As pandemic restrictions ease in much of the world, a surge in economic activity is straining global supply chains already hammered by shutdowns, shortages and logistical imbalances.
Shortages from lumber to computer chips have wreaked havoc on entire industries. Analysts are warning about the possibility of empty shelves in back-to-school supplies and holiday toys. Confronted by these challenges—both local and global in scope—companies are increasingly struggling to regain their footing and find solutions to navigate supplier agreements and ensure liquidity requirements.
Many businesses think the key to surviving the current supply chain disruption is to simply pay more so they can keep their suppliers happy until the situation stabilizes. In fact, the supply chain stress we are now experiencing is an opportunity for companies to explore more advantageous forms of financing and to cement their relationships with suppliers.
These days, importers and exporters alike are faced with the challenge of locking in deliveries of raw materials or running the risk of idling plants while losing customers to competitors. Just-in-time delivery, which helped propel efficiency gains at many companies for decades, is a luxury that is no longer achievable in many places. Even offering to pay more has little impact when other companies are doing the same.
Reeling and feeling the economic shocks
Economists are raising the alarm about the toll these bottlenecks are taking on the economy. Not only are the supply disruptions dampening current GDP, but the impact is expected to roll well into the future.
With prices up and supply down for many commodities and products, manufacturers and retailers need to quickly find new ways to do business. The strain on supply lines means businesses must rethink how they pay their suppliers and how they secure their supply chains. Here are four areas where companies need to rethink the old ways of doing business.
1. Thinking beyond the typical incentives
During typical times, businesses can often stake out priority positions with suppliers by agreeing to guaranteed order flow and higher prices. While these improved terms are appealing for producers, supply chain disruptions can limit the ability of suppliers to commit to production volumes in advance. Two alternative incentives worth considering for many companies are:
· Payment terms. The usual 90-day terms for payment can starve many suppliers, from mining companies to parts makers. By agreeing to faster payment terms, many businesses can help secure the much-needed supplies.
· Order size. Similarly, companies with the capacity to place big orders can also benefit. Even if it means stockpiling parts in your plant, a larger order creates an incentive for a supplier to keep sending you the goods you need.
2. Access non-debt supply chain financing
With order flow and delivery disruptions, many companies are also confronting cash-flow imbalances. In response, businesses can look to alternative financing mechanisms beyond the typical lines of credit that reside on the company's balance sheet.
One option for a company of any size is to explore various alternatives through non-debt supply chain financing. By working with a financial institution, suppliers can look to transfer to a financial institution a highly rated receivable due from a corporate client in a non-recourse sale transaction.
3. Take advantage of a global network
When the supply chain is international, additional challenges can arise. Without a company presence at the location where a supply chain initiates, maintaining a priority position with producers can be difficult. To help bridge the distance, a reliable financial partner in those locations can help alleviate many concerns.
Having a banker who is physically in the country or region is a terrific resource. In particular, working with a bank that has a unified international structure can help provide funding solutions by underwriting either new or earmarked lines of credit for a subsidiary in one country based on a credit line or credit profile of the parent in the headquarters country.
4. Monitoring payments through the chain
Ensuring both quality control and accurate, timely payments to suppliers is also vital to maintaining strong supplier relationships.
Well-designed commercial letters of credit are important safeguards when combined with inspection, verification and testing services.
In addition, enabling a treasury management system to track scheduled payments and align them with shipping confirmations is key. In cases where payment flows are disrupted or other issues arise, having the ability to monitor international wire transfers through a transparent payment system can be critical.
While there are no quick solutions to overcome many of the supply bottlenecks faced by businesses today, there are alternative strategies to help mitigate some of the challenges. And, with consumer demand soaring for both packaged and durable goods, the race is on to rebuild inventories and return to full production.