Supply Chains of the Future: Recovery-Proof Solutions
By Eleanor Hill, Editor
The Covid-19 pandemic has highlighted the fragility of supply chains across the globe. TMI speaks to five industry experts to understand how treasurers can help shore up supply chains right now – with quick-to-implement solutions, ranging from dynamic discounting to e-invoicing. We also look at the future of supply chains, given a potential resurgence of domestic sourcing and the rise of sustainability, examining how companies can finance their supply chains to prepare for the economic recovery.
More than 200 of the Fortune 500 have some form of operations in Wuhan, China – the so-called epicentre of the Covid-19 pandemic. This fact alone highlights how reliant the world has become on international sourcing, and how fragile supply chains can become when faced with disruption from unforeseen events.
Although China is now reopening, productivity levels are nowhere near ‘normal’. And the Western world is, at the time of writing, largely still in lockdown. It is fair to say that the impact of Covid-19 on supply chains – not to mention purchasing habits – has been immense.
Edi Poloniato, Global Head Working Capital Solutions, Kyriba, a leading provider of liquidity and supply chain solutions explains: “We are experiencing an unprecedented event. Even if some vital sectors, for example agriculture, consumer goods, medical supplies, are seeing significant, and rare, demand surges, all economic players are affected. As a result, purchase and demand are impacted at the same time, which blocks financial chains.” Currently, we observe three main demand and supply scenarios:
- Immediate Demand Surge – Supply Shock: Sectors providing food, essential personal care and health goods have been experiencing ‘stockpiling’ and demand in these sectors has gone through the roof because of panic purchases. “Those companies are struggling to meet exponentially increasing and unexpected demand, despite core suppliers pushing the limits of their production capacity,” says Poloniato.
- Mid-term Demand Shock – Supply Shock: Non-essential industries such as retail and electronics are a part of what the mid-term demand shock – supply shock category. “They are experiencing a lagging demand that will likely bounce back relatively quickly once different parts of the world start coming out of quarantine,” he notes.
- Long-term Demand Shock – Supply Shock: Non-essential, premium/luxury products and related industries such as automotives, travel, hospitality and tourism are a part of the long-term demand shock – supply shock category and will most likely experience a much lower recovery rate in demand. “As such, they are likely to struggle the most to avoid bankruptcies and serious cash flow crunch while wrestling with supply chain woes,” he believes.
James Binns, Global Head of Trade and Working Capital, Barclays, agrees that it is a mixed picture. “As Edi has highlighted, sectors related to food, healthcare, or daily essentials are currently experiencing high demand, so some corporates are looking for additional working capital to help meet that demand. At the other end of the spectrum, in the leisure and hospitality sector, and certain areas of the transport and travel sector, for example, businesses are looking for assistance via government schemes such as the UK’s Coronavirus Large Business Interruption Loan Scheme [CLBILS], which helps businesses to access finance up to £200m.”
Box 1: How does SCF work?
For those sectors that are impacted in less extreme ways, explains Binns, “we are seeing clients use a mix of CBILS (for smaller businesses) and CLBILS with working capital solutions. This is an interesting trend as corporate treasurers are proactively re-evaluating funding solutions, looking beyond the more traditional overdraft and debt-related avenues they have relied on previously”.
As a result, Binns believes there is rapidly growing awareness of the funding requirements of supply chains and the sustainability of supply chains going forward. “While buyers are looking to optimise their payment terms, they are equally aware of the need to help suppliers survive the crisis in order to maintain the integrity of their supply chain for the future. Buyers are also becoming more aware of the importance of their smaller suppliers – and the cash flow issues these types of businesses face. Interest in financial solutions to reach the longer tail of smaller suppliers is therefore gathering pace.”
Early payment solutions
Against this backdrop, an increasing number of buyers are looking to leverage reverse factoring, also known as supply chain finance (SCF), solutions for their large and medium-sized suppliers (see box 1), while deploying dynamic discounting (see box 3) for their smaller suppliers.
Box 2: The benefits of SCF programmes
During the financial crisis of 2008, which generated demand shocks and triggered significant global supply chain risk, many companies (especially those in manufacturing and retail sectors) found solace in SCF programmes to help improve their survival rate and future preparedness during the liquidity crunch.
According to Poloniato, Kyriba’s customers who adopt a working capital optimisation programme through SCF, benefit from numerous advantages, including:
Poloniato explains: “If the buyer does not want its working capital to deteriorate or if it wants to increase its free cash flow by extending the payment terms, implementing an SCF programme can be an efficient solution. While this days payable outstanding [DPO] strategy obviously ‘generates’ cash, it does not have to be applied at the expense of suppliers which may especially be feeling the crunch of quarantines, intermittent production cycles and distribution challenges. That is why buyers can help suppliers by offering early payment terms via SCF banking partners.”