CFO challenge focus: Supply chain volatility

Corcentric

Within the C-Suite, the Chief Financial Officer’s role has expanded to address many of the biggest business challenges of recent years. Supply chain volatility is one such challenge, threatening disruptions to cash flow, production and sales forecasting. These disruptions, in turn, impact bottom line profitability and the ability to service customer demand, attracting the broader attention of stakeholders in the senior leadership team.

Consequently, the C-Suite look to the CFO, and by extension the finance team, for ways to mitigate risk and limit the impact of supply chain volatility throughout the business.

What causes supply chain volatility?

Global supply chains are impacted by changes to supply and demand in each and every one of their operating regions, as well as changes to the import/export process and legislation, environmental factors, and operational challenges across their networks.

In recent times, the impact of the COVID-19 pandemic on supply chains has been considerable. Companies saw demand decreasing and made aggressive cuts to their production schedules. However, for many, demand did not decrease as much as expected, and turning production back on proved more difficult than anticipated.

In addition, buying habits changed. Buyers stocked up on goods that were not traditionally purchased in large quantities. Manufacturers treated these as spikes rather than ongoing problems.

Geopolitical tensions and policy changes also invariably cause supply chain disruption. The war in Ukraine and other global upheavals have taken their toll on global supply chains, as suppliers struggle to source raw materials and route deliveries as they have done in the past. Sanctions placed on Russia have driven up energy prices, leading to higher transportation costs. Even Brexit in the UK has created additional paperwork, delays, and costs for supply chains in this region.

While many of us were locked down and awaiting our home deliveries, the infamous Suez Canal incident in 2021 caused unexpected delays to goods en route from East to West. Unfortunately, it’s hard — impossible, even — to predict what unexpected incident might be next.

This decade has also seen rising transportation costs and limited capacity at ports and within transportation networks, resulting in delays and rising costs across supply chains globally.

As if the above factors weren’t enough to contend with, low unemployment and working from home has led many people to leave jobs that were uncompetitive or unfulfilling. Consequently, many supply chains have experienced shortages/outages due to lack of resources to fill shifts.

It’s not hard to see why the phrase Supply Chain Crisis was coined in the early 2020s.

The evolving importance of supply chain relationships

Careful supply chain management is needed to address the supply chain issues mentioned above. Companies can no longer risk the extremes of just-in-time (JIT) and lean supply chain practices that were championed for their cost-saving benefits over the last few decades.

JIT is no longer appropriate for goods with high supply chain complexity, such as those reliant on a global network of participants. Companies need to shift to increases in safety stock (or eliminating JIT) coupled with supply chain redundancy (having a local provider of key materials) where possible, to minimise supply chain disruption.

On the downside, increasing stock locks up capital through increased days inventory outstanding (DIO). This requires additional cash to buy inventory. However, rising interest rates and tight capital markets further complicate this issue. If DIO needs to increase in order to minimise supply chain risks, CFOs may look to balance the impact on the cash conversion cycle through either reducing days sales outstanding (DSO) or extending days payable outstanding (DPO).

Extending DPO can have ramifications for already stretched supply chain relationships. Retention of critical supply chain partners is important to ensure continuity of service, so asking them to accept later payments may prove to be a risky endeavour.

Supply chain partners also play an important role in meeting ESG targets. ESG initiatives encourage businesses to look closely at their supply chain partners and processes to improve sustainability, environmental, and societal impacts. Retention of known and trusted supply chain partners is crucial to supporting ongoing ESG commitments.

Inflation and supply chain volatility

Inflation brings added complexity to supply chain management. On the one hand, it makes sense to purchase more at lower prices to increase inventory. On the other hand, inflationary pressures impact spending as consumers reduce unnecessary spend and become more price conscious, leaving companies with too much inventory on the books.

Raw materials purchased in bulk, to hedge against rising costs, require cash to purchase them. The cost of borrowing cash may cancel out any gains to be made here, but CFOs have to weigh up the risks of short-term profitability against the benefits of longer-term security that higher inventory and raw materials can bring.

Protecting against supply chain volatility

CFOs have a variety of options to tackle supply chain volatility. One of the most logical places to start is by looking at the supply chain through the lens of strategic sourcing; identifying risks and adjusting procurement to lock in pricing and reduce the future impact of price volatility.

Business can also consider dual source, make versus buy, or local source strategies. These may increase costs, but can ensure supplies when supply chain issues would have otherwise created ruptures.

Supporting supply chain partners, who are strategically important to the smooth running of operations and ESG targets, with supply chain finance can protect against unwelcome disruption.

Conversely, extending payment timeframes to increase DPO and utilise the capital more profitably can subject supply chain partners to dangerous financial pressure – leading to increased volatility and disruption to supply chains. Providing supply chain finance to suppliers can offset some of these risks, as can working with a managed service provider, such as Corcentric, to fund the gap between when suppliers need to be paid and when you would ideally pay them.

Responding to volatility

The role of the CFO may include protecting the business against the impacts of supply chain volatility through improved supply chain relationships, increased inventory, and supporting suppliers’ cash flow through supply chain finance, but this is only half of the story.

Having the right metrics and KPIs to be able to identify and swiftly respond to supply chain volatility is crucial for success. In order to do this, financial leaders need to improve their visibility of supply chain impacts and have sufficient control available to address them quickly.

How Corcentric can minimise exposure to supply chain volