could be the case if existing supply relationships with recipients are either subject to Chinese law or provide for a China-based place of jurisdiction. Our Chinese colleagues would be more than happy to support you with the obtainment of a “Force Majeure-certificate”.

In any case, pursuing a pro-active approach in connection with the handling of the economic consequences of the coronavirus epidemic will be the better choice. To use a medical terminology: Only a careful and thorough anamnesis of the possible legal risks as well as of the potential options will reduce the risk of being unexpectedly confronted with the negative diagnosis of a court.

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Practical workforce strategies that put your people first

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In moments of uncertainty and concern, it’s not only about what leaders of organizations do but equally how they do it that matters.

COVID-19 is taking the world by surprise, causing a great deal of uncertainty and raising issues that require thoughtful, people-first responses. This newly identified coronavirus was first seen in Wuhan in central China in late December 2019. As we enter March 2020, the virus now has a global reach on all continents except Antarctica. As the virus spreads, communities, ecosystems, and supply chains are being impacted far beyond China.

In January 2020, ahead of the Lunar New Year and as health concerns were still growing, MWC conducted a survey in China of human capital policies and practices. The survey drew over 1,000 responses from enterprises operating in China, including a cross-section of private, foreign, and state-owned enterprises as well as not-for-profit organizations.

The survey shows that from the beginning of the COVID-19 outbreak, the immediate focus of employers has been on ensuring the health and safety of their employees:

  • Ninety percent of the employers believe it is an urgent requirement to provide their employees with remote and flexible work option.
  • Energy, resources, and industrial companies encounter the biggest constraints in offering flexible working and remote solutions, and have focused on providing epidemic protection—they have been ensuring sanitation, personal protective equipment, and safety of the workplace environment.
  • More than half of government and public service entities are focusing on addressing employees’ psychological stress.

Authorities internationally are taking decisive action to respond to this emerging public health threat, which has caused the business community to consider the adequacy of its own preparedness measures.

It’s important to remember we have faced crises like this in the past and will face them again in the future. We need to be prepared, rational, and even altruistic in response. If there is disruption, there will also be recovery, so how we act in a time of crisis can also inform our long-term impact.

Responding to the immediate challenge: a framework to view the impact on your people.

 

*We are here to help you navigate so schedule a call to discuss your specific business goals