Supply Chains of the Future: Recovery-Proof Solutions

The Covid-19 pandemic has highlighted the fragility of supply chains across the globe. TMI speaks to five industry experts to understand how treasurers can help shore up supply chains right now – with quick-to-implement solutions, ranging from dynamic discounting to e-invoicing. We also look at the future of supply chains, given a potential resurgence of domestic sourcing and the rise of sustainability, examining how companies can finance their supply chains to prepare for the economic recovery.

More than 200 of the Fortune 500 have some form of operations in Wuhan, China – the so-called epicentre of the Covid-19 pandemic[1]. This fact alone highlights how reliant the world has become on international sourcing, and how fragile supply chains can become when faced with disruption from unforeseen events.

Although China is now reopening, productivity levels are nowhere near ‘normal’. And the Western world is, at the time of writing, largely still in lockdown. It is fair to say that the impact of Covid-19 on supply chains – not to mention purchasing habits – has been immense.

Edi Poloniato, Global Head Working Capital Solutions, Kyriba, a leading provider of liquidity and supply chain solutions explains: “We are experiencing an unprecedented event. Even if some vital sectors, for example agriculture, consumer goods, medical supplies, are seeing significant, and rare, demand surges, all economic players are affected. As a result, purchase and demand are impacted at the same time, which blocks financial chains.” Currently, we observe three main demand and supply scenarios:

James Binns, Global Head of Trade and Working Capital, Barclays, agrees that it is a mixed picture. “As Edi has highlighted, sectors related to food, healthcare, or daily essentials are currently experiencing high demand, so some corporates are looking for additional working capital to help meet that demand. At the other end of the spectrum, in the leisure and hospitality sector, and certain areas of the transport and travel sector, for example, businesses are looking for assistance via government schemes such as the UK’s Coronavirus Large Business Interruption Loan Scheme [CLBILS], which helps businesses to access finance up to £200m.”

For those sectors that are impacted in less extreme ways, explains Binns, “we are seeing clients use a mix of CBILS (for smaller businesses) and CLBILS with working capital solutions. This is an interesting trend as corporate treasurers are proactively re-evaluating funding solutions, looking beyond the more traditional overdraft and debt-related avenues they have relied on previously”.

As a result, Binns believes there is rapidly growing awareness of the funding requirements of supply chains and the sustainability of supply chains going forward. “While buyers are looking to optimise their payment terms, they are equally aware of the need to help suppliers survive the crisis in order to maintain the integrity of their supply chain for the future. Buyers are also becoming more aware of the importance of their smaller suppliers – and the cash flow issues these types of businesses face. Interest in financial solutions to reach the longer tail of smaller suppliers is therefore gathering pace.”

Early payment solutions

Against this backdrop, an increasing number of buyers are looking to leverage reverse factoring, also known as supply chain finance (SCF), solutions for their large and medium-sized suppliers (see box 1), while deploying dynamic discounting (see box 3) for their smaller suppliers.

Poloniato explains: “If the buyer does not want its working capital to deteriorate or if it wants to increase its free cash flow by extending the payment terms, implementing an SCF programme can be an efficient solution. While this days payable outstanding [DPO] strategy obviously ‘generates’ cash, it does not have to be applied at the expense of suppliers which may especially be feeling the crunch of quarantines, intermittent production cycles and distribution challenges. That is why buyers can help suppliers by offering early payment terms via SCF banking partners.”

James Binns Global Head of Trade and Working Capital, Barclays

Meanwhile, “With third-party platforms performing dynamic discounting, buyers can use their own funds to assist suppliers. This enables financing to reach much further down the supply chain than SCF, and onboarding is typically rapid since the technology is sophisticated and the KYC burden is reduced as there is no bank or 3rd party funding involved,” Binns adds.

Colin Sharp, SVP EMEA, C2FO, echoes this, saying: “Financial supply chain solutions need to be available for all suppliers, especially the more delicate small and medium businesses which are underserved by the financial markets. Our Dynamic Supplier Finance enables the support of all suppliers, large and small. Moreover, as James alluded to, the fact that platforms like C2FO are highly digitised, and unnecessary paperwork has been eliminated, means that the lead times to onboard a supplier are vastly reduced.

Dynamic Supplier Finance is a highly regarded C2FO innovation, that allows funding from the buyers own cash, and from our bank and non-bank funding network, providing seamless flexibility to choose the best funding option(s) for both the buyer and its suppliers.

For buyers with cash that isn’t generating great returns (not uncommon in current conditions), deploying funds to suppliers through dynamic discounting, and improving gross margin in the process, can be an attractive option – even more so in times of crisis. Michael Rieskamp, MD Europe, Taulia, notes: “Ultimately, all the supplier cares about is getting paid and on time, not whether it is the buyer’s own money or money from a bank. So, solutions such as Taulia are gaining significant traction as more organisations see the benefits, and the flexibility for the long tail of suppliers compared with bank-led solutions. It doesn’t matter how large or small your business is, and suppliers can be enrolled in as little as 90 seconds.”

