The Key to Unlocking Supply Chain Resilience is Financial Flexibility

By Brian Medley • Published February 7, 2023 • 5 minute read

Since 2020, business leaders have maneuvered around an ongoing cycle of disruption and recovery. There are few areas where this has been felt more acutely than in the supply chain. Inventory shortages, lockdowns, fluctuations in demand, geopolitical conflict and economic turbulence have all been top-of-mind. But yet another challenge will demand the attention of business leaders in 2023: a shifting global economy.

Even the most confident sectors of the market are paying close attention to rising interest rates, inflation and fears of a global recession. Fortunately, these concerns have been a long time in the making, and many companies have gotten a head start on paying down debt, getting their financial house in order and tuning their business strategy accordingly. Even still, there are growing concerns around liquidity as markets tighten, economic forecasts waver and instability persists.

Supply chain and finance leaders are asking: How can we financially fortify our supply chain? How can we minimize risk? How can we do all this while also preparing for the next unknown – especially considering some disruptions strike with little to no forewarning? The answer is adopting strategies that provide financial flexibility so companies can tackle challenges head on as they come.

A Resilient Supply Chain Starts with Financial Flexibility

In early 2021, we published a blog about the importance of financial resiliency in the supply chain. There are clear similarities between the volatility many businesses were facing in the early days of the pandemic and the volatility they’re facing today. Yes, the formula has changed a bit – less lockdowns and shutdowns, of course – but the overall effect is still the same.

Supply chains must be nimble and resilient on all fronts. This includes the ability to adapt and respond to disruption, but the only way to achieve that is through financial flexibility. Supply chain resiliency cannot exist without the freedom to allocate resources to appropriately respond to disruption. It also empowers companies to quickly pivot to an offensive stance once disruption calms down, and invest in growth strategies that build the business.

Supply chain resilience can be built in several ways:

Assessing, managing and mitigating supplier risk. Companies must view risk as a constant and, if managed effectively, as an opportunity to create value. This requires identifying what your true risks are and re-engineering processes to manage and mitigate those risks. Consider every process – from supplier onboarding to offboarding and everything in between – to detect and anticipate risk.

Protecting and optimizing cash flow, among other core financial metrics. Companies can’t afford for their valuable working capital to be trapped in the supply chain and pushing that burden to suppliers weakens supply chain resiliency and increases cost. Instead, all available dollars should be used to strengthen the company’s financial health and better prepare for unexpected disruption. Corporate debt, leverage ratios, credit ratings and Return on Invested Capital (ROIC) are all areas where working capital optimization can offer significant improvement.

Ability to fund disruption-driven response and change. When supply chain disruption occurs, regardless of what or why, companies must respond with speed and agility. In some cases, that may mean quickly onboarding new suppliers or standing up new infrastructure and production processes. Regardless, the ability to quickly access liquidity to fund changes in the supply chain – without taking on new debt – is paramount.

Helping suppliers navigate disruption. Disruptive events can be felt throughout the entire supply chain, but the effects of those events can be wildly disproportionate. An OEM may take a hit on Wall Street, but their suppliers could go out of business altogether. Financial resiliency across the supply chain requires buyers to play a role in helping their suppliers navigate disruption by ensuring cash flow impacts are minimized and/or mitigated.

Decentralizing the supply chain. “Putting all your eggs in one basket” can make it incredibly challenging to quickly pivot or bounce back from disruption. Diversifying labor and capital allows businesses to more nimbly respond without interrupting normal operations.

Many businesses have taken bold steps over the last three years to make their supply chains more resilient in many areas. But the pressures of 2023 will test supply chain resiliency in a different way. This year will be a litmus test for financial flexibility as companies strive to protect and improve cash flow amid tougher market conditions.

One way supply chains can improve financial flexibility across their supply chain is through multi-funder supply chain finance.  Supply chain finance programs create and amplify financial flexibility for both buyers and suppliers. It allows buyers to free up cash that would otherwise be trapped within the supply chain while also enabling suppliers to get paid early so they can accelerate their own cash flow.

It’s also less risky than bank-led supply chain finance programs that typically rely on a single source of funding. This is especially true in the current liquidity climate where banks are under increased stress and are more likely to exit a market or pull back funding. With multi-funder supply chain finance, buyers and suppliers have immediate access to the liquidity required to navigate disruption and change – a much-needed enabler of the financial flexibility that will be required to sustain companies in the years ahead.