The impact of covid-19 on the global economy, customer purchasing patterns and production capacity is forcing many chemical companies to consider actions that have not been considered in the past in order to maintain their business in this difficult environment.
The impact of covid-19 on the global economy, customer purchasing patterns and production capacity is forcing many chemical companies to consider actions that have not been considered in the past in order to maintain their business in this difficult environment. All of these countries face the challenge of trying to reduce the spread of covid-19 while ensuring the safety of their staff, while meeting the demands of customers and, in some cases, the desire to enhance capacity.
With the shutdown of automobile, construction and other manufacturing sectors, the demand of downstream chemical companies and many other manufacturers is falling sharply. At the same time, the demand for special chemicals, including disinfectants and disinfectants, for personal care, household, industrial and institutional use, is increasing and in some cases unprecedented
Each chemical organization is affected in different ways and its steps must be tailored to a specific customer base, supply chain, and other factors. However, for every company in the chemical value chain, working capital management is a crucial discipline. This is especially true for chemical companies that face significant challenges in the current market environment.
The company can take the following measures to improve working capital:
Review tax, accounts payable and other liabilities to maintain cash flexibility.
Under the coronavirus assistance, relief and Economic Security Act (cares act), chemical manufacturers operating in the United States may benefit from several tax delays and other mechanisms.
These mechanisms include delaying the payment of the social security component of employer's payroll tax between March 27 and December 31, 2020; deferring to January 1, 2021 to meet the funding obligations of the fixed income plan; accelerating the ability to obtain corporate alternative minimum tax (AMT) credit carry forward refunds; and temporarily increasing the interest expense limit of enterprises. Companies with global operations should also assess government support and tax deferral options available in all relevant jurisdictions (as detailed here).
Manufacturers may also consider identifying deferred issued purchase orders, reducing payment frequency or delaying payment triggers, such as using the latter of invoice date or receipt date. Finally, enterprises can try to cooperate with owners to postpone or stagger the rent of office and production facilities.
The rationalization of the investment portfolio should be examined more strictly and the inventory should be adjusted appropriately.
In the past, chemical organizations (especially specialty chemicals) have been cautious, even silent, reviewing their portfolios to reduce potential product lines.
However, the larger and more diversified the portfolio, the more difficult it is to forecast demand. Without clear signals and accurate forecasts, companies will eventually hold more than necessary inventory. What is wasted in a better economy is at stake in today's environment.
This requires careful consideration of which product lines are profitable or can improve profit margins; which products should continue to be supported as demand is expected to rebound rapidly; and which products should be completely removed.
For example, if some SKUs do not move, do they play a strategic role in the portfolio and can they be replaced? Or, if customers try to order out of stock products, can they be replaced by slower or outdated products, thereby "slimming" and saving cash? For companies that are on the verge of bankruptcy and need to quickly decide to divest the right assets This rationalization is also necessary.
Collecting data is not complicated; demand signals are obvious. In this particular period, many customers from all walks of life are going to extremes - hoarding at one end and abandoning products entirely at the other - looking inside the warehouse will make it clear what customers think they can and cannot leave.
Cooperate and integrate with suppliers and customers to improve long-term common resilience and success.
As chemical manufacturers rationalize their portfolios, it is important to remember that their major suppliers and customers are also experiencing these difficult business environments. These include the oil and gas industry, which has been hobbled by demand disruptions and price wars, and auto companies that have been forced to suspend production in a downturn to protect the health and safety of their employees.
In fact, some suppliers are very important in the value chain. They produce different products for specific customers, and their business ability may be threatened. It's a difficult balance that requires negotiation, innovative thinking and a new business model.
Chemical companies are taking advantage of an opportunity to help suppliers improve their financial security, which is the supplier financing plan, using third-party financial platforms or funds. These financing programs can help suppliers to obtain cash when necessary without borrowing money, giving them the flexibility and support to provide uninterrupted products and services to manufacturers. In the past few months, we have seen an increase in the number of suppliers using these items in a number of industries, as well as an increase in the amount that suppliers pay in advance, rather than waiting for cash payments based on their payment terms.
The company should also make sure that customers and suppliers are facing serious financial pressure and understand their viability. Once we pass the immediate challenges and prioritize cash from customers, in addition to clearly understanding the potential impact, whether suppliers can no longer source materials for the company.