It’s no secret that companies are facing a myriad of supply chain challenges in the current environment. High inflation, rising financing costs due to increasing interest rates, mounting inventory storage costs, product shortages and geopolitical disruptions such as the Ukraine-Russia conflict and the US-China cold war are all having an impact on companies and driving the need to diversify supply chains.
“There’s a very unique set of circumstances at the moment, from issues relating to Brexit to global economic conditions,” comments Tom Crowe, Head of Open Account Trade Product at Lloyds Bank. “And much of this results in disruptions to supply chains.” While this might initially have been manifested by shortages in the semiconductor space and disruption to the auto industry, he adds, “there seems to be much wider disruption now.”
As Crowe observes, “It’s a very volatile world we live in at the moment. And that’s making life more difficult for everybody.”
Seeking supply chain resilience
Nevertheless, there are actions that businesses can take to address these challenges. For one thing, it’s more important than ever for companies to have a full understanding of their supply chains. “It’s not just a case of knowing who your suppliers are – potentially it’s also about knowing who your suppliers’ suppliers are, and how susceptible your supply chain is to disruption,” comments Crowe.
He argues that supply chain resilience can be understood as the ability to adapt to risks, shocks or sudden changes in circumstances, and mitigate their impact. “The ability to do that is absolutely vital for companies of all sizes,” he adds. As such, resilience requires end-to-end visibility over the supply chain. It also requires a degree of flexibility, as companies may need to source alternative suppliers at short notice.
That said, Olamide Olaofe, Director, Working Capital Solution Development at Lloyds Bank, notes that an effective way to increase supply chain resilience is to understand the impact a crisis could have well before it happens. As well as diversifying the supplier base, he says, companies are also looking at strategies such as nearshoring and reshoring as a means of reducing delivery times and gaining more control over their inventory.
How can supply chain finance help?
When it comes to getting products onto shelves, companies need not only an efficient physical supply chain, but also a healthy financial supply chain. As such, Olaofe states that supply chain finance can play an important role in improving supply chain resiliency.
“It provides much-needed liquidity at a lower cost throughout the buyer’s supply chain,” he explains. “And it utilises the buyer’s credit rating, which is typically better than the suppliers’.” With financing costs rising in today’s market, he says the ability to offer suppliers financing at a lower cost is particularly valuable – “and supply chain finance can also bolster commercial relationships between buyers and suppliers.”
As such, Crowe argues that buyers can gain an advantage over their competitors. “You’ve heard of preferred suppliers,” he says. “This type of solution enables the buyer to be a preferred customer, which means the company is in a better position if there’s heightened competition or a shortage of goods.”
From extending payment terms to supporting strategic goals
While supply chain finance has been used by companies around the world for a number of years, Crowe notes that the reasons for adopting such arrangements have evolved. Previously, companies often implemented programmes alongside an extension of the payment terms offered to suppliers. “Now it’s a much wider discussion, with companies looking to support their strategic objectives,” he says.
One reason for this shift may be the forthcoming arrival of enhanced disclosure rules. “Having to disclose in your annual accounts that you have different payment terms for suppliers on a supply chain finance scheme versus ones that aren’t on the scheme may cause a certain amount of consternation to some clients – so maybe that’s helping to move things in a different direction,” Crowe says. “But companies are also realising that they can’t just use their supply chains to extract financial benefit – they have to support their suppliers and mitigate supply chain risk.”
Another consequence of the disclosure rules is the drive towards making payment terms consistent, notes Crowe. “Extending payment terms beyond industry averages can create some doubt as to whether the implementation of supply chain finance is intended for working capital purposes, or is being used to hide debt on the balance sheet,” he says.
But the change of focus is not just being driven by regulatory developments. More recently, says Crowe, companies are regarding this type of solution as an enabler that can help them achieve their goals – “whether that’s working capital optimisation, supply chain resilience or rolling out a sustainable supply chain.”
SCF and ESG
With sustainability still high on the corporate agenda, there is a growing awareness of the sustainability implications of the company’s supply chain activities. As such, supply chain finance has considerable potential as a way of helping companies achieve their environmental, social and governance (ESG) goals.
“Companies are becoming much more purpose-driven,” comments Crowe. “We’re all very aware of the environmental challenges that are forcing businesses to become more sustainable and to implement an ESG agenda.”
He adds that companies are finding that their Scope 3 emissions – in other words, emissions that arise from the supply chain, rather than being produced by the company itself – are the largest contributor to their own sustainability ratings. “Companies are therefore encouraging their suppliers to adopt more sustainable practices, and to meet today’s standards,” he says.
In practice, companies may struggle to persuade suppliers to align with their own standards and agendas. There is a perception that there are not enough incentives for suppliers to adopt sustainable practices. However, supply chain finance can be used to incentivise and reward suppliers for their efforts. In particular, says Olaofe, companies can use it to provide financial rewards for suppliers that are becoming more sustainable, thereby encouraging them to make the necessary investments in their sustainability efforts.
“For example, you can reward suppliers for taking positive steps such as calculating their scope 1 & 2 greenhouse gas emissions,” he says.
To benefit from this type of solution, suppliers need to provide evidence of the level of sustainability they have achieved, which can be done by completing an ESG assessment created by the buyer and its ESG scoring provider. “Suppliers with better ESG ratings can then be offered preferential rates in the programme,” Olaofe explains.
At this stage, many companies are still at the investigation stage of exploring sustainable SCF programmes. But others are already moving forward with implementations and reaping the rewards of sustainability.
Choosing the right partner
From supply chain resilience to sustainability, supply chain finance programmes can bring major benefits – but it’s also important to choose the right partner. So what should companies be looking for in a provider?
For one thing, it’s important to note that implementation can take time and effort. “These are generally medium-to-long projects to implement,” says Crowe. “It takes work to onboard suppliers onto those programmes, especially if it’s a global programme and suppliers are based in overseas jurisdictions.” As such, it is important to work with a partner that has the staying power to support the project over a period of time.
It’s not just about operational capabilities: Crowe points out that companies need providers that can offer certainty of funding, whether from their own balance sheets or from other funding partners. “And that funding needs to be available on a long-term basis,” he adds.
Also important is working with a partner that is prepared to invest in technology, has a robust platform for administering the programme, and is able to onboard suppliers in an efficient way – Lloyds Bank, for example, is able to onboard suppliers onto its programme in 24 hours or less. Equally, companies should aim to find a partner that shares their values and understands the importance of building supply chain resilience.
“Lloyds Bank is investing heavily in its ESG sustainability team,” says Olaofe. “We provide advisory services to customers, and we’re investing in technology and people to deliver a truly best-in-class solution.” This includes collaborating with a number of market providers to create a holistic supply chain resiliency proposition – “all the way from scanning your supply chain to multi-tier supplier mapping, right through to the actual financing.”
As such, Olaofe concludes, the bank is well placed to help companies navigate the challenges of today’s environment and incentivise change within their supply chains.
