Today’s headlines are a firm reminder of how quickly and extensively global supply chains can become disrupted, and how far-reaching the impacts can be. Some disruptions can be spotted far ahead in the distance giving companies a longer runway to prepare. For example, the possibility of a recession or market correction has been on the minds of economists and business leaders for some time. As a result, many companies have spent much of the past year paying down debt, getting their financial house in order, and tuning their business strategy.
Other disruptions, however, strike with little or no forewarning. Preparation only goes so far in mitigating the impact of these events – what companies really need is resiliency.
Operational and supply chain resiliency is by no means a new concept, but an increasing number of dynamics (economic, geopolitical, environmental, etc.) have put pressure on the global supply chain. According to Deloitte’s global extended enterprise risk management survey, 74 percent of organizations surveyed faced a disruptive event with third parties in the prior three years. As many as 20 percent experienced a complete third-party failure or an incident with major consequences. Resultingly, resiliency has become more important than ever.
The window of time companies have to respond to a disruptive event has also narrowed. Per Deloitte, an issue can “go from miniscule to calamitous in no time.” Some of this can be attributed to an ever-increasing global economy, supplier specialization, centralized labor and capital, and greater precision in production and inventory forecasting.
While this level of efficiency saves time and resources, it also means disruption in any area can be felt upstream or downstream in a shorter amount of time. Centralization, for instance, has long been hailed for its financial efficiency by enabling companies to minimize unit costs through centralized labor and capital. However, companies are now beginning to realize the vulnerability of relying on single points of failure. Case in point: companies who relied on Chinese suppliers are now feeling the severe impacts of COVID-19, which has shut down supply chains completely in China and left many companies scrambling to find other suppliers.
Another reason is the hastening speed of information flow – namely through social media. Many companies, particularly direct-to-consumer, have found the transparency required by social media to be a double-edged sword. A positive review can go viral, but so can negative buzz borne out of an unexpected disruption, including the supply chain.
A Resilient Supply Chain Starts with Financial Resiliency
Today’s business climate is volatile, and with volatility comes a requisite to be nimble and resilient. Supply chains must be able to adapt and respond to disruption, no matter if it stems from positive innovation or negativity. The key is that supply chain resiliency cannot exist without financial resiliency.
- Assessing, managing and mitigating supplier risk. To quote Deloitte again: “Many business leaders view risk as a negative and risk management solely as a lever to protect value. Instead, companies can begin to think of risk as a strategic component and, if managed effectively, an opportunity to create value for the organization. To get on top of these potential threats, Yauch says you must identify what your true risks are. After that, transform processes to help manage and mitigate that risk. Here, no process is safe. Rethink everything from initial due diligence in selecting vendors to off-boarding after terminating them. Finally, through risk sensing, you can leverage external data to gauge the likelihood of future disruptions—whether they’re expected or they emerge as unknowns.”
- Protecting and optimizing cash flow, among other core financial metrics. Companies can’t afford for working capital to be trapped in the supply chain. This capital should be used to strengthen the company’s financial health so that’s it better prepared to face 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, companies must respond with speed and agility. In some cases, that may mean quickly onboarding a new supplier 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 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”, so to speak, can make it incredibly challenging to quickly pivot or bounce back from disruption. Recent trade tensions and the COVID-19 pandemic are impacting supply chains around the world, but diversifying labor and capital allows businesses to more nimbly respond without interrupting normal operations.
There are many ways companies can improve their financial resiliency and foster broader resiliency across the supply chain. One is supply chain finance, which creates and amplifies financial resiliency 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. That results in buyers and suppliers having immediate access to the liquidity required to fund and navigate disruption and change – both of which show no signs of slowing in 2020.