Flipping between SCF and dynamic discounting solutions is also becoming easier for those buyers running a mix of the two initiatives, says Poloniato. “Technology can help buyers to switch easily from one technique to another depending on their cash situation without impacting their internal procedures and their suppliers. We see examples of buyers setting up liquidity thresholds that trigger the use of dynamic discounting or supply chain finance, for example.”

Here, Binns adds that, in future, corporates are likely to want to see SCF and dynamic discounting integrated into a single, bank-agnostic platform, so that buyers can manage the needs of all their suppliers – including the long tail – in one place. “Certainly, our strategy at Barclays is to embrace third-party platforms and we are working to connect to them in the near future. The ultimate idea would be to offer clients connectivity via their platform of choice and to assist in funding the vendors that we already bank via that platform,” he notes.

This is music to Sharp’s ears. “Being able to mix SCF and dynamic discounting in a single platform will be vital in order to serve all of the supply chain – and for the buyer to meet and exceed internal key performance indicators [KPIs] as they move between working capital, margin and so on,” he adds.

Such a set-up is also a priority for Taulia, says Rieskamp. “We have recently announced a strategic alliance with J.P. Morgan which offers the bank’s clients both the capability to onboard suppliers of all sizes across the globe and the flexibility to toggle seamlessly between bank-funded and self-funded early payments. This kind of innovation is very exciting – and great news for corporates.”

E-invoicing imperatives

To make the most of such an integrated environment in the future, Rieskamp believes that a renewed focus on e-invoicing is also called for. “Getting paid on time, or early, requires invoices to be sent to the right place, and received in a timely fashion and in the right format. Unfortunately, this isn’t always the case.”

Everyone knows that paper invoices are inefficient and costly, this is why shared service centres (SSCs) and business process outsourcing (BPO) became so popular – a place where low-cost workers could rekey information from paper invoices into ERP systems. But no one anticipated SSCs being shut down entirely, and the pandemic has completely changed the way invoices are dealt with.

Colin Sharp SVP EMEA, C2FO

“Many companies have begun emailing invoices as a stop-gap, but this still requires the customer to input data manually into their accounting system, leading to slow approval times and the risk of error. E-invoicing is therefore receiving a great deal of attention and there are solutions in the market that make it very easy to convert old invoice templates into an electronic invoice that suits the format needs of the buyer – with fields like the order number clearly marked,” Rieskamp explains.

In response to Covid-19, Taulia has launched an initiative called Rapid Start Invoicing, which can be implemented within seven days. This gives suppliers the ability to submit invoices electronically and enables buyers to digitise their accounts payable (AP) processes, while keeping on top of outgoing payments and keeping employees engaged in the business. “As such, there’s a great deal of value in implementing e-invoicing, and it becomes even more powerful when used in conjunction with a solution like an early payment programme,” he believes.

Edi Poloniato Global Head Working Capital Solutions, Kyriba

Poloniato agrees: “Companies are generally under-equipped with e-invoicing solutions. Invoice processing is still an artisanal and time-consuming process.” Furthermore, even organisations which do have a type of e-invoicing solution in place often have a blind spot when it comes to interfacing with ERP [enterprise resource planning] – which could, if done correctly, speed up and streamline the overall process. “In addition, electronic signatures are still rarely used for the validation of purchase orders or quotes, for example, meaning that many organisations are missing out on efficiencies here.”

The Covid-19 crisis is therefore an opportunity for organisations to recognise the need to speed up their e-invoicing process, believes Poloniato. “Not least since electronic invoices will become mandatory in B2B exchanges between some countries, like France, within the next three years.”

Despite the obvious benefits, building the business case for e-invoicing is not always quite so easy, says Jordan Novak, SVP, Market Innovation, C2FO. “The problem with many of the processes like e-invoicing is that the benefits are typically soft or intangible and the costs in time and resources to convert are high. We have a Fortune 10 client that has only 1% of its invoicing left in paper format. It is cheaper for them to have 500 employees accept, scan, and enter these invoices than convert that 1% to e-invoicing!”

Rethinking risk

An area that all the experts agree will be advantageous to focus on as a result of the Covid-19 crisis is improved risk management and mitigation in the supply chain. Binns comments: “Given the growing awareness of concentration risk within supply chains, we expect to see greater focus on contingency planning post-crisis.” Where concentrations exist around particular countries or particular suppliers, he believes large suppliers will now be looking to diversify their supply chains in order to mitigate or at least minimise that risk. This could potentially mean bringing new suppliers onboard.

Michael Rieskamp MD Europe, Taulia

Increased risk in global supply chains could also see companies rethinking where they source products from, and whether technologies such as 3D printing might be advantageous. “Of course, it’s an emerging technology and it is more relevant in certain sectors, such as white goods, components and toys, but it will be interesting to see whether Covid-19 drives an increase in the use of 3D printing in supply chains, with more production being on-shored or localised as a means to improve business continuity,” notes Binns.

