4 Dynamics Shaping Supply Chain Leaders’ Priorities in 2023
By 7 minute read• Published January 5, 2023 •
Heading into 2023, supply chains will encounter growing turbulence on many fronts: financial, operational, and geopolitical to name a few. An unstable business climate will define the first half of the year as a global recession looms in some regions while gaining further momentum in others and critical energy, food and labor shortages will strain productivity in already stressed supply chains.
The headwinds that will shape supply chains in 2023 will be largely out of business leaders’ control. Examples include geopolitical conflict and tensions in Ukraine and Taiwan as well as financial stressors, including liquidity concerns, currency exchange volatility and rising interest rates. Current uncertainty will likely give way to even greater turbulence in the early months of 2023 – the implications of which will be felt for some time.
Business leaders will take bold steps to financially fortify their supply chains in response to ongoing disruption. These measures will also likely uncover new opportunities for improved efficiency and supply chain diversification.
This blog explores four trends driving supply chain business leaders’ priorities in 2023. These trends reflect macroeconomic observations, supply chain finance trading data across PrimeRevenue’s B2B payments platform, and conversations with supply chain business leaders across the globe.
1. Recession in Europe will precipitate a liquidity crisis that will have global implications.
While the U.S. is expected to narrowly avoid a recession, Europe inches closer to a recession that will likely pick up through the first quarter of 2023. The European Union’s executive commission slashed its 2023 economic growth forecast as peak inflation along with high fuel and heating costs shrink consumer confidence and purchasing power. In the U.S. and UK, financial leaders are facing a potential liquidity crisis amid new tax policies, corrective actions by central banks, and bond market pressures. In October 2022, U.S. Treasury Secretary Janet Yellen expressed concern about “a loss of adequate liquidity” in the $23.7 trillion market for US government securities.
All signals indicate at least one-third of the world economy will enter a recession in 2023 as a result of record inflation, rising interest rates, and labor market volatility. According to the World Bank, global growth is in its steepest slowdown since 1970 with further slowdown expected. This persistent volatility will have a lasting impact on emerging and developing economies and further tighten access to liquidity for businesses. Business leaders will focus on building up liquidity reserves and generating operating cash to grow their business despite economic turbulence.
2. The global chip shortage will not ease up until late 2023, and even then, industry prioritization will affect supply.
While there are earnest efforts to expand chip-making outside of China and Taiwan’s borders, the simple truth is the vast majority of production still happens within their borders. Disruption continues to drag down production volumes as the region endures changing Covid policies, raw material and labor shortages, and more expansive government controls. It will be at least 2024 before the economic pain inflicted by the global shortage subsides – and possibly longer particularly if geopolitical tensions between China and Taiwan escalate.
This has prompted many countries – and the chip manufacturers themselves – to expand production capabilities to new regions. The U.S. has allocated $39 billion for chip-making grants and European countries are offering incentives to help double the continent’s share of global production by 2030. While these efforts are well underway, the lead time for relief is long. For example, TMSC announced a new $12 billion plant in Arizona in 2020, but mass production won’t happen until 2024. Even if production stabilizes in early 2023, the shortage will likely continue for another year or more as companies rush to prioritize and meet backlogged demand. One example is the automotive industry where manufacturers must first meet pent-up demand from rental car companies before consumer demand.
3. The gas and grain crisis in Ukraine and Russia will have global implications, but also reveal massive opportunities.
The war in Ukraine (on top of increasing climate shocks and pandemic-related disruptions) will continue to have far-reaching implications for countries that rely on Ukraine and Russia for oil, gas and grain.
However, once things stabilize in Ukraine and Eastern Europe, there is tremendous opportunity for growth that will have similar downstream, albeit positive, impacts. Ukraine’s economy pre-invasion was one of the fastest growing economies in the world. Its booming middle class was bolstered by thriving agriculture and tech sectors. Its neighbor, Poland, was Europe’s 6th largest economy by nominal GDP and a major producer of machinery and mineral raw materials.
Stabilization in these regions (and forward-thinking investment strategies) will reveal opportunity for strong growth as demand for these outputs remains high. Business leaders should be prepared to identify and take advantage of these opportunities, and pursue them with financial agility and responsiveness. In some cases, this may require expanding liquidity options that will enable the business to move fast without negatively impacting key financial metrics.
4. Chief Supply Chain Officers’ (CSCO) decision-making will pivot from efficiency and just-in-time to resiliency and just-in-case.
Chief Supply Chain Officers will have their work cut out for them in 2023. They must prioritize operations and seek ways to re-engineer technology, systems and processes that ensure inventory is available to be moved to where it’s most needed. CSCOs will have to factor labor loss risk into every decision.
It’s important to point out that most supply chains are currently not nimble enough to be truly resilient and adaptive because they are primarily wired for just-in-time outputs. There is no room for excess inventory within a framework of fervent efficiency, but this strategy is ineffective during periods of sustained volatility. Businesses have a massive opportunity to rebuild and re-engineer systems and processes that allow for better resiliency.
Supply Chain Finance Will Play a Key Role in Improving the 2023 Financial Outlook
The outlook for 2023 reflects anticipated turbulence, disruption, and stabilization – all of which require liquidity to effectively navigate. Businesses will seek ways to shore up liquidity and reduce financial risk as record inflation in addition to higher operating and growth costs persist. Traditional options like commercial lending will be less attractive – or unfeasible altogether – due to rising interest rates.
For many businesses, supply chain finance represents an untapped tool in their liquidity toolbox. Aside from being drastically more affordable than other forms of liquidity, it improves working capital and cash flow for both buyers and suppliers. These funds can be used to buffer the impacts of a recession, diversify operations and supplier bases, and expand to new regions and sectors. Supplier finance programs will provide business leaders with the financial confidence to realign their operations and decision-making to a more turbulent business climate – while also uncovering new growth opportunities on the other side.