The global supply chain shortages, from lumber to computer chips, have no ordinary origins. So the best options for navigating today’s bottlenecks are less than intuitive.
Many businesses think the key to surviving the current supply chain disruption is to simply pay more so they can keep their suppliers happy until the situation stabilizes, and this increased cost of goods ends up affecting the consumers. In fact, this supply chain stress is an opportunity for companies to explore more advantageous forms of financing and to cement their relationships with suppliers.
Just look at what Apple went through last year. When supply chain constraints began affecting current and future results, Apple locked in some supply orders through previous investments, and it also paid suppliers more. Those steps only went so far, and supply chain challenges lingered for the tech giant.
These days, buyers and sellers alike are faced with the challenge of locking in deliveries of raw materials, semi-finished, and finished goods or running the risk of idling plants and losing customers to competitors. Just-in-time inventory delivery is a luxury that is no longer achievable in many places. Instead, companies must think of securing a “just-in-case” inventory at all times.
Economists are raising the alarm about the toll these hurdles are taking on the economy. “Over the near-term, risks are stacked to the downside and include a lack of inventory as clogged supply chains are showing scant signs of easing,” said Scott Anderson, Chief Economist at Bank of the West.
“Over the near-term, risks are stacked to the downside and include a lack of inventory as clogged supply chains are showing scant signs of easing.”
With prices up and supply down for many commodities and products, manufacturers and retailers need to find new ways to do business. The strain on supply lines means companies must rethink how they pay their suppliers and secure their supply chains. Here are three approaches.
1. Thinking Beyond the Typical Incentives
During typical times, businesses can often stake out priority positions with strategic suppliers by agreeing to guaranteed order flow and higher prices. While these improved terms are appealing for producers, supply chain disruptions can limit the ability of producers to commit to production volumes in advance. For many buyers, there are two alternative incentives that can be readily considered:
Payment Terms: The usual 90-day terms for payment can starve many suppliers that need upfront cash to rehire and cope with pandemic disruptions. By agreeing to faster payment terms, many businesses can help secure much-needed supplies. But to pay suppliers faster, a buyer must tap into its treasury or borrow, neither of which is ideal.
Order Size: Similarly, companies with the capacity to place big orders can benefit. It is easier for suppliers to sell a lot of the same goods to a single customer. Even if it means stockpiling parts, a larger order creates an incentive for a supplier to keep sending you the goods you need.
2. Access Non-Debt Supply Chain Financing
The need to purchase more inventory and pay suppliers earlier leaves many companies with cash-flow imbalances. In response, large and medium-size buyers with strong credit profiles can look to alternative financing mechanisms beyond the typical lines of credit on the company’s balance sheet.
One option is to explore various alternatives through non-debt supply chain financing. Suppliers to large and medium-size buyers can look to transfer a highly rated receivable due from a corporate client in a sale transaction to a financial institution. The result would be non-debt for both the supplier and the buyer. Additionally, a small supplier may benefit from the reduced cost of financing if a larger and stronger credit profile buyer arranges the mechanism at lower pricing.
In this case, buyers and sellers alike can avoid tapping their own treasuries while avoiding excess drawdowns on their lines of credit.
3. Monitoring Payments Through the Chain
Tracking and monitoring the movement of goods is only one part of effective supply chain management. Ensuring quality control and that suppliers are paid on time and are receiving the correct amounts can be keys to maintaining strong supplier relationships.
Well-designed commercial letters of credit are important safeguards when combined with relevant inspection certificates, verification, and testing services, such as Bureau Veritas and Société Générale de Surveillance, to certify products meet ISO and other standards.
In addition, ensuring your treasury management system is not on auto-pilot—and that you have a system to track scheduled payments and align them with shipping confirmations—is also vital. Transaction messaging and programmed alerts can be especially important for company treasurers needing to verify and approve both payments made to suppliers and those received from customers.
In cases where payment flows are disrupted or other issues arise, having the ability to monitor international wire transfers through a transparent payment system can be critical. Accurately and reliably transferring funds to suppliers is at the heart of any long-term and loyal relationship—and can help ensure that future orders are placed high on the level of priorities.
While there are no quick solutions to overcome many of the supply bottlenecks businesses face today, there are alternative strategies to help mitigate some of the challenges. And with consumer demand soaring for both packaged and durable goods, the race goes on to rebuild inventories and return to full production.
A version of this story first appeared in Supply & Demand Chain Executive in September 2021.