How to Offset New Supply Chain Disruptions with a Working Capital Initiative
By 5 minute read• Published May 3, 2022 •
How much more disruption can global supply chains afford to take? It’s difficult not to reflect on this question as the end of the first half of 2022 comes into view. We are two years into a global pandemic that has forever changed the way we operate global supply chains. As soon as we believe the end is in sight, there is another challenge that puts our supply chains further in the hole. Whereas most supply chain professionals were focused on efficiency pre-pandemic, today the key focus is on agility, resilience and sustaining supplier operations. While the magnitude is significant, the reality is the challenges of today (and the changes they’re generating) are the latest in a series of major changes most supply chains have been experiencing for over a decade.
Disruption – the historic kind that reverberates across the supply chain – has been happening at a steady clip for some time now. Starting in the mid-2010s, digital transformation began sweeping through virtually every industry, prompting large spikes in innovation investment. Companies (and their suppliers) had to either embrace these changes or risk falling behind. That mandate has applied to every aspect of the supply chain, including payments. Digitization of key documents and transactions in the commerce between buyers and suppliers has no longer become a competitive advantage – it is a barrier to entry.
For the better part of the last decade, there was an orderly evolution to how companies and their supply chains responded to this mandate. They executed their long-term digital transformation strategies systematically and proactively. Until March 2020.
The Year of Stabilization Takes a Different Turn
The pandemic was the hit no one saw coming, of course. Supply chains were forced to reorient amid surges in demand, persistent supplier and labor shortages. Not only were specific suppliers lost, our data clearly shows that entire ports, countries and even regions went offline for a period of time. When systems go down for days, weeks or even months, the work to return those systems (global supply chains) to equilibrium takes much longer. Working through that stabilization was what we anticipated 2022 to be about for global supply chain managers.
Today, we’re reckoning with a global crisis of another sort. The unfortunate crisis in Ukraine is ushering in a new wave of supply chain disruptions that are directly and indirectly impacting buyers and suppliers across the globe, on top of the already historic level of volatility. As the cost of oil rises, so do logistics costs. But that’s just one dimension of the supply chain impact. Ukraine and Russia account for 25 percent of the world’s wheat supply. And Russia’s attack on Ukraine has halted more than half of the world’s output of semiconductor-grade neon for computer chips.
Supply chains across the world are feeling the reverberations of this conflict as business leaders assess the risk of further regional destabilization. That’s prompting global supply chains to transform into supply webs according to The Wall Street Journal. Journalist Christopher Mims summed it up nicely:
“Now, sanctions against Russia, the continuation of the trade war with China, natural disasters and the production and shipping capacity knocked out by the invasion of Ukraine appear to be making issues with globalized supply chains chronic.
For many companies, the pandemic-fueled pause in globalization is turning into a broad effort to figure out how to make supply chains more robust by adding more factories, suppliers and sources of materials. It isn’t deglobalization by any stretch, but it is an expensive and time-consuming reshuffling of where things are made.”
Is Now Really a Good Time to Launch a Working Capital Initiative?
Business leaders are seeking ways to financially stabilize the supply chain as well as protect their most vulnerable supply chain partners. Two games must be played here – the long one and the short one. Strategies for the long game include things like nearshoring, supplier diversification and infrastructure investments. They are heavy lifts that require significant time and investment in not only ensuring access to resources and raw materials, but in many instances, re-education of labor forces. Suppliers must be stood-up and that requires resources, labor and cash.
The short game is more tactical. How can we help our current suppliers survive another wave of disruption when, in many instances, they are already struggling to tread water in a very stormy sea? What can we do now to fill gaps in supply to accommodate demand? And how can we do these things in the context of inflation and rising interest rates?
One of the most economically sound ways to accomplish these long- and short-term goals is through a working capital initiative like supply chain finance. It allows companies to unlock liquidity currently trapped in the global supply chain while giving suppliers access to early payment. By accelerating payment on invoices for goods and services that the supplier has already earned, they can access cash at the most efficient rates in the market. As an alternative to commercial lending, it’s especially attractive right now amid rising interest rates. Companies can increase liquidity without increasing debt and resulting cost of funds. And suppliers can accelerate cash flow at a fraction of the cost compared to the cost of a loan.
It’s a win-win for the entire supply chain and the financial impact is immediate. A short runway to impact is one reason why so many companies are showing new interest in supply chain finance or looking to revive and modernize previously launched programs.
Broad-scale disruption isn’t going anywhere – it’s a reality that financial leaders must adjust to as they strategize stability with their supply chain counterparts. Perhaps the question worth answering is not how much more disruption can the supply chain afford to take. It’s how can global supply chains be prepared for whatever disruption will be thrown at them.
If the last several years have taught us anything, it’s the importance of being prepared – financial and otherwise – for the next big disruption no matter how unthinkable or sustained it may be. The winners of today and the future must have the tools available to ensure resilience, flexibility and sustainability. For themselves and every supplier in their supply chain.