How Buyers and Suppliers Can Ride Out Supply Chain Storms 

Few could fail to acknowledge the impact of recent supply chain disruptions. But how can businesses large and small manage events that are often outside their direct control? Bringing together its experts from Asia-Pacific, the Americas, and Europe, Taulia explores practical options from a local, regional and global perspective.

Both physical and financial supply chains have been subject to immense pressures for almost two years. There have been disruptions in some of the major shipping hubs, with vessels delayed in port or at anchorage. Onward deliveries have suffered at the hands of road-haulage issues, creating further backlogs in port facilities and adding to delays in the distribution of goods and services.

Ongoing Covid-19 issues, with variants emerging and receding at different times, have seen both overlapping and successive waves of production and supply outages around the world, forcing major supply chain delays. And now the sudden bounce-back by some economies has exacerbated supply-and-demand problems across the world. A shortage of production and transport workers is creating major logistical difficulties for most manufacturers, and the spectre of inflation risk looming, not least as huge price spikes emerge for base commodities such as wood and fuel.

The big question for many Asia-based businesses, notes Steve Scott, Head of Asia Pacific, Taulia, is whether or not single-source supply lines remain advantageous. Numerous companies in the region have relied on China, and even specific regions therein, for both component manufacture and final production. The problem now, he says, is that recent events demonstrate how difficult it is to recognise, understand, and mitigate every new emerging supply chain risk.

Steve Scott
Head of Asia Pacific, Taulia

In this world, single-source may prove overly compromising, and not just with direct suppliers. The approach now brings with it deeper concerns for buyers because current issues are just as likely to impact underlying supply chains, and these will be largely invisible to buyers.

Even when single-source is not adopted, few large global buyers are able to fully assess the resilience of long-tail supply chains because directly managing thousands of supplier relationships at this level is not feasible. Either way, Scott notes, when a supply chain is gridlocked, it takes costly time and effort to unwind and rebuild.

As a case in point, the 90% or so of Fortune 1000 companies that have tier one and two suppliers in China are facing such a challenge, suggests Blake Evans, Head of Sales for Americas and APAC, Taulia. In Los Angeles and Long Beach ports, for example, where around 40% of US-bound goods enter the country, the port authorities, steered by the US Government, have had to work with trade unions to achieve 24/7 operation just to clear the backlog of arrivals from Asia, caused by production outages and logistics displacement issues.

Blake Evans
Head of Sales for Americas and APAC, Taulia

The US has also faced natural events such as category 4 Hurricane Ida which wreaked havoc on the south eastern seaboard in August 2021. And with the winter now commencing in the US, Evans is concerned that a repeat of the severe ice and snowstorms of last year – then manageable as supply chain “blips” – could amplify the widescale impact of current interruptions.

The disturbances being felt in the Americas is similar to those being felt in most industries in Europe, notes Alexander Mutter, Managing Director, Head of Enterprise EMEA, Taulia. “Most economies in Europe rely heavily on imports, with little industrial energy or raw material production across the region,” he says.

As the pandemic struck, the first effect was the shock to the supply chain when goods could not be shipped from Asia. This underlines just how far this region’s corporates have become dependent upon imports too, with single-sourcing now identified as a potential problem. Although previously valued as a means of economies of scale, dependency risk has risen, forcing much rethinking across European industries. Mutter notes that near-shoring of production and increasing plant automation are approaching the top of the agenda.

With everything from components to shipping containers in short supply, some manufacturers and retailers are even chartering aircraft to shift goods, paying over the odds in a desperate bid to maintain supply chains. The sense of threat is contagious, says Mutter. “If you look into many industrial ecosystems, these supply-and-demand issues are affecting multiple connected sectors,” he says, echoing the words of Scott. “If one key component is hit, the impact is often felt across several verticals.”

Alexander Mutter
Managing Director, Head of Enterprise EMEA, Taulia

Changing models

The realisation that the just-in-time (JIT) inventory system has hit a buffer is one that most sectors now recognise only too well. Procurement strategies are shifting more towards a ‘just-in-case’ approach to inventory. Evans cites one major Japanese automotive manufacturer that, following the 2011 earthquake and tsunami, shifted towards a more balanced inventory approach. In doing so, he notes that it has been able to continue production uninterrupted by more recent events. “It’s a good example of thinking ahead, and we’re now seeing more businesses build up nearby inventory buffers while preserving their balance sheets.”

