The Coronavirus outbreak in China, which is now spreading throughout the world, has forced millions of people to stay at home and not travel which will have an obvious knock-on impact on the economy here in Australia. While the full financial impact of the outbreak on global business is still revealing itself let’s take a look at how this will affect small business.
Why does this affect my small business?
China is the “factory of the world” so anything that halts China, halts global supply chains. Small businesses try to avoid tying up cash by having large stockpiles. Instead, they prefer to have the smallest amount of inventory possible as supply chains generally run smoothly. This leaves little room for error. The supply chain in some areas of China are currently 4-6 weeks behind in production and this could extend further dependant on the outbreak. While the focus could be on Chinese sourced materials, it is important to note the other industrial centres, such as around Milan, are also experiencing shutdowns to production.
How will this affect my small business?
With the global supply chain halted not only for Chinese supplied raw materials but for some whole products like clothing, footwear, food, engines, tools & small parts required for electrical, plumbing and engineering work, this will have an effect on Australian small business for some months to come. This essentially means there could be a delay in receiving the above items, the items may have limited availability and the price for such items may also increase. This can cause a delay in generating your income. The limited travel not only from the Chinese but internationally will also have an effect on the tourism and hospitality sectors. The decrease in visitors means a decrease in local tours booked and local retailers or food venues visited by such travellers.
What can I do to prepare for this?
Create business continuity plans. These plans should pinpoint contingencies in critical areas and include backup plans for transportation, communications, supply, and cash flow. Involve your suppliers and customers in developing these plans. For example, are there other sources of the product that you could access, or you may need to consider other markets to sell your product.
Don’t forget your people. A backup plan is needed for people too. The plan may include contingencies for more automation, remote-working arrangements, or other flexible human resourcing in response to personnel constraints
Cash flow. Review your cash position and what it may mean under various scenarios around delays in receipt of goods or services, and if you are exporting to markets affected. Work out what the effect may be, consider sources of working capital to get you through this and communicate with your bank.
Communicate. Supply chain disruption brings the risk of unintended reputational damage – a clear strategy for transparent communication with customers, external stakeholders and employees, as well as along the supply chain, will be critical and can become a competitive advantage in these situations.
Know all your suppliers. Map your upstream suppliers several tiers back. Companies that fail to do this are less able to respond or estimate likely impacts when a crisis erupts. Similarly, develop relationships in advance with key resources — it’s too late after the disruption has erupted.
If you need assistance in managing your risk caused by this world wide event, or would just like to talk through a few ideas or concerns, please contact NCA here.