11 minute read
Special Feature: A break in the supply chain
A BREAK IN THE CHAIN
Since the beginning of Covid-19, companies around the world have been facing supplychain disruptions. In South Africa this has been exacerbated by civil unrest, floods, and the Russia-Ukraine conflict. Ang Lloyd chatted to a few CFOs to find out how they’re navigating these extraordinary challenges.
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According to the International Monetary Fund’s (IMF’s) global economic growth forecast for July 2022, supply-demand imbalances continue to play a role in high inflation and low trade output. Somewhat alarmingly titled ‘Gloomy and more uncertain’, the report says that if renewed Covid-19 lockdowns affect China, inflation rises even higher, and the RussiaUkraine conflict further constricts international trade and European gas supplies, global growth could potentially decline to a dismal 2.0 percent in 2023 – putting it in the bottom 10 percent of outcomes since 1970. South Africa is, of course, not insulated from these economic shocks; the IMF predicts that by 2023, the country’s growth will have fallen from 4.9 percent in 2021 to 1.4 percent. However, things are picking up. According to a June Statistics South Africa report, the volume of goods produced in factories increased by 4.7 percent quarter-on-quarter during the first quarter, export orders remained positive, and GDP growth seen during the same period returned the economy to its pre-pandemic size. Yet supply-chain issues remain a persistent thorn in the side of many South African companies. While demand has increased for several sectors, supply shortages continue to be a problem. Doing business has become incredibly expensive, too, with a 500 percent increase in the cost of using a 12m freight container to send goods by sea from China to South Africa. Not only must CFOs contend with supply-chain disruptions and stockouts at a global scale, but South Africa has faced its own challenges in the form of the July 2021 civil unrest, a cyberattack on Transnet soon after, April 2022’s KwaZulu-Natal floods, and, for good measure, stage 6 load-shedding. When all of this is combined, it makes a South African CFO’s job increasingly difficult. “In the current climate, conditions are so volatile that while CFOs plan for certain scenarios, we have seen over the last two years that anything is possible,” says Laila Razack, Equites Property Fund CFO. “There are the black swan events, too – the events we haven’t even contemplated yet.”
Just-in-time to just-in-case
Along with the cost of shipping and poor infrastructure, Africa continues to experience higher logistics costs than its global peers, which exacerbates long-standing issues like supply-chain bottlenecks, shortages, and lead times at borders. “Throughout the continent, the largest part of product-to-market costs is the cost of logistics, not the cost of manufacturing,” explains George de Beer, Imperial Logistics CFO. George adds that Imperial has had to juggle international challenges, like Brexit creating a driver shortage in its European operations, and the worldwide semiconductor shortage, which has severely impacted the global automotive industry. “These are all out of our control,” he says. “But we can make sure that our financial metrics remain sound and having a diverse portfolio gives you headroom if things go a bit pear-shaped.” Economists predict that a return to normal for the global supply chain is “unlikely” for the rest of 2022 and possibly longer. The days of cost-effective shipping, or even reliable road and rail transportation in South Africa’s case, are no longer a given, and supply chains need to be fortified.
According to Laila, a CFO in the logistics property space, supply chains are being bolstered to mitigate issues. “There is a paradigm shift from ‘lean and low-cost supply chains’ to ‘resilient and diversified supply chains’, which includes nearshoring manufacturing operations and using more suppliers locally. We are also witnessing a trend of retailers increasing inventory levels globally, as the strategy is evolving from a just-in-time to a just-incase model.”
As technology improves and supply chains become smarter and more efficient, logistics companies and retailers are consolidating multiple facilities into “campuses”. This, Laila explains, results in operational cost-savings from warehouse management to security. “We are also seeing massive investment in IT infrastructure to ensure robust and resilient supply chains.” Laila adds that retailers are rethinking their distribution models, and many are adopting omnichannel distribution. This means that customers can purchase and receive orders from several sales channels. For example,
Deepa Sita
they can purchase online and collect at a brick-andmortar store or purchase online and have the products delivered to their homes. “In this evolution of customer expectations, retailers have to re-evaluate their supply chains to provide a seamless offering to consumers,” she says.
Strategic supply chains and alternative solutions
When a factory is flooded, a warehouse looted, or a shipment pushed out, businesses and their CFOs need to act quickly. According to Tiger Brands CFO, Deepa Sita, this also means looking at the big picture. “As CFO, you need to have a good handle on market dynamics and the impact of your decisions on the business while balancing outputs,” says Deepa. “You can’t achieve this by just staying in your head office. You need to get out and network with customers and vendors to learn from them and see what other organisations are doing so that you remain relevant to your customers and consumers. This helps you source alternative solutions to challenges.” Tiger Brands – South Africa’s largest food company – has felt the full impact of the global supply-chain squeeze and the knock-on inflationary pressures, including soaring energy, packaging, and commodity costs. All of this has been exacerbated by the Russia-Ukraine conflict. More recently, the company’s suppliers – still recovering from the July 2021 unrest – were hit by flooding in KwaZulu-Natal.
“As a company, we have intensified our efforts to reduce costs and drive efficiencies to minimise the need for selling price increases,” says Deepa. “But significant price increases across most of the portfolio are inevitable.” For Deepa, fortifying and optimising supply chains is now crucial. Last year, Tiger Brands focused on stabilising supply-chain operational performance and put in place processes to boost productivity and efficiencies. The wheat price volatility due to the Ukraine crisis hasn’t helped matters, but the company is also taking steps to deliver organisational, process, and technology improvements. “Events such as the civil unrest and the KwaZulu-Natal floods highlight the importance of CFOs needing to continuously look for opportunities to reduce costs, drive efficiencies, engage in strategic sourcing instead of reactive and, importantly, invest smartly in activities that will drive top-line growth.” The lubricants industry has also seen a huge impact on its supply chains due to input costs of base oils, demanddriven pricing of containers and freight services, delays in shipping, and more. “The result has been erratic prices as various companies try to find ways to deal with the crisis,” explains Petrocam CFO Ridwan Gany. Petrocam Lubricants has a tactical approach to dealing with the disruption. “In times where the supply chain is erratic and unpredictable, chasing margin on its own is a recipe for disaster. Instead, we’ve taken the strategic approach of zoning in and focusing on market segments that we think provide the best possibility for future market share growth,” Ridwan says. He adds that, while these segments are not necessarily the most attractive in terms of margins at the moment, they do afford Petrocam the opportunity to provide the right product to the right people at the right time.
Laila Razack
“The logic is built on customer acquisition in an innovative, marketable and scalable manner, which we can leverage for growth when market conditions shift.”
Thinking on your feet
Pramy Moodley, Sappi’s Southern Africa CFO, knows all too well what it’s like to experience a major disruption – from both a supply-chain and personal perspective. She was in KwaZulu-Natal during the July 2021 civil unrest, and as CFO for a global paper and pulp provider, she had to navigate the fallout on multiple fronts. According to Pramy, the civil unrest brought Sappi’s operations in KwaZulu-Natal to a standstill, and the supply chain was negatively impacted. “Fortunately, we didn’t suffer physical damage to our property or forests, but we lost a substantial amount of money due to our three mills having to shut down for employee safety; from a personal experience, it’s something I don’t want to re-live.”
As Sappi’s Southern Africa CFO, Pramy had to think on her feet – not only from a profitability perspective but also from a working capital and cash flow aspect. She had to model the impact through collaboration with procurement, supply chain, manufacturing, and forestry teams. “The fact that we had various teams managing the process meant that we had sufficient stock in the pipeline for our customers, and we sourced raw materials from various suppliers to ensure that our manufacturing plants continued to operate,” says Pramy. To throw a spanner in the proverbial works, the Durban Port was subsequently hit by a cyber-attack, and only refrigerated stock was allowed through – not paper or dissolving pulp, as it wasn't considered critical stock. According to Sappi’s FY22 Q2 results for the period ended March 2022, the flooding in KwaZulu-Natal caused another temporary halt in production. The results caution that although Durban’s port officially resumed operations, export deliveries could be negatively impacted for some time due to damaged access roads, congestion, and limited availability of vessel space. “We anticipate that there will be no material impact on EBITDA for the year. However, after external insurance proceeds, the estimated net loss of approximately US$28 million will be reflected as a special item expense in the third quarter,” reads the Q2 results. After the floods, Pramy notes that Sappi reviewed the supply-chain process and optimised the existing shipping options to ensure the continuous supply of product to its customers.
According to the FY22 Q2 results, demand for a Sappi product, Sappi Verve, remained robust, and along with improved conditions at the Durban port and the use of the regular breakbulk vessel, resulted in a nine percent quarter-on-quarter increase in sales volumes. l
Ridwan Gany Pramy Moodley
WHAT CAN CFOs DO TO MITIGATE SUPPLY-CHAIN RISK?
According to data from risk consulting firm Verisk Maplecroft’s Civil Unrest Index Projections, 75 countries may experience an increase in protests by late 2022 – and South Africa has a medium-to-high level index score.
Many supply-chain issues are indeed out of the CFO’s hands, but for Laila, bolstering resources for security is a good place to start, especially when it comes to strategic facilities and those deemed essential for the provision of food, medication, and basic goods. “Equites Property Fund is engaging with many tenants looking for innovative ways to improve security in the short-term,” she says. But, she adds, in the long term, society, businesses, and government need to understand the root cause of civil unrest and take active steps to remedy this. “We have a highly unequal society, with structural economic challenges. Unless we remediate some of these challenges, the strikes will remain a concern for us.”
Premy believes that CFOs and big business need to pressurise the government to improve infrastructure, which is not up to standard. “Sappi is often forced to use road instead of rail, and with that comes significant cost. Government must ensure that our ports are operating at the levels they should be, too. Despite being sub-Saharan Africa’s biggest container hub, Durban is a very poor-performing port by global standards." According to a 2021 World Bank container port performance index, Durban was ranked 364 out of 370 (last place goes to Los Angeles Port, which in 2022 has seen ships having to float offshore for weeks before they can unload due to the container backlog). Deepa adds that Tiger Brands remains concerned about the potential for social upheaval to reignite, which is why CFOs must have contingency plans to mitigate risks. “The July 2021 civil unrest and looting placed that risk high on the agenda,” says Deepa. “The work we are doing to optimise our supply chain has gone a long way in contributing to how we mitigate any risks.” For George, creating public-private partnerships will go a long way to increase investment into Africa’s logistics infrastructure, and boosting local manufacturing to enhance cross-border trade across the continent is critical. “For CFOs, a digital supply-chain strategy is key to enable growth by providing coherent processes and systems that support core business and strategic delivery, and by facilitating access to new value propositions and revenue streams.” Chief financial officer or chief resilience officer?
For Pramy, the volatility in the markets makes it very difficult to forecast impacts on profitability, managing work capital, and ensuring you have sufficient cash flow to operate – and forecasting is key to what CFOs do. But this also means that CFOs need to be resilient and agile. “I've been in my position for almost six years, and three out of the six have just been continuous change. It's no longer number-crunching; it's more about how you adapt to change and overcome this swiftly. Covid-19, riots, flooding – you must think on your feet all the time and find the best solution as quickly as you can, otherwise it impacts your operations, and your competitors will take bigger leaps than you.”
