T&R July Special Report-2021

Rooting out Risk in the Supply Chain

The pandemic both introduced and exposed risks to the global supply chain. And from these trials, what lessons can we take, and how should those lessons inform future risk management?

The Ever Given, the Japanese-owned container ship that lodged itself onto the banks of the Suez Canal on March 23, 2021, became, for many, the face of the supply chain crisis. The result of a sandstorm, when the vessel was finally refloated on March 29, the disruption to trade was estimated to be about $9.6 billion per day in canal traffic alone. For treasury, this incident exacerbated serious structural problems in the supply chain that had already become apparent in 2020. Companies may have believed they had a solid handle on the financial stability and continuity of their most critical suppliers, however, Covid-19-related shutdowns of transportation channels, factories and even borders highlighted previously undetected risks.

Staying on top of key suppliers

One of the main disruptions to the supply chain has been with key suppliers, which faced labor and capital shortages due to the pandemic. C2FO’s senior vice president of global operations, Alexandra Donnelly, notes their struggles can have a spiraling effect. “Commodity shortages, labor shortages, challenges in shipping are the tip of the iceberg,” Donnelly says. “This translates into consumers seeing bare shelves. In addition to these challenges in the supply chain, we are seeing unprecedented demand. This translates to lost revenue for companies.” Bare shelves and shortages of new cars not only lead to lost revenue and profits, but could also put a strain on bottom lines and working capital, as more of it is deployed to compensate for the disruption. And notes Dr. Nada Sanders, distinguished professor of supply chain management at Northeastern University, not staying up on the financial and business issues facing key suppliers can have both huge strategic and financial implications. “A company basically risks significant financial loss in the form of tied up inventories or a lack of inventory ability to meet customer demands and maintain marketplace position,” Sanders notes. “All this rests on suppliers and necessitates managing the supply chain.” Sanders points to inventory problems, such as a stockout or a production stoppage, as happened with auto manufacturers halting new vehicle production while they waited for the necessary semiconductors to be delivered. (See sidebar.) Still, she notes there are lessons to be learned. “Global supply chains were unprepared to meet the massive disruption posed by the Covid-19 pandemic. First, the key lesson learned is that today’s supply chains have become overly complex. Supply chains are essentially intertwined global networks, traversing across many countries and continents. Therefore, a problem anywhere along the network has large ripple effects. Given this complexity, most companies do not have a good view upstream or the ability to accurately assess their risk exposure.” Sanders notes that offshoring created some of this vulnerability: for instance, a stoppage in delivery of supplies could stem from when countries stopped exports in response to the pandemic, or when shipping routes were disrupted in incidents like the Ever Given.

Diversification is making a comeback

What was previously considered a best practice in supply chain management — consolidating the number of key suppliers within a supply chain — is now receiving increased scrutiny. While consolidating suppliers can lead to price breaks in some cases, limiting a company to a single supplier at any point in the supply chain can lead to critical shortages in components needed to produce a product. And once Covid-19 hit, the pandemic and its aftermath showed that diversification in supplier base can insulate companies from disruptions in the supply chain, which can be even costlier in terms of lost revenue, cash flow and profits. While supplier base diversification can make a lot of sense, the need for extra cash payments to a larger number of suppliers can strain a company’s cash flow and liquidity. And in some instances, Donnelly notes that diversification may have to consider the financing ability of the supplier: their ability to raise working capital, who is at financial risk, and if there’s a role to be played in assisting. “[Many of these suppliers] are minority-owned businesses, women-owned businesses, small businesses, businesses that generally have trouble getting working capital. Getting the means with which to fund their businesses from banks and conventional sources at a reasonable cost is a problem for many of these suppliers.” This sentiment is echoed in a recent article by Peter Jacobstein, chief strategic partnership officer of The Interface Financial Group, who notes that Covid-19 was especially felt by smaller firms, which had trouble accessing capital at reasonable rates. He says this should matter to all businesses – even large buyers, for three reasons:

“All buyers have a role in ensuring the stability of the supply chain – and the larger business ecosystem,” writes Jacobstein. “The simplest thing buyers can do is to pay promptly. Doing so ensures that small and mid-sized suppliers have access to the working capital they need. Of course, this is easier said than done. Buyers of all sizes are as affected by liquidity concerns as their suppliers. So, when shorter terms aren’t possible, third-party funding can fill the gap.” Donnelly points out that investing in key suppliers can be done through pre-paying invoices or buying inventory in advance. She also indicates that this investment can be in the form of mentorship for the management teams of smaller suppliers, which can help assuage any shocks the smaller firms may have with their business. Buyers also benefit through ensuring that these smaller suppliers can meet their future demand, and potentially prevent future disruptions to their supply chains.

