Question Answered: Navigating challenging supply chains

Trade & Supply Chain

Question Answered: Navigating challenging supply chains

Published: Nov 2024

“What are the key issues impacting supply chains and how can treasury prepare?”

Thomas Mehlkopf

Head of Working Capital Management

SAP & Taulia

Companies across industries spanning car manufacturing, semiconductors and pharmaceuticals as well as sectors like fashion are increasingly focused on how they should reconfigure their supply chains in response to geopolitical tension and shipping bottlenecks.

Supply chains are shifting from global to (globally connected but) regional, witnessed in the auto sector bringing suppliers back to Europe. But this raises challenges around economies of scale and higher production costs. We can see the change is underway through shifting flows in supply chain finance in fashion which are moving from Asia to new suppliers based in countries like Poland and Turkey.

As companies shape new regional supply chains, they often strive to have at least two suppliers to ensure diversification, but this also creates pressure on costs. Solutions to this include dynamic discounting which effectively reduces the cost of goods sold.

Companies are also creating larger inventory for strategically important goods. To offset the impact of this balance sheet extension, we are seeing a spike in demand for inventory finance. Every customer we see enquires about inventory finance, seeking to keep their balance sheet clean and ensure they can continue to meet customer demand.

There is also a very high focus on free cash flow which is where Supply Chain Finance programmes combined with Payment Term Harmonisation initiatives can help. Similar to the risk diversification on the supply chain side, we see more and more treasurers diversifying their SCF programmes by working with multiple banks. It provides additional security. Banks regularly re-evaluate their relationships with customers as well as their overall strategy and geographies. This can impact treasurers and their SCF programmes if operated globally by just one bank.

Another trend we see is corporates focus more on data across their supply chain. Procurement, inventory and logistics all need to be able to see the same data, including financial data, in real-time. For example, data on late payments is one indicator if a company may be financially struggling and require liquidity where early payment programmes such as Dynamic Discounting or SCF can help. By connecting sales and procurement data and their forecasts, predictions can be made as to which raw materials might be short on stock in the future and require extra attention.

AI offers the potential to use data and draw the right conclusions to frame working capital strategies. But companies will only be able to harness the power of AI if they have rich data sets. This is where working capital platforms with millions of suppliers on the network can provide huge value given that large amount of data.

We would like to see more innovation around ESG. There are sustainable finance programmes out there, but we need regulators and financial institutions to align reporting standards to truly scale them.

Gopul Shah

Director, Corporate Treasury and Trade Structured Finance

Golden Agri-Resources

Companies across the board are coming under increasing scrutiny for ESG risk. This is compounded by growing regulations covering areas including deforestation, emissions reduction, energy consumption and climate disclosures. As a seed-to-shelf agribusiness, Golden Agri-Resources (GAR) needs to ensure our supply chain will be ready to comply with emerging trends around ethical, resilient and sustainable supply chains. This applies equally to our own plantations and our suppliers, among them hundreds of thousands of smallholder farmers.

GAR’s Social and Environmental Policy (GSEP), established in 2015, has set a benchmark for sustainable, responsible practices across our supply chain and is one way we’re addressing these issues to ensure customers can rely on deforestation-free supply.

Wherever commercially feasible, many supply chains are also shifting towards local sourcing and nearshoring to improve resilience and lower their carbon footprint. By using renewable energy, investing in green technology and shortening supply chains, businesses can improve sustainability standards, their carbon footprint and efficiency.

GAR has spent over a decade mapping, analysing and improving its supply chains to ensure that palm oil production is resilient, sustainable and decoupled from regulatory and deforestation risk – all the while meeting customer demands. We have expanded the traceability of our total palm oil supply chain in Indonesia to achieve 99% Traceability to the Plantation (TTP), and we have 100% traceability to our own estates. We’re using this experience to extend traceability into other non-palm commodities such as sugar, soy and coconut.

Palm oil traceability data is available to our customers through the blockchain-powered GAR Traceability Platform. This is vital due diligence ahead of upcoming regulations like the European Union Deforestation Regulation and will prepare our supply chain for future developments like the UK Environment Act.

This data doesn’t just allow us to demonstrate deforestation-free status. It helps us to understand our operations, suppliers and smallholders so we can support them in areas where improvement is needed to ensure their practices are more responsible, more sustainable and even more productive.

Collaboration across the supply chain, including smallholder education, is key to making this work. That’s why we have committed to train 100,000 Indonesian smallholders in sustainable palm oil agriculture by 2035.

Agricultural supply chains have significant potential to support decarbonisation efforts and play a role in the carbon economy. Plantations support a huge amount of organic material that can sequester carbon, as well as provide nature-based solutions and biomass energy sources to replace fossil fuels, ensuring food security while contributing to renewable fuel supplies.

The implementation of carbon-related regulations, carbon taxes, carbon credits and carbon trading are also likely to generate new sources of cash income that can facilitate the repayment of coupons or loans, using verifiable carbon certificates. Carbon linkages also provide investors and lenders with a clearly measurable and verifiable payoff mechanism which plugs the shortcomings of green or sustainable loan obligations.

Mark van Ommen

Partner

Zanders

Alongside well-known issues facing supply chains like the pandemic and war in Ukraine, other more subtle developments are increasing supply chain complexity.

Like the fact corporates must consider ESG metrics in their sourcing and companies have ESG ratings and external validators. Elsewhere, the growth of e-commerce and D2C businesses has put different requirements on sourcing and logistics, and a different way of selling and delivering a service. For example, selling to consumers and smaller buyers puts more emphasis on using card providers and payments service providers (PSPs) rather than banks. These processes need to be integrated into the ESP and TMS, but in many cases these new ways of paying have developed outside treasury which has limited visibility.

Businesses, including treasury and finance teams, are building more robust supply chains. Firstly, by creating diversification of the supply chain, such as for example China+1 policies where they do not solely produce in China, but also in countries such as Vietnam, Indonesia and the Philippines. Friend-shoring is also on the rise. We see companies taking a less cost-focused approach when designing their supply chains and focusing on sourcing that is sustainable from a long-term perspective.

Other strategies prevalent in certain industries include inventory build-up where companies are moving away from Just-in-Time methods. Then there is vertical integration, which can range from light-touch partnership approaches to full acquisition of companies in the supply chain. Supply chain finance also provides affordable credit to suppliers by leveraging the group’s strong credit rating, supporting resilience in the supply chain.

We have seen some early initiatives to extend SCF beyond the direct supplier further into the supply chain to support smaller suppliers that struggle to access affordable funding.

Data analytics can play a role supporting supply chains with scenario planning. Using predictive analytics, supply chain risks can be modelled, not unlike in advanced financial risk management. Combined with implementing more flexible sourcing and production processes, this type of forward-looking scenario approach may allow corporates to respond faster and shift their sourcing when required.

In large organisations, the data needed to monitor and manage supply chain risks is often spread across a complex system landscape and not seamlessly integrated. Any data strategy needs to be closely aligned with group finance and IT functions to make sure the required data, not just related to supply chain but also other areas of treasury, is available in standardised, real-time and analysable form.

Supply chain complexities are driving corporates from prioritising low-cost sourcing to focussing more on sustainability and perceived risk. Advantages include simplified logistics, more insight into ESG components of supply chain and reduced impact of geopolitical risk but it may cost more. That said, traditional manufacturing countries such as China have seen the cost of labour increase, reducing the arbitrage opportunity.

Next question:

“What are the main issues facing corporate treasurers in India?”

Please send your comments and responses to [email protected] by 18^th December 2024.

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