Over the past few years, the global economy has faced an extreme amount of turbulence. The pandemic was the first of many waves of disruption and new ones are coming to shore. The crisis in Ukraine is having a direct and indirect impact on supply chains around the world as are recent factory closures in Shanghai due to prolonged COVID-19 lockdowns.
Add to that the effect of record-high inflation – 8.5% as of March – caused by skyrocketing food, energy, housing, and transportation costs coupled with surprisingly robust consumer demand. The U.S. consumer price index rose at its fastest pace since December 1981 and consumers, buyers and suppliers are feeling the financial squeeze.
Hand in hand with inflation rates, many supply chains are plagued with instability and availability issues related to goods and employees. These are primary contributing factors driving inflation of prices for raw materials and labor. According to an analysis by the Associated General Contractors of America, the price of construction materials jumped nearly 20% in 2021. And as the prices to produce and transport goods across the supply chain continue to rise, so does the time it takes to deliver them. Shipping capacity constraints and bottlenecks across all logistics modes has many experts estimating relief is still, at its earliest, months away.
More concerning is that these pressures are showing few signs of abatement. Disruption, volatility and chaos within global supply chains is not only here to stay, but it has also become the de facto climate of business in 2022. This poses a critical question to supply chain and finance leaders – how can companies position themselves to be more competitive in spite of volatility?
We know that the highest payer has a clear advantage in a marketplace of shortages. What else can companies add to their financial toolkit to maintain or achieve that advantage?
One area worth focusing on is payment efficiency and how it impacts the overall financial health of the supply chains. After closer inspection, many business leaders are finding their inability to pay suppliers on time or offer them access to much-needed liquidity is harming not just key financial metrics – it’s also undermining their ability to be competitive by weakening strategic relationships between customers and their suppliers.
Supply chain finance is one tool that can help buyers (and suppliers) better navigate supply chain shortages, disruption and inflation. From faster and more predictable cash flow to keeping debt in check and improving financial metrics, and thereby credit ratings, supply chain finance can strengthen the overall financial health of a business. By tapping into liquidity trapped in their supply chain, businesses can flexibly adapt to any disruption by minimizing the impact of inflation and rising costs on their balance sheets.
How supply chain finance can help businesses adapt to inflation and rising costs
A buyer-initiated form of early supplier payment, supply chain finance can help companies of all sizes benefit from better cash flow, increased visibility into payment processes, and sustained access to working capital. In today’s economy, that translates into two powerful advantages. The first is the ability navigate economic stress of all kinds. The second is having the tools to invest in growth.
Additionally, supply chain finance can deliver much-needed financial relief to both buyers and suppliers. The benefit to suppliers cannot be understated. In many supply chains, disruption has happened on the backs of suppliers, some of which don’t have the financial fortitude of their larger counterparts and customers, and many of which have struggled with late buyer payments. For these companies, access to early and on-time payment does more than improve cash flow – it fuels business resiliency and stability by helping suppliers navigate economic turbulence and delayed buyer payments without taking on additional (and often expensive) debt.
As more buyers offer early payment programs like supply chain finance to their suppliers, it’s important for suppliers to assess the strength and health of the program in play. There is a right way and a wrong way to approach supply chain finance, and financial transparency is crucial. Suppliers must be able to validate the reputability of the program and ensure there is a third-party that facilitates transactions and enforces proper accounting treatment.
All eyes will be on the global economy as we lean into the second half of 2022. But prevailing wisdom suggests we could be heading for rougher waters before the market corrects. That’s why it is more important than ever for companies to make investments in the future of their supply chain financial health. If we have learned anything in recent years, it is that uncertainty is unwavering, and preparation is advantage.