Business research

Focus on supply chain risk

Supply chain management has been a difficult problem for over two years now.

Just-in-time inventory management seems to be a thing of the past, with disruptions so widespread that we may well see top-tier companies being praised for their supply chain management capability.

COVID shutdowns and stay-at-home orders have hit manufacturing and logistics hard, and the Russia-Ukraine conflict has produced additional economic shocks, particularly in energy and commodity markets.

The costs associated with these supply chain disruptions increase and are reflected in the final prices of goods. Rapid increases are now commonplace, in contrast to the long period of flat or falling prices over the past three decades.

These global events may well have a long-term effect and smart companies are acting now. Here is an overview of some of them:

Inventory buffer and associated financing

A natural response is to source excess inventory as a protective measure.

The challenge is that logistics costs have skyrocketed. Containerized freight charges have increased by several hundred percent over the past few years, and with competition for available capacity, it is difficult to successfully plan the movement of freight.

These factors have led to a large increase in human and financial resources devoted to the supply chain function and reduced margins for companies with less pricing power.

For companies that can consolidate their freight into larger shipments or have more regular freight needs, they may be able to get priority or even a discount inherent in their considerable purchasing power. On a cooperative basis, small businesses can seek to emulate this model. Having a strong relationship with freight forwarders has never been more important.

Excess inventory sourcing as well as logistical delays have compounded to create a large backlog of goods awaiting shipment or in transit. This scenario introduces additional risks like spoilage and loss, most of which will be insurable but at an additional cost.

Times to move goods from point A to point B have increased and Benjamin Franklin’s warning that ‘time is money’ may have been brought to the fore on a scale never seen in recent corporate memory.

In this context, the financial fundamentals of a working capital cycle are amplified.

Investment in current assets is funded by current liabilities, and a company’s creditworthiness is the basis of a funder’s ability to help. The equity committed by investors remains an essential component and this, in most cases, determines the creditworthiness of the borrower.

Shane Conway, NAB’s Executive Transactional Banking and Enterprise Payments, says NAB has seen some interesting dynamics at play.

“We help our clients increase their equity holdings which will help them have a greater flow of supply,” says Conway.

“The data confirms this pivot – inventory days are on the rise and yet businesses are aware of the risk of overstocking if commodity prices move negatively or demand declines. Proactive and cautious customers do a great job of finding a careful balance.

This strategic reorientation resulted in a radical increase in working capital requirements. NAB offers several alternatives to fund this working capital through trade and supply chain finance. The bank remains committed to financing its customers and ensuring their continued success during these difficult times.

Use purchasing power

Wherever possible, consolidating a supplier base into a core group while maintaining sufficient supply diversification (varying by counterparty and jurisdiction) can help a client become an increasingly significant buyer. and strengthen the power of business in the value chain.

In a situation where the supplier has to choose which buyer to supply, customers may be able to get priority and get the necessary stock ahead of the competition. Relationships, consistency and reliability are important.

There are several ways to effectively manage these relationships with key suppliers. The first is to recognize that they are guided by the same financial measures as other companies, namely maximizing revenue while minimizing costs and bad debts. Offering preferential trade terms can help achieve a supplier’s objectives through:

  • Offer faster payment (reducing their working capital investment) and therefore become a more attractive customer than an alternative buyer who sticks to pre-agreed commercial terms.
  • Minimize their counterparty risk because the risk of a client’s insolvency is reduced given the reduction in payment terms.

This initiative increases a customer’s working capital investment, but also provides better security of supply. Balancing costs and benefits is the art here and accessing sufficient financial firepower as well as visibility into payment progress are ways in which NAB can support our customers.

Thanks to advances in SWIFT Global Payments Innovation (GPI), greater visibility can be provided for international payments. GPI enables banks in the international payment message chain to notify all correspondent banking participants of the status of a payment in transit to the payee’s account.

It does this in real-time through Application Programming Interface (API) messages, which are currently sent back to the payment initiator for visibility and transparency of payment value.

GPI will soon extend this visibility to payment recipients. With greater visibility into the payment as it moves through the banking system, the impact of disputes on payment completion should be reduced.

By sharing the confirmed status of payment from correspondent banks in the chain, suppliers can have greater certainty of when and when value will arrive. This can be a useful talking point if a customer is switching to enhanced supplier terms, such as payment in advance.

Promote ESG references

Proving and communicating supply chain sustainability is a key management responsibility today. Environmental, social and governance (ESG) initiatives are high on the agenda of companies and investors.

Promoting genuine ESG credentials to a supply base can have the benefit of improving competitive advantage against alternative buyers who may be less advanced. Meanwhile, this engagement can help a client’s ESG team with details to quantify the organization’s overall contribution, including supply chain and end buyers.

Suppliers are likely to be interested in ESG progress, and a two-way flow of information can support the ESG narrative to communicate to stakeholders.

Navigating Sanctions

Economic sanctions are restrictions applied by one or more countries to encourage and enforce a target response considered internationally acceptable. Sanctions remain an important tool for international diplomacy and are supported by the financial sector.

The recent expansion of sanctions and the series of sanctions related to non-compliance have necessitated increased attention in this area. NAB is committed to helping its customers comply with sanctions by helping customers manage this risk and the bank has tools and services available to help businesses stay compliant with these important regulations.

Summary

Recent geopolitical developments have necessitated emphasizing the importance of supply chain risk management. For many decades, a determined lean march was underway with just-in-time inventory management and associated cost optimization as the goal. This has now been derailed in favor of security of supply. In an inflationary environment, a gradual increase in inventory held can hedge against rising costs and insulate a business against logistical impacts.

Effective management of a supply chain is increasingly important and recent events have highlighted the drawbacks of insufficient attention given to this management responsibility.

Future posts will focus on inventory financing and export considerations, as there are similar challenges and opportunities to those we have described here and these topics merit further discussion.

How NAB can help you

Supporting Australian businesses is NAB’s top priority. Through an extensive network of relationship teams, NAB provides access to qualified and knowledgeable bankers who are invested in the continued success of our clients and who want to support the role they play in the economy. Funding and risk management are key areas of focus for the NAB Trade & Working Capital and Transactional Banking teams, and we would welcome the opportunity to provide further assistance.

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