Shock-proofing your risk exposure

The Covid-19 disruption highlighted the need to shock-proof the global supply chain, whether from geopolitical concerns, the effects of climate change or future supplier failures. Sanders recommends “nearshoring,” or finding local suppliers for some items, and has been recommending companies develop a “caveats to lean” strategy, where select critical items and other items that have a longer production time are kept in larger supply to create buffers against future disruptions. She notes that digital can play a large role in helping buyers “see” up and down the supply chain, and better grasp the overall risk. “The capability of current digital technologies permits visibility,” says Sanders. “Most companies had not invested enough in this capability in the past. The risk of not being able to see what is happening with customers, markets and suppliers has become evident.” For treasurers and financial executives looking to implement processes to prevent future supply chain disruptions, she recommends the following three points:

Maintaining the viability of the supply chain is critical – whether suppliers are large or small companies. In a world where corporate social responsibility has moved to center stage, supporting small and mid-sized suppliers is an ethical imperative. Small businesses account for nearly half of the U.S. GDP, making the health of small businesses an economic imperative for our country.

Focus on carefully crafted metrics to hold leadership accountable, and look beyond simple short-term financials and measure risk appropriately. Provide financial support to lean into digital technologies that will enable visibility, transparency and communication. Invest in key talent and human resources.

“Executives need to finally understand the critical role of supply chains and the importance of key metrics that allow them to measure supply chain risk and hold leadership accountable,” Sanders says. But, “while investing in digital is extremely important, companies are understanding that expert knowledge of key talent is more important than ever. The reason is that historical data is proving insufficient, and knowledge of markets and relationship management are more important than ever.” Donnelly also reports that suppliers are joining end customers by frontloading their inventories of raw materials and other components in their process to meet future demand. Some customers have assumed higher air freight and other shipping costs to ensure they have sufficient inventory, and some customers have been picking up products from secondary ports, a practice they may have been reluctant to do in the past due to the inconvenience and extra costs involved.

Vertical integration where it makes sense

Large companies that have felt supply chain constraints are bringing back one last trend: vertical integration of some key processes. The process of bringing in-house a process that was formerly outsourced gives the company much more control and stability over the process or procedure. For instance, in response to the global semiconductor shortage, some automotive manufacturers have taken on the production of these chips themselves. In another instance, this might include bringing functions like assembly and shipping in-house, as when Costco purchased Sears’ delivery arm, Last Mile Delivery, for shipping of large bulk orders to customers. Expect to see a continued trend towards larger, end user organizations moving to vertical integration where it makes sense. This is a lesson learned from the pandemic. The more in-house control a company has, the less likely it is to see interruptions to key parts of the supply chain and customer distribution efforts. CFOs need to be involved in supply chain discussions with other members of senior management. The pandemic has raised numerous issues around the need to help small, at-risk suppliers, but it has also highlighted the need to modernize shipping and transportation operations in terms of getting critical supplies to operations in a timely, cost-effective manner. This means ensuring the proper technology solutions are in place, as well as proper internal expertise in these key areas. Gone are the days when the supply chain was an issue solely for the transportation and logistics folks within the organization. Today’s CFOs need to be a key part of their organization’s supply chain management efforts.

Drive sustainable and groundbreaking solutions for your suppliers. BY C2FO

By Roger Wohlner

-- Alexandra Donnelly, SVP Global Operations, C2FO

Commodity shortages, labor shortages, challenges in shipping are the tip of the iceberg

A Single Point of Failure

Because of disruptions to the global semiconductor market, automotive manufacturers are estimated to lose $110 billion for 2021 as 3.9 million vehicles are expected to be lost, according to consultancy firm AlixPartners.

Dr. Nada Sanders, Distinguished Professor of Supply Chain Management, Northeastern University

The risk of not being able to see what is happening with customers, markets and suppliers has become evident.

SIDEBAR: A Single Point of Failure

Roger Wohlner is a financial writer who brings his extensive experience as a financial advisor and in corporate finance to his writing. Fluent on a wide range of financial topics, his work has been featured in ThinkAdvisor, TheStreet, Investopedia, Morningstar Magazine, US News & World Report, Yahoo! Finance, The Motley Fool and a number of other sites.

Rooting out Risk in the Supply Chain

The pandemic both introduced and exposed risks to the global supply chain. And from these trials, what lessons can we take, and how should those lessons inform future risk management?

Even when things are normal and we are not faced with a crisis like a global pandemic, many small and medium-sized businesses that fall into the supply chain of many companies may have trouble accessing low-cost capital, or even accessing capital at any cost.

Larger companies can use short-term vehicles, like commercial paper, to raise working capital. For longer-term capital needs, they may be able to issue bonds, get a bank loan or issue stock. These channels are more limited for small and at-risk suppliers.

SIDEBAR:

By Jordan Novak, SVP, Market Innovation at C2FO, and Tania Dunham, Managing Director at C2FO

Four Company and Supplier Benefits from a Diversity and Inclusion Marketplace

Here are four key benefits of launching a D&I Marketplace:

It’s time that businesses worldwide ramp up their commitment to targeting inequitable financial systems that affect minority- women- and other diverse-owned businesses. The challenges many diverse suppliers face today are significant. The existing financial system can, unfortunately, inhibit minority- and women-owned businesses from accessing affordable capital. In 2010, the Minority Business Development Agency (MBDA) in the U.S. Department of Commerce published a report on the disparities in capital access for minority-owned businesses. The report found that minority-owned businesses pay higher interest rates on loans. They also are more likely to be denied credit and are less likely to apply for loans because they fear their applications will be rejected. These disadvantages make it imperative that we do more to ensure the economic health and growth of these underrepresented and underfunded businesses. In our work with most of the Fortune 100, we at C2FO see the increased commitment of resources and effort made by large corporations to increase diversity and inclusion within their supply chains. To enhance those initiatives, C2FO has partnered with many organizations to create programs dedicated to diverse suppliers, referred to as C2FO Marketplaces, that drive sustainable and innovative capital solutions to underrepresented companies. Like these companies, you can support your diverse suppliers by creating a dedicated marketplace that provides accelerated invoice payments at competitive rates. You can easily tailor a Diversity and Inclusion (D&I) marketplace to work in alignment with any existing accelerated payables program you offer your trading partners. Diversity creates value, and a dedicated, preferred-rate marketplace can help drive sustainable and groundbreaking solutions for your suppliers.

Four Company and Supplier Benefits from a Diversity and Inclusion Marketplace

Help your diverse suppliers alleviate many of the financial challenges they face

Meet key financial metrics

Attract diverse suppliers and build a robust network

Reach your ESG goals

Support your supply chain

1. Meet key financial metrics

You have 100% control over the funding in your D&I Marketplace. You have the flexibility to fund from your balance sheet, or you can work with C2FO’s Capital Markets team to identify one or several of our multinational bank partners to support your program and initiatives. Whether you’re looking to improve gross margins by funding from your own balance sheet or preserve cash by using other funding sources, you decide how you support your suppliers’ financial health without impacting your working capital position.

2. Reach your ESG goals

With your D&I Marketplace, you’ll have measurable data to track and audit the funding supporting your broader ESG goals. Data received allows you to report on the flows of liquidity to diverse suppliers, providing your company the opportunity to highlight the amount of funding and support that's been provided to companies owned and operated by minorities, women and members of socially and economically underrepresented groups.

3. Attract diverse suppliers and build a robust network

As you know, the importance of having diverse companies in your supply chain and corporate ecosystem is immeasurable. You likely have initiatives in place to attract diverse business partners and help secure their financial futures. A D&I Marketplace with C2FO will not only enhance those efforts, it can also be a significant differentiator as those diverse businesses seek access to low-cost capital options that are crucial to their business. Adding this benefit has shown to be a powerful incentive for additional business and a much deeper and diverse supply chain.

4. Support your supply chain

Diverse businesses are strategically crucial to your supply chain, yet many face inherent challenges that can make them financially fragile. By creating an equitable marketplace with preferred rates that address the financial headwinds diverse businesses face, you can create a safe harbor that nourishes growth through greater opportunity. Offering competitively priced access to capital empowers diverse businesses to achieve their goals and thrive. By launching a D&I marketplace, you can ensure your company’s future with the most innovative, competitive and diverse supply chain possible.

About Jordan Novak

Jordan leads Market Innovation for C2FO, providing a unique approach to optimize the way businesses generate and allocate capital globally. Prior to C2FO, Jordan was based in Singapore as a key finance leader for Dell Technologies. He served as a liaison to supply chain partners and multinational banks to drive strategic initiatives aligned with business direction. Jordan also served as head of trade and supply chain sales for the technology, telecommunications and media industries at Wells Fargo.

Senior Vice President, Market Innovation at C2FO

About Tania Dunham

Managing Director, Market Innovation at C2FO

Tania is responsible for providing guidance and strategy around new product development at C2FO. Prior to C2FO, Tania managed global enterprise relationships for American Express. During her tenure, she consulted on supply chain improvement strategies and automated payables initiatives for Fortune 500 corporate clients. Tania also held business development and marketing positions for wireline and wireless networking clients while with Sprint. She has a JBA degree from The University of Wisconsin–Madison.

C2FO is the world’s largest platform for working capital. We serve over one million businesses representing $10.5 trillion in annual sales across more than 180 countries. Our online platform connects more than $110 billion of daily accounts payable and accounts receivable. Whether you need working capital or have excess working capital, Name Your Rate™, and the C2FO platform will match your request in seconds. You can accelerate or extend AP or AR on demand, providing you, your customers and your suppliers greater control over cash flow. You can also utilize AR financing and other data-driven funding options. C2FO is working capital, working for everyone. Our mission is to deliver a future where every company in the world has the capital needed to grow. To learn more, visit C2FO.com.

About Alex Donnelly

Senior Vice President, Global Operations

As SVP global operations Alex focuses on implementation, ERP services, and market operations covering the client technical experience end-to-end. She is also responsible for operational delivery from headquarters to each global region. She started with C2FO in 2012 implementing some of the earliest adopters and crafting the go-to-market operational strategy for every geographical region as it opened. Prior to joining C2FO, she worked in marketing for a technical training company. Alex holds a BA in Journalism and Anthropology from the University of Iowa, Magna Cum Laude.

Help your diverse suppliers alleviate many of the financial challenges they face

Home

Support your supply chain

Attract diverse suppliers and build a robust network

Reach your ESG goals

Meet key financial metrics

By launching a D&I marketplace, you can ensure your company’s future with the most innovative, competitive and diverse supply chain possible.