The financing of 3D printing is also thought-provoking, he says. “First, there is a certain amount of financing required for a local 3D printer. Then, there is intellectual property [IP] being sold, in terms of programmes and patterns to operate the 3D printer and make the required item, which will result in a trade finance need to support these cross-border IP flows. This will be an interesting area for treasurers to watch.”

Another point of development linked to contingency planning is the potential for logistics providers to hold and manage inventory. Binns comments: “I believe we will see an uptick in inventories being held, given the renewed focus on blockages and breakages in global supply chains, but corporates may not wish to hold these additional inventories in their own warehouses. Instead, they might prefer to hold the inventories near-shore, with a trusted logistics partner.” This trend is likely to be a particular focus once recovery begins, and global demand begins to spike.

Elsewhere, the digitisation of documents in physical supply chains will also likely accelerate as companies look to have greater visibility and control post-crisis, adds Rieskamp. “Track and trace capabilities from source to destination are becoming much more important. This ties in nicely with digitisation of the financial supply chain through e-invoicing, which I believe will play an important role in enabling corporates to be nimbler throughout the recovery period.”

Recovery readiness

Preparing for the economic recovery is in itself a challenge, with the risk of being under-resourced weighing heavily on corporates’ minds. “As and when recovery begins, suppliers will need funding like they’ve never needed funding before because their liquidity buffers will have been eroded by the Covid-19 crisis,” explains Binns. “Coping with additional demand will be tough – and the right funding needs to be in place to help see them through the rapid change of pace. At the same time, average credit quality is likely to have decreased, so there will be an increased need for risk mitigation between different trading counterparties as well.”

He highlights the potential for a return to more structured documentary trade and the use of instruments such as letters of credit, both sight and usance. “These are highly effective supply chain finance and risk mitigation tools and the accounting treatment is relatively simple and efficient. So, I hope that corporates will give greater consideration to the power of some of these tried-and-tested solutions, in the right situation, as recovery takes hold,” says Binns.

Meanwhile, the role of governments, export credit agencies, and the various trade agencies, will be critical in ensuring that the banks have the right level of credit appetite and credit limits behind them to be able to support the recovery. “Without the right funding in place, supply chains will not be efficient and they won’t be able to cope with the rise in demand again. Ongoing collaboration between government, trade bodies and banks will be vital, therefore,” cautions Binns.

Sharp echoes this and highlights the need for multiple players to support financing during recovery. “Supply chains will need to be viewed as an ecosystem, some of which can support the working capital goals of the buyer and some of which need support from the buyer,” he says. “The ability to access a diverse pool of funding – bank and non-bank – will be important. As markets ease and corporates have an excess of cash from the protective measures currently being employed, they will want to deploy cash effectively: the ability to mix seamlessly between buyer cash and third-party funding in a simple experience for the supplier will be vital. This will also allow more effective steering of EBITDA, working capital, free cash flow and supply chain risk as internal KPIs and goals continually change. Pre-invoice funding will also be important as the volume of purchase orders increases in line with economic activity.”

Jordan Novak SVP, Market Innovation, C2FO

Novak adds: “The key for companies will be dealing with the pandemic hangover and putting financing programmes in place that are flexible enough to pivot immediately in shifting economic conditions.” He notes that, during recovery, “every supply chain system and solution needs to be able to respond as quickly as those companies which shifted manufacturing from cosmetics to hand sanitiser and drive value deeper, up and down the supply chain. This means true innovation, true on-demand technologies. It will not be good enough in a recovering, fragile global economy to build infrastructure to support a single strategy or a single side of your fulfilment channel”.

Looking at the bigger picture and thinking broader is also one of Binns’ key pieces of advice. “For years, I’ve encouraged large buyers using SCF to look beyond their own working capital ratios and their own funding to the broader supply chain ecosystem. I hope that one of the positives coming out of the crisis will be much greater awareness of what an optimal provision of funding across supply chains looks like – and that large, investment-grade buyers will continue to recognise their role in influencing the ecosystem to the benefit of their suppliers. In the medium and long term, the benefits of such an approach to a large buyer – and their suppliers – will be much greater than short-term gains made through pushing out payment terms, for example.”

Poloniato is starker in his guidance around preparing for recovery. “One thing is certain: when we come out of the current crisis the world will be different. Some experts predict that this is just a preview and, unless we seriously change our course of actions and priorities, this is just the first in a series of crises. Our new normal will be punctuated with an even flow of quiet periods and prolonged crises.”

With this in mind, he believes organisations should strongly push for working capital programmes to shore up liquidity preparedness while improving their odds of success when the tide turns. “Remember it’s not a matter of if, but when. The winning companies will be those which can increase both their financial survival and success rates,” he concludes.