Building a Competitive Supply Chain: Putting Ethics First

Published: May 16, 2022

Alistair Baxter, Head of Receivables Finance at working capital management company Taulia, discusses the key macro challenges that treasury professionals need to consider now to drive growth. He also outlines how ESG can lend a competitive advantage in supply chains.

The turbulence of the current macro environment has business strategists puzzling over where the next wave of growth opportunities will emerge from. These opportunities may not be as obvious as in years gone by, but they almost certainly will arise during the remainder of the year and businesses must prepare if they are to take advantage of them. CFOs and treasurers play a key role in this preparation and need to consider where their cash is and how to deploy it for growth, how to embrace currency flexibility as a route to overcoming the impact of political tensions, seeing the opportunity in disruption and embracing the full force of ESG.

Optimising receivables to drive return on investment

Businesses and their growth are ultimately funded by cash. Businesses need cash to buy the goods and services they require to operate, to invest in growth through research and development or marketing, and to explore external investment opportunities.

Working capital velocity is paramount in growing sales and earnings, especially in a post-pandemic-led environment. As the UK economy faces a period of ‘stagflation’ (when inflation is high, but there is no corresponding growth), it is vital for businesses to ensure they understand their financial balance sheets back to front. This means knowing how much cash they have, where it is, and understanding what it could do for them to drive growth.

Where cash is concerned, knowledge is power – and technology plays a crucial role here. Many economic variables are outside of a CFO and treasurer’s influence , but putting in place systems to help focus on areas they can control is a recipe for success. Understanding where receivables are, what they will be doing next and how they can be used to achieve growth is critical in challenging environments.

End of the dollar-based global order?

Shortly after the start of the Russian invasion of Ukraine on 24 February, Larry Fink, CEO, BlackRock, discussed the possibility of the conflict prompting the end of globalisation , with a potential end of the global financial system based on the dollar. Already, Russia is demanding European gas payments in roubles and China has clear intentions to make the yuan a global currency of choice, while localisation and onshoring are becoming dominant trends.

The outcome of any currency power shifts is unclear, but businesses should be alert to any impacts of currency politics on their supply chain and payments networks. Responding to switches in global power can be overcome in part by embracing currency flexibility. There are, of course, operational considerations to take into account, so planning ahead and embedding currency flexibility early is prudent.

Businesses may have to become comfortable (and do so extremely quickly) with where their money is going to and coming from – across more currencies – and work hard to ensure they still retain transparency of their cash position.

Continued supply shocks

In recent weeks, we’ve seen inflation skyrocket. What will have hit consumers across much of the UK, Europe and the US, still hasn’t led to significant economic slowdown despite actions being taken by the Bank of England, European Central Bank and the US Federal Reserve. While CFOs cannot control inflation, they are able to prepare their businesses to pivot procurement processes and ensure there is sufficient liquidity available to support necessary changes in purchasing and the procurement arm of the business.

These may come in the form of sourcing onshoring or nearshoring suppliers to de-risk from geopolitical activity or reassessing suppliers geographically to quell the effects of inflation, which may be uneven from region to region. An open mind to problem solving will be of vital importance as new challenges throw up unfamiliar solutions, and potentially different opportunities for businesses throughout the supply chain going forward.

Embracing the force of ESG

ESG is now firmly embedded in the consumer and employee psyche. In 2021, PwC’s Consumer Intelligence report revealed that 83% of consumers think that companies should be actively shaping ESG best practices, and 86% of employees prefer to support or work for companies that care about the same issues as they do . Evidently, to keep all stakeholders happy, businesses need to prioritise ESG throughout their business, including their supply chain.

Supply chains are starting to experience the trickle-down effect when it comes to making decisions and pricing differentiators around ESG and, the evolution of technology within the supply chain has heightened the level of transparency and visibility to all businesses regarding ESG credentials. In the modern world, businesses have autonomy of choice as to which buyers and suppliers they choose to work or align themselves with, in accordance with their corporate ESG principles, standards and values.

Bigger businesses have a major role to play in ESG, but also perhaps the largest mountain to climb in getting it right. In the meantime, many SMEs have made great progress in improving their supply chains. For all the challenges ESG presents, there is opportunity for CFOs and treasurers to establish their businesses as differentiators against their peers in terms of ethics and values of who they work with and how. The technology and corporate momentum are available to support supply chain ethics throughout the remainder of 2022 and beyond.

^{[1] Financial Times, March 2022,  BlackRock chief Larry Fink says Ukraine war marks end of globalisation}

^{[1] PWC, Consumer Intelligence Report, 2021, Beyond compliance: Consumers and employees want business to do more on ESG}