Focus on supply chain risk

The ongoing disruption of the pandemic and Russia and Ukraine conflict have highlighted the need for a different approach to global logistics.

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Supply chain management has been a challenging issue for more than two years now.

It seems just-in-time inventory management is history, with disruption so prevalent we could well see leading companies lauded for their supply chain management capability.

COVID lockdowns and stay-at-home orders have hit manufacturing and logistics hard, and the Russian Ukraine conflict has produced additional economic shocks – especially in energy and soft commodity markets.

The costs associated with these supply chain disruptions are mounting and being reflected in end prices of goods. Rapid increases are now common, which contrasts with the long period of stable or declining prices over the past three decades.

These global events may well have a longstanding effect and smart businesses are taking action now. Here is an insight into some of them:

Inventory buffer and associated funding

A natural response is to procure surplus inventory as a safeguard.

The challenge is logistics costs have skyrocketed. Containerised freight charges have increased by several hundred per cent over recent years, and with the competition for available capacity, there is a challenge to successfully schedule freight movement.

These factors have resulted in a large increase in human and financial resources being devoted to the supply chain function and reducing margins for businesses with less pricing power.

For those firms that can bundle their freight into larger consignments or have more regular freight requirements, they may be able to command priority if not also a discount inherent with their considerable buying power. On a co-operative basis, smaller firms can seek to emulate this model. Having a strong relationship with freight forwarders has never been more important.

Sourcing surplus inventory along with logistics delays have compounded to create a large build-up of goods awaiting shipment or in transit. This scenario introduces additional risks like spoilage and loss, most of which will be insurable but at additional cost.

Timeframes in moving freight from point A to B have increased and Benjamin Franklin’s warning that “time is money” has been perhaps highlighted at a scale not seen in recent corporate memory.

Against this backdrop, the finance fundamentals of a working capital cycle are amplified.

The investment in current assets is funded through current liabilities and a company’s credit standing is the basis for a funder’s ability to assist. The equity committed by investors is still an essential component and this, in most cases, drives the creditworthiness of the borrower.

NAB’s Executive Transactional Banking and Enterprise Payments, Shane Conway, says NAB has seen an interesting dynamic at play.

“We are supporting our clients to increase their holdings of stock that will help them have a greater flow of supply,” Conway says.

“The data confirms this pivot – inventory days are on the rise and yet companies are aware of the risk of overstocking should commodity prices move adversely or demand drop. Proactive and prudent clients are doing a great job of striking a careful balance.”

This strategic shift has been reflected in a step-change increase in working capital requirements. NAB offers several alternatives for funding this working capital through trade and supply chain finance. The bank remains committed to funding its clients, ensuring their continued success during these challenging times.

Using buying power

Where possible, consolidating a supplier base to a core group while maintaining sufficient diversification of supply (varying by counterparty and jurisdiction) may help a customer to become an increasingly important buyer and enhance the power of the firm in the value chain.

In a situation where the supplier needs to choose which buyer to supply, customers may be able to achieve priority and obtain the stock needed ahead of the competition. Relationships, consistency and reliability matter.

There are several ways of effectively managing these key supplier relationships. The first is to recognise they are driven by the same financial metrics as other businesses – namely optimising revenue while minimising cost and bad debts. Offering preferential commercial terms can help achieve a supplier’s aims through:

  • Offering earlier payment (reducing their working capital investment) and consequently becoming a more attractive customer than an alternative buyer who sticks to the previously agreed commercial terms.
  • Minimising their counterparty risk as the risk of a customer’s insolvency is reduced given the curtailed wait-time for their payment.

This initiative increases a customer’s working capital investment but also provides for enhanced surety of supply. Balancing the cost and benefit is the art here and accessing sufficient financial firepower along with the visibility of payment progress are ways NAB can support our customers.

Through advances in SWIFT Global Payments Innovation (GPI), enhanced visibility can be provided for international payments. GPI enables banks in the international payment message chain to notify all corresponding bank participants on the status of a payment enroute to the beneficiary account.

It does this in real-time via application programming interface (API) messages, which are currently provided back to the payment initiator for visibility and transparency of payment value.

GPI will soon extend this visibility to payment beneficiaries. With greater visibility on the payment as it moves through the banking system, the incidence of disputes on payment completion should be reduced.

By sharing the confirmed status of the payment from the correspondent banks in the chain, suppliers can have better certainty on value arriving and the timing. This may be a useful discussion point if a customer moves to enhanced supplier terms arrangements, such as payment in advance.

Promoting ESG credentials

Proving and communicating the sustainability of the supply chain is a critical management responsibility today. Environmental, social and governance (ESG) initiatives are high on the business and investor agenda.

Promoting genuine ESG credentials to a supply base may have the benefit of enhancing competitive advantage compared with alternative buyers who are perhaps less advanced. Meanwhile, this engagement may assist a customer’s ESG team with detail to quantify the overall contribution of the organisation, including supply chain and end buyers.

Suppliers will likely be interested to hear ESG progress, and a bidirectional flow of information can support the ESG narrative to communicate to stakeholders.

Navigating sanctions

Economic sanctions are restrictions applied by one or more countries to encourage and enforce a response from the target that is considered internationally acceptable. Sanctions remain an important tool for international diplomacy and are supported by the financial sector.

Recent widening of sanctions and the spate of penalties attached to non-compliance have necessitated an increased focus in this area. NAB is committed to support its clients comply with sanctions assisting customers to manage this risk and the bank has tools and services available to assist companies to remain compliant with these important regulations.

Summary

Recent geopolitical developments have necessitated a focus on the importance of supply chain risk management. For many decades, a determined lean march was underway with just-in-time inventory management and its associated cost optimisation the goal. This has now been derailed in favour of surety of supply. In an inflationary environment, a step-change increase of inventory holdings can hedge against rising costs and insulate a firm against logistics impacts.

Effectively managing a supply chain is increasingly important and recent events have highlighted the downsides of insufficient attention being given to this management responsibility.

Future publications will focus on inventory funding and export considerations, as there are similar challenges and opportunities as we have outlined herein and these topics warrant further discussion.

How NAB can help

Supporting Australian business is NAB’s core priority. Though an extensive network of relationship teams NAB provides access to qualified, competent bankers who are invested in the continued success of our customers and who want to support the role they play in the economy. Financing and risk management are key focus areas of NAB’s Trade & Working Capital and Transactional Banking teams, and we would welcome the opportunity to further assist.

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