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Global firms facing tough operations decisions

As a labor of love, I am the chairman of a nonprofit that raises money to support educational programs for schoolchildren in the border region.

We recently had a board meeting to approve our 2021 budget. This meeting reinforced how difficult planning is during the COVID-19 pandemic. Many of our activities are contingent on the timing of the vaccine rollout. Venues for fundraising events have to be booked ahead of time and deposits made. We had deep discussions as to the odds of our world returning to a somewhat normal condition where more certain planning could be made.

Commercial trucks enter the U.S. from Mexico at the Santa Teresa port of entry in September. Companies that operate in the global market are being forced to make tough decisions about the future without knowing how the pandemic will play itself out in coming months. (Roberto E. Rosales/Albuquerque Journal)

Now imagine being a company operating in the global market, making production input purchases from suppliers and dealing with buyers, each facing the same uncertainty you are in – planning for the future in order to keep the company operating and trying to eke out a profit.

Years ago, the planning cases I did with groups in my MBA program were very useful in helping me navigate through business cycles throughout the years. However, no business case I imagine could approximate the horrible combination of a global pandemic, supply chain disruptions, protecting employees and having to navigate through trade wars that we are currently facing.

Global companies have several choices that they can make to mitigate any disruptions to their supply chains. The first is to carry more inventory of production inputs or of finished product that you are distributing.

This presents a few issues. A company will have to spend money upfront on inventory that it will not turn for a while. This will disrupt cash flow by tying up capital. Secondly, a company will have to make arrangements to house the extra inventory or lease/build additional space. Finally, there is a saying in production that for every square foot of inventory you are carrying, a square foot is not being used to produce a product.

Over the years, companies have moved to maximize every square foot in their plant for production, which can generate profits versus inventory, which is a cost.

Companies can also establish production/supply operations in countries where major customers exist. This entails having the capital to lease/buy space in the foreign country. It also involves operating in a foreign business culture, which could necessitate bringing in locals to help set up and manage the operation. In my profession, I recruit companies to the U.S. from other countries. Some have extensive business experience in American business culture. However, others are new to operating in the U.S. and I have witnessed severe culture shocks related to laws, logistics, accounting, finance, and taxes.

Managing the workforce either by increasing or decreasing employees to try to manage the future is another option. Increasing the workforce implies that a company is betting that the pandemic is in its final stages and pent-up demand is going to lift the economy. However, last year it was predicted that we would start to see the end of the pandemic in October. This then changed to the first quarter of 2021. Now, it is predicted that the COVID vaccine will not be available for all people residing in the U.S. that want it until summer. There are reports stating that at least 75% of the residents of the U.S. will need to be vaccinated in order to develop herd immunity that will successfully minimize the spread of the virus, thus letting normalcy return. Many Americans are already stating that they will not be vaccinated if the given the opportunity.

Decreasing your workforce to be cautious about the future economy also has its downsides. If employees are laid off, the company will probably have to increase the percentage of unemployment taxes that it is required to contribute. Finding good employees who are skilled, trainable, and a good fit is a challenge every HR manager faces. If the economy starts to grow in 2021, a lot of companies are going to be competing for the same pool of talent. This may make it difficult for firms who have laid off employees to ramp up their operations and take advantage of increased demand.

Companies can also set up contingency supply options with customers to help them neutralize risk in the future. This can be accomplished by offering customers better pricing or terms if they buy in larger amounts. This of course depends on the customer’s capital and ability to store more product. However, this is an option that will allow a company to have its customers share in the storing of inventory in order to deal with any supply chain disruptions.

Finally, a company can choose what seems to be the average human being’s preferred strategy: Do nothing and hope for the best. This is an option that does not work particularly well, especially when dealing in the global market. Managers that poorly plan don’t stay in their positions for long. However, even as much as the pandemic has taught us about dealing with uncertainty, many companies will fail because they are not proactive in managing the future and all of the surprises it promises to bring.

Jerry Pacheco is the executive director of the International Business Accelerator, a nonprofit trade counseling program of the New Mexico Small Business Development Centers Network. He can be reached at 575-589-2200 or at jerry@nmiba.com.

 

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