COVID-19 is forcing business leaders around the world to reconsider the way they manage resources and investments, including real estate. While many white-collar employees are working from home, and CFOs in those industries are taking steps to reduce office space, social distancing is more difficult in manufacturing and industrials, where most jobs cannot be done remotely.
For David Yeaman, president and co-owner of the Canadian injection moulding service Molded Precision Components (MPC), laying employees off was not an option he was willing to consider. MPC, which manufactures precision plastic components, was already mostly automated, so social distancing was less challenging.
But despite expecting a major slowdown in demand (MPC mostly supplies the automotive industry), Yeaman knew he could find other ways to put his talented team of engineers to work.
“What can we do within our four walls?” he asked himself. The company has its own design, engineering, Moldflow, 3D printing, 3D optical scanning, tool design, tool build, automation, and manufacturing all in house. “So I told everyone, ‘I don’t know what we are going to do yet, but with the talent we have at MPC we will surely figure out a way to redeploy our resources and make a difference fighting COVID’.”
But that something else required a rethink of MPC’s processes and floor space needs. FM spoke to several experts about the questions other manufacturing finance professionals facing the same challenges should be thinking about when it comes to real estate decisions.
Can you expand your space?
No one knows how long the virus will remain a threat. But even in the immediate term, for businesses that have had to pause or slow activity, it is worth considering whether expansions or reconfigurations can be made to an existing footprint to allow for social distancing and get operations up and running again — or running at fuller capacity.
“Unless you can wrap production like a snake within walls [of your facility], you have to think about expanding those walls out and extending the production line,” said Byron Carlock, CPA, PwC’s US real estate practice leader based in Dallas.
That said, it can be difficult to spread out continuous-flow production lines. In order to add length to a conveyor belt, you need to move every piece of machinery along the belt, said Andrew Burn, KPMG’s UK head of automotive. That can be an expensive challenge in a time of retrenchment and recession. Then there are quality control questions to consider.
“Think about the food sector. You get products coming out of ovens and into coolers or packaging, and it’s very difficult to start stretching the production lines because sometimes you lose the integrity of the product you’re manufacturing,” Burn said.
Can you open some locations and not others?
After months of lockdown, executives and employees alike will be itching to get back to work, but it may not be possible to restart all activity at once. For larger-scale companies with a global footprint, one option might be reopening facilities in regions deemed safe while continuing to suspend those in more at-risk areas.
“As different countries come out of various forms of lockdowns, and demand for your product in aggregate might be 10% to 20% down, you don’t necessarily restart all your factories,” said Simon Jonsson, UK head of industrials at KPMG.
For example, you might restart your factory in France but not in Germany, or restart one at 100% capacity and the other at only 50%.
“Within your global footprint of sites you have spare capacity, and there may be rationing you can do between individual sites,” Jonsson said.
Can you bring people back with PPE and testing?
Ever since the pandemic reached the US, the executive team of Biena Snacks, a Massachusetts-based snack brand, has been in close contact with its food processors, packagers, and other third-party suppliers.
Jim Soby, CPA, CGMA, Biena vice-president of finance, has seen food manufacturers across the country forced to slim down production and focus on core products, stagger and run more shifts, and keep factories going almost 24 hours a day or seven days a week to allow for social distancing and slower production lines.
But Soby, who used to be CFO of Nestle’s Tribe Mediterranean Foods, is hopeful that with more personal protective equipment (PPE) now available, businesses will be able to bring more people back to work.
“For us, it was more of a temporary situation. …There was very little high-grade PPE, so there was a run on supply,” Soby said. “Now people are getting back to normal with PPE."
He noted that buying masks and other protective equipment, as well as implementing temperature checks and testing, is much less costly than running factories for additional hours.
Can you change your product mix?
To address the slowdown, MPC decided to design, tool, and manufacture high-quality, recyclable, reusable face shields and immediately began working on prototypes, while simultaneously continuing to produce automotive parts to be ready when that industry picks up again. "We made all kinds of decisions without any assurances whatsoever, but had we not made them at the time, the opportunity would have disappeared,” Yeaman said.
By acting fast and on intuition, MPC was able to provide nearly half of the Canadian government’s order for face shields; it is supplying over 50% of the government's demand — about 27 million shields. It hired additional full-time and temporary staff, invested in more equipment, and will significantly surpass its usual annual revenues. But what about the floor space?
In switching products and boosting revenues, the company was able to afford temporary trailers plus additional space rented from other manufacturers that had suspended activities. It was also able to accelerate plans for a new building that had already begun before the pandemic.
In other words, MPC actually expanded its physical footprint as well as its staff and production. It was able to do so because of the additional revenues from the pivot to medical manufacturing.
What about warehousing?
Many manufacturers are struggling to find enough warehouse space as they experience a slowdown in demand due to COVID-19 while continuing to build stock to buffer the supply chain.
“Where do you house your input raw materials and your output materials?” said KPMG’s Burn.
In the UK, warehousing had become a problem even before the pandemic.
“Think about Brexit. We all know that warehousing was becoming a premium commodity as people were stock-building,” Burn said.
For MPC’s Yeaman, the key is to get creative and think outside the box — or building.
His team, which actually emptied the warehouse to make room for the face-shield operations, found an unusual short-term solution for the stock that had been cleared out: They asked the local township for permission to borrow a temporarily closed hockey rink, as well as an empty firehall. They also asked a drive-in theatre across the street if they could borrow parking space for all the temporary new staff.
Longer term, MPC will rely on the new building, which is being expanded to 45,000 square feet from the previously planned 30,000. Yeaman is confident it is worth the investment; even as the demand for face shields eventually slows, he will remain in the medical equipment market, which offers better margins than automotive products. He will also continue to manufacture auto parts, however, and expects to pick up additional transfer business as competitors fail.
Yeaman’s advice to other financial managers making tough real estate decisions? “I would get creative,” he said. “One of the biggest things is the willingness to collaborate — to put aside competition and find collaborations that make sense.”
For more news and reporting on the coronavirus and how management accountants can handle challenges related to the pandemic, visit FM’s coronavirus resources page.
— Portia Crowe is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.