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Manufacturing, Distribution, and the Impact of a Human Virus

February 26, 2020

One of the last scenarios anyone wants to experience is the impact of global uncertainty at the hands of a new, and unknown human virus. There are many questions left unanswered concerning the potential impact of COVID-19 (Coronavirus) on the U.S. economy. Whereas many people are concerned about the human risk from the virus, business executives and investors are also becoming concerned about the headwind it creates in the global economy. Food and beverage manufacturers and distributors are already beginning to face a variety of dynamics that they will need to work their way through.

As a human-interest event, COVID-19 has been difficult on families in China (and now around the world) whether they experienced the virus firsthand or were subject to the economic upheaval that continues as businesses have been shuttered for a month or more.
The situation regarding the virus is a constantly evolving one, and news flows quickly. COVID-19 had broken containment in 4 nations including 3 in Asia (China, South Korea, and Japan) and one in Europe (Italy) by February 24. The virus has also been identified in at least 29 nations including the U.S., although the infections in those countries are “contained” as of the same date.

In the early days, health officials focused on containment of the virus, leading to measures that shut off economic systems. Sixteen cities, impacting 45 million people were quarantined, and movement was restricted.

Food and beverage manufacturers have a unique set of economic factors that will push and pull demand for their products. During previous pandemics, consumers demonstrated a tendency to stockpile food and beverage products. With unemployment low and household income rising, consumption in the U.S. has been strong over the past three years. Stockpiling activity on top of that trend will boost near term demand for food and beverage products.

In addition, some of the largest consumer economies in the world have had their food and beverage supply chains disrupted over the past month. Store shelves are low and there is an immediate need for supplies of all food types. Even if low-cost producer nations are the first to get a phone call from countries that need immediate supplies, the global ripple effect will create demand from U.S. food and beverage companies.

We don’t often consider the impact of China’s consumption on the U.S., but for manufacturers and distributors that provide the now low supplies, the fallout is already being felt. Supply chains are being reexamined to identify new sources of entry. Contingency plans are being implemented to manage the higher-than-normal inventory. Forecasts are being generated to determine timelines and inventory required when the bans are lifted.

Some companies in the sector are facing the uncertainty and real probability that their own production facilities in hard-hit nations may be shut down. This will create interesting U.S. competitive dynamics to emerge. Availability of lower-cost brands could shift to scarcity, and overall food prices could rise as a result.

Executives in the sector will have to focus their attention on business continuity. Companies should also plan for disruptions in supplies and keep tabs on any foreign sources of products, components for machine maintenance, or other items that could create a business continuity risk. Keeping close contact with suppliers and partners could be more important than ever as this situation evolves. Having a contingency plan in place and thinking of alternate sourcing options in the event of a supply chain disruption could be prudent. Beyond building relationships and strengthening communications, technology can play a role by tightening controls on supply chain management, pulling potential vendors to assess risk, tracking demand, and more.

Credit managers are also monitoring the evolving risk of factors used in determining credit worthiness. How much exposure does a company have to global supply chain disruptions? How long could a company endure a work stoppage and retain suitable liquidity?

There could be accounting and tax implications as well. Required quarterly tax payments may need to be adjusted based on reduced sales or increased cost. Executives should remain in contact with their accounting and tax professionals, keeping them informed of the ongoing situation so that appropriate adjustments and accurate forecasts can be made.

If there is anything that COVID-19 has proven, it’s that nobody can predict how it will impact global economic systems and the business environment. Food and beverage manufacturers have a unique opportunity to meet rising global demand (emergency needs) for food products in countries impacted by the virus.

For now, executives should review their business continuity plans, employment policies, spend time educating employees, and keep professional partners informed. For questions about your daily operations or supply chain technology solutions, contact Sara Stubler.

For more information about COVID-19, the Centers for Disease Control is a good source of information as is the World Health Organization and the National Institute of Health.

About THE AUTHOR
Sara Stubler specializes in international and corporate tax. She provides solutions that help her clients minimize tax burdens, increase cash flow, and maximize profits. She does this by taking the time to get to know her clients and their challenges—and by staying in contact with them year-round. ... >>> READ MORE
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