Insight & Analysis

Treasury responds to supply chain crisis with working capital and liquidity provision

Published: May 2022

A panel session at the ACT conference focused on issues in the supply chain.

The supply chain crisis has led to a spike in volatility and uncertainty, resulting in treasury teams having to put aside more liquidity, said David Ranson, Group Treasurer at Pentland Brands, the family-run activewear group that owns some of the world’s best sports, outdoor and lifestyle brands including Speedo, Berghaus, Ellesse and Mitre. Speaking at the ACT’s annual conference in Liverpool, Ranson said that quick decision making – enabled by Pentland’s family ownership – and payments visibility, have become crucial in navigating the supply chain crisis at the company which doesn’t have its own retail network (products are sold either directly or by licensees and distributors) but has sourced from Asia since the 1960s and has its own servicing centre in the region.

Ranson explained that the company regionalised its supply chain before COVID. Prior to COVID it also paid many suppliers within weeks after goods were onboarded to vessels. “We didn’t pay in advance, but the clock started ticking once the product was on the ship,” he said.

Seeking to free up cash flow, three years ago the company extended its terms with suppliers in a prescient move, given today’s multiple variables affecting the company’s supply chain. “We are finding it increasingly challenging to project supply chain cash flows out longer than 80 days,” he said.

Supply chain pressure spiked in response to Russia’s invasion of Ukraine and lockdowns in China and is now putting a squeeze on business margins, said fellow panellist Shanella Rajanayagam, Trade Economist, Global Research, HSBC. She said that supplier delivery times are being stretched and input prices continue to surge because of shortages and rising commodity prices, exacerbated by underinvestment in fossil fuels because of the transition. She noted the squeeze is hardest in the tech sector, food and beverages.

The conversation turned to the value of dual suppliers and putting suppliers on an equal, 50:50, footing. This structure enables firms to switch suppliers when they need to – if one supplier is only feeding 5% of the business, it won’t be able to step up when needed. Although, ideally, companies should spread their supplier base geographically, their ability to do so is often limited because buyers must rely on where the expertise lies. These kinds of decisions must also be balanced against corporates seeking to reduce and consolidate their number of suppliers.

Treasury’s role

Rajanayagam and Ranson reflected on the role of treasury in the supply chain. Get too involved and treasury teams “end up owning it,” nor does treasury have the supply chain knowledge. Ranson said that once supply chain programmes have been set up, operating banks can shoulder most of the burden. However, he noted how it is important that treasury speaks the language of supply chains; moreover, companies in the supply chain often seek to liaise directly with senior treasury members.

Rajanayagam flagged the supply chain crisis will have working capital implications and warned that port congestion is likely to get worse ahead. Container traffic diverted to other ports (like LA) in response to congestion is now backing up in these other locations in a ripple effect compounded by some businesses bringing forward holiday restocking. Panellists also noted how companies are buying space on ships one year out, locking in contracts. “Businesses are negotiating earlier,” said Rajanayagam.

She noted how companies are increasingly investing in resilience, shifting from just in time supply chains to a just-in-case mentality, increasing the amount of inventory they hold with implications for working capital. “Electronics producers are now holding a higher level of chips,” she said. This approach must also be balanced against the consumer downturn, she warned.

Treasury teams are also diversifying to shore up their supply chains as well as dual sourcing, near shoring and strengthening their relationship with their suppliers. Although she didn’t note a widespread trend to exit China, she said treasury teams are prioritising digitisation to improve transparency and visibility of the entire supply chain. Technology reveals what companies are spending on their suppliers. “The more we dug into it, the more we understood what was going on,” concluded Ranson.

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