But there’s another interesting component of this change. “Before, sourcing was driven solely by profitability,” says Mutter. “Now we’re seeing a shifting of emphasis onto supplier relationship management.” This is a space where Taulia is closely involved, and it is seeing a greater push, within a wider range of industrial ecosystems and geographies, for suppliers to be recognised by buyers as the key to their success, and not simply a resource to exploit.

The view that supplier-health matters as much as cost is driven by the realisation that supply chain ecosystems can be as fragile as their natural counterparts: look after it, and it won’t fail. This is helping to refocus supplier relationships. Among high-profile clients on ESG-led SCF programmes –  including a breakthrough deal with Bridgestone – Taulia is currently in discussion with a food and drink industry major.  The group is reshaping its procurement and logistics processes to align with ESG factors. The aim is to help make supply chain partners more resilient. By introducing elements of sustainability such as recycling and the reduction of distribution mileage, suppliers earn favourable finance rates, and the buyer earns supply chain security and credibility for its sustainability programme.

Protecting ecosystems

However, this is far from common practice. If the wider community of small and medium-sized enterprises (SMEs) that form the bulk of the supply chain ecosystem is unable to continue production and delivery of components, risk is still uncontained. Should production of the end product (a car for example) slow or cease as a result of a break in the supply chain, consumers may be faced with limited availability and possible price rises, the manufacturer and distributors will see its revenues fall, and the original equipment manufacturers (OEMs) – and their underlying suppliers – will see component demand scaled back or terminated.

An SME facing falling buyer demand must either scale back or cease production, or accept that goods it has already manufactured may not be paid for until demand picks up. It’s this threat to liquidity, says Scott, that is the main danger to the SME community, but consequences may be felt further up the chain.

“It comes back to financial resilience,” he states. “Asia has long had a huge trade finance gap, especially in the developing economies and in ‘first-mile’ production [of raw materials] where, for instance, local transportation availability can affect onward deliveries. Often the real issue is limited access to capital and process inefficiencies caused by underinvesting, rather than direct supply chain disruptions caused by a lack of components coming up the chain.”

It’s likely that almost every part of every industry is now looking at how to manage inventory levels in a way that keeps them from experiencing a financial impact. For Scott, this translates not only into the need for total transparency and communication but also the provision of liquidity where it’s needed. Only this will give SMEs greater confidence to invest in their own efficiency, growth and resilience. He notes: “The certainty of cash flow, and the provision of capital throughout the supply chain, creates a much more efficient ecosystem”.

Political response

The overarching driver and solution must flow from domestic and regional stakeholders, and that includes government. While Asia is a diverse economy where multiple jurisdictions often serve to create a varied regulatory approach, Scott says most key policy-makers view recent supply chain issues as a serious global disruption. They are considering how to reinvigorate their respective economies where free movement internationally has been frustrated by the pandemic.

“Those that are encouraging the free-trade agenda in Asia [including through the Trans-Pacific Partnership] will see this complex task differently to those that are not,” notes Scott. “However, from a commercial perspective, the need is to create as much transparency and trust in trading relationships as possible, allowing participants to adapt to the geopolitical situation in the most effective way.”

While this will not in itself solve every situation, he believes that it will go some way to rescuing trading ecosystems, particularly in jurisdictions where overall economic growth may not be sufficient to assist the cash flow strength of its smaller business communities.

However, some Asian countries have proven to be very adept in their response to the management of the pandemic. Scott cites the work of the Malaysian Government, which in 2020 mandated that all large corporates should offer their lower-tier suppliers some form of vendor finance. India’s Trade Receivables Discounting System (TReDS) is an earlier move in this direction, and since 2016 it has required certain large companies to provide cost-efficient cash flow financing for smaller suppliers.

The European reaction to such issues has been to try to protect SMEs while still supporting major buyers, says Mutter. The German Government introduced its Supply Chain Due Diligence Act, which will come into force on 1 January 2023. This requires large corporates to introduce clear standards for social and environmental objectives into their supply chains. He believes that other governments across the EU are likely to implement similar acts.

