Evaluate your supply chain to optimise costs under COVID-19 situation

As we mentioned in our last email that cost optimization is critical at this time. This is the time to be frugal. Remove all the flab and be lean and efficient. Focus on your core business. Bad costs (unnecessary spending, bad performers, traditional working methods, non-core operations, etc) need to be ruthlessly eliminated. We also discussed some ways to mitigate costs.

This brings us to our next topic of managing your supply chain. Re-evaluate them. The objective of this exercise is to find this:

• Are your suppliers weak: Would your suppliers be able to handle this situation? Would they be able to supply material to you when the lock down lifts and later? If not, what are your other options? Also, can you support them in any way?
• Are your suppliers strong:  If yes, can they extend better credit terms or lower prices to you? Can they help you out in any other way?

How to approach:

1. Identify critical vendors: You should identify and evaluate two kind of suppliers.
   • One from whom you purchase a significant amount of goods/service
   • The other from whom you purchase any critical goods/services, which is not easily replaceable
2. Communicate: This is crucial. Have frank and open conversations with your suppliers. Try to find a middle ground with your suppliers, so that the burden can be shared justly. Communicating will also give you a pulse on their financial and operational situation also. This will help you plan your operations.
3. Create backup: Even if your suppliers are strong, it will be useful to have some backup options in case they are not able to deliver. We are living in very uncertain times, and unexpected should be expected. Have a few standby options for important supplies.
4. Financial evaluation:
   1. Financial growth and margins:
      1. Check growth/decline in operating revenues of your suppliers in the last two financial years. Were they growing or slowing down? This will give you an idea of their business, pre-corona stage.
      2. Compare their revenues and profit margins (EBITDA and PAT) with other similar companies in the industry. This will give you a pulse on the company situation vis-à-vis industry. Was the company doing better or worse than the industry? This will directly tell you whether you can depend on the supplier or not.
   2. Other business interests: Check if your supplier has other businesses or has directorships in other companies. Multiple business interests means less focus on one business. And focus is crucial currently. You can find this information for free from Tofler’s website or Tofler Company 360 product. Just find your supplier business on Tofler and explore its company network there.
   3. Days receivables outstanding ratio: This ratio indicates average number of days in which a company receives its payments from its clients. For example, if your supplier has days receivables outstanding of 45 days, then that’s the average time in which it expects the payment from its clients. You should check this ratio for your suppliers. Then look at the days in which you make payment to your suppliers. Is that less than their ‘days receivables outstanding’? Perhaps, you can negotiate better credit terms or lower prices in that case.
   4. Are you a big client to your supplier:  Some of you would just know. For others, who are not sure about this – compare the size of your contact with your supplier’s last year operating revenues? Is it a significant part of his revenue? Basically, are you an important enough client for him? He might then be willing to negotiate more on the payment terms and prices, at least, for a short time.

How to find this information:
You can download financials of your suppliers and its peer companies from MCA and compare their revenues and profits. You can calculate their profit margins and receivables ratios from the financial numbers. Or you can also use financial reports or Tofler Company360 product which provides all such information on your supplier with pre calculated profit margins and important ratios. Currently, you will get financials for March 2019. However, they can still be put to good use.

In our next blog, we will share insights provided by CEOs of biggest Indian companies on business outlook and expected economic changes.

Besides, please find links to our previous writeups related to COVID-19:
How can businesses deal with economic impact of COVID-19
Addressing issue of salary expenses in the COVID-19 situation
How to optimise costs for better cash management under COVID-19 situation