Since the start of the Covid-19 pandemic, there has been huge disruption to established supply chains. Treasurers must now consider everything from increased commodity risk to new FX requirements and growing ESG expectations. NatWest’s Mirka Skrzypczak, Head of Working Capital & Trade Products, and Rowan Austin, Head of Trade Origination and Advisory, outline six steps treasurers can take to leverage the opportunities among the sea of change.
1. Improving resilience and commodity sourcing to better manage black swan events.
Prior to 2020, supply chains had become increasingly global and complex, with a focus on driving down costs. “Despite some Brexit challenges, supply chain vulnerabilities were not necessarily front of mind pre-Covid – both buyers and suppliers were operating in a comfort zone,” says Skrzypczak.
Now, though, corporates must continuously build resilience into their supply chains, enabling them to adapt to ongoing external events and continue to operate smoothly. “With the energy crisis, exacerbated by the war in Ukraine, and persistent challenges related to Covid-19, treasurers must work with their colleagues in sales and procurement to build an adaptive resilience strategy around their supply chain,” she advises.
This includes everything from assessing customer viability to researching alternative suppliers. And from a financial perspective, treasurers must rigorously assess commodity risk, and seek out intelligent hedging solutions, given the current energy crisis and the war in Ukraine. “Hedging commodities has never been so important in terms of managing price risk throughout black swan events, both from the point of view of the corporate’s own working capital, and from the perspective of buyers and suppliers – all of whom will be hit by rising prices,” she notes.
2. Tackling geopolitical risk with friend-shoring.
Throughout 2020 and 2021, early resilience strategies had seen numerous corporates reshoring supply chain activities – moving them from far away locations closer to home markets in order to minimise disruptions. Austin explains: “Corporates began to quickly assess where their key suppliers need to be located and re-assessed the relative differential between cost efficiency and security of supply. There’s no point having the lowest cost of supply if you can’t be sure you’re going to get the assets you need to provide your product.”
Reshoring is still happening to a certain extent in 2022, and inventories are still increasing. “But as geopolitical risk has increased, we are seeing the rise of ‘friend-shoring’,” continues Austin. “This involves relocating supply chain activities to a country that is more aligned with the company’s values and geopolitical strategy, while also enabling improved shipping times and potential cost efficiencies.”
For treasurers, the impact here could be working with suppliers in new locations and new currencies – requiring bank accounts to be opened and FX solutions to be put in place.
3. Increasing inventories but ensuring working capital efficiency.
Alongside reshoring, the pandemic, coupled with the war in Ukraine, and logistical hold-ups, has precipitated a shift away from just-in-time (JIT) models to just-in case (JIC), whereby inventories are increased as a means to improve supply chain resilience.
Skrzypczak explains: “Throughout the majority of our key customer base, there is a definite increase in inventory build-up. For treasurers this means that a lot of working capital is being trapped in assets, and the cash conversion cycle is lengthening. As such, treasury teams are now looking at solutions such as asset finance, alongside their existing SCF solutions and other financial instruments, to enable working capital to be freed up wherever possible.”
But this is no easy feat. “The challenge is knowing what instrument to use at each point in the trade cycle to enable working capital efficiency, as well as how to unlock working capital internally before seeking external solutions,” she notes. “In addition, more treasurers are turning to derivatives to help manage the wider market challenges, and yet many are not entirely comfortable with these instruments – so they must re-educate themselves. Of course, banks can help here, and provide expertise and solutions right across the trade cycle, in a holistic manner.”
4. Integrating ESG into the supply chain mainstream.
Another growing risk in the supply chain space is reputational risk related to ESG. Increasingly, stakeholders including consumers, the C-suite and regulators, expect corporates to operate in an ethical and sustainable manner. Austin comments: “There’s a significant recognition that it’s absolutely critical for supply chains to support a corporate’s purpose and goals, as well as looking after people and the planet.”
What’s more, around 80% of a corporate’s carbon footprint is locked up in the supply chain, so as businesses make net zero commitments, suppliers are coming under close scrutiny. “Treasurers can make a difference here through considering sustainable SCF programmes. These are a nascent proposition, with only a handful currently live, but they incentivise sustainable behaviour among suppliers by enabling those that meet certain ESG criteria to access cheaper financing. And it makes sense that in the future, all SCF programmes will have an ESG element to them,” he adds.
ESG can also be supported through greater supply chain visibility, believes Austin. “Even before deploying sustainable SCF, corporates can work to improve their insights into their own supply chain. At NatWest, for example, we work with a third-party specialist firm, EcoVadis, to rate all our own suppliers. This enables us to better understand the ESG impact of our entire supply chain, and make more informed decisions to encourage sustainability, even before looking to sustainable SCF.”
5. Embracing digital tools for better supply chain management.
Another development towards achieving supply chain visibility is the acceleration of digital workflows, hastened by the pandemic.
Austin comments: “Thanks to remote working, the systems, controls, and infrastructure around supply chain management have become more digital. We are also seeing a number of corporates leveraging sophisticated supply chain management [SCM] platforms, which provide visibility across the entire supply chain, enabling an end-to-end understanding of risk.”
Where previously such investments were viewed as being nice-to-have, they are swiftly becoming essential as a means to help tackle supply chain disruption. “These sophisticated systems also help to predict demand – and therefore inventory needs – using AI and ML. This then ties the physical supply chain back to financial flows, enabling the treasurer to be better informed,” he adds.
Despite rapid digital developments on the SCM side, the trade finance space is experiencing slightly slower progress. Austin explains: “Only around one in 1,000 bills of lading is currently electronic. So, there is a huge need to drive much more meaningful change in terms of the digitisation of trade.”
That said, there are some fascinating fintech initiatives starting to take off – such as Halotrade. “This company uses blockchain to create complete visibility in supply chains – right from the farmer, for example, all the way to the bank. And all the links along the chain are trackable and transparent, providing significant visibility benefits for large corporate buyers,” he explains. Meanwhile, best practices are measured and rewarded, and finance is able to flow efficiently to the local workers and business owners who make the end product possible. “This is the future of trade, and treasurers will benefit from it immensely.”
6. Prioritising change management.
“New technology is brilliant and holds enormous potential to increase efficiency in supply chains. But the majority of these technologies, such as blockchain, cannot be used in a plug-and-play manner,” warns Skrzypczak. “It requires serious consideration, and rewiring of existing processes and systems. In addition, corporates wanting to embrace these developments must change their legacy working practices to make the most of what the technology offers. This necessitates a culture of continuous improvement and a robust change management programme,” she believes.
Notwithstanding the hard work ahead, Austin says that “disruption is the new norm – whether it be technology, logistics, geopolitical change or something else entirely – and needs to be managed appropriately. As a result, disruption presents a significant learning opportunity, as well as a catalyst for treasury evolution in terms of more efficient management of financial risk.”
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