Best practice

But regulation is not always the driving force behind supplier-health programmes, Mutter noting that many corporates and even smaller firms are going beyond the legal requirements. There’s good reason to do so: consumer-power. “If something is wrong in your supply chain that affects your business, regardless of your size, the risk that consumer behaviour will have a negative impact on your business case is now just too high not to respond,” he explains.

With businesses of all sizes understanding this, many are announcing pursuit of certain UN-drafted Sustainable Development Goals. For some, clarity on how these goals will be achieved is not always obvious, which is why help and advice is at hand, says Mutter. “At Taulia, we’re now closely involved in progressing discussions with clients on the impact that sustainability has on every component of their supply chain ecosystems.”

The important note here for any business trading across a number of geographies is to ensure visibility, transparency, and clarity across their supply chains, states Scott. A business that cannot determine if it is overexposed to a particular supply source, for example, cannot address that risk.

Many large organisations find themselves unable to source the right data to make such judgments in a timely manner because their systems are siloed. “The role of technology in helping to achieve visibility, transparency, and clarity is therefore hugely important,” says Scott.

Old and new drivers

To reach a state of transparency, he suggests that organisations need to consider what is happening in their supply chains, what information needs to be known to address those issues, and how they can extract and analyse the right data in a timely manner. Only when a deeper understanding of the full supply-chain ecosystem is possible can an organisation prepare to mitigate the wide-ranging risks created by a Black Swan event such as the pandemic.

The capacity of a system such as Taulia to consolidate, report, and analyse key supply chain data is also serving to broaden the role of supplier finance. It’s core role is to provide the most efficient means of managing both buyer and supplier cash conversion cycles and create the most efficient way of injecting capital into the supply chain. But it also enables firms to overlay ESG drivers which, as Scott comments, “is increasingly important in supply chain ecosystems as it helps corporate buyers demonstrate that they know and care who they are trading with”.

For Evans, the benefits multiply, with more suppliers on programmes being rewarded with cheaper finance and additional business “because they are helping their corporate buyers meet their own ESG goals”.

Furthermore, ESG commitments align with the wider digital agenda that is emerging in supply chain management. From the removal of entrenched paper-driven processes, to increased visibility and transparency over processes, digitisation is today one form of disruption in this space that is welcome, says Mutter. “Real-time flows enable an immediate understanding of the impact of events, and faster response times. As a result of recent experiences, digitised businesses have seen how to improve, become more resilient, and have driven improvements along the entire purchase-to-cash chain.”

One solution in particular that has benefitted clients during the pandemic is e-invoicing, notes Mutter. With people working from home, paper invoices posted to business addresses added a logistical challenge to an already slow payment processing regime. Digitisation of purchase order and invoicing documentation removes that challenge, boosting cash flow for suppliers.

Supplier information management is also improved by digitisation. In a decentralised world, accessing details of international suppliers delivering to the geographically dispersed manufacturing sites of a global buyer can be challenging, notes Mutter. “And yet gathering information on a portfolio of suppliers to analyse elements such as invoices, payments, currencies or delivery performance is of huge value,” he notes.

To this end, he reports that Taulia’s technical infrastructure helps clients – even those with disparate systems – attain full buyer and supplier visibility. Dashboards, for example, help users detect and respond to physical supply chain issues. But through deeper data analysis and reporting across multiple jurisdictions, they also assist in identifying new opportunities, such as how best to leverage cost of goods or finance arbitrage. “It’s all about making better decisions,” states Mutter.

Of course, a key function of the Taulia platform is supplier financing. Provided in its many forms, with additional drivers such as ESG, suppliers are able to better manage their own cash flow and liquidity, helping to sustain the entire supply chain ecosystem. In tandem with Taulia’s inventory management application, with functions such as third-party logistics management, vendor-managed inventory and consignment inventory, Evans explains that buyers and suppliers can optimally control stock flow “in a way that is less impactful on the balance sheet”.

Trade continues

The need to manage supply chain disruptions is intensifying. It’s easy to see why Evans believes inventory management will become “a huge focus in the coming years”. With the move away from JIT, the capacity of Taulia to bridge supplier and buyer activities enables management of the entire inventory process.

When this level of visibility and transparency also informs and triggers the timing of payments and finance – including ESG-driven supplier finance – across an entire supply chain ecosystem, the platform is helping to keep supply chains moving in the most efficient way, from the first to the last mile. Indeed, Taulia is helping businesses ride the storms of current and future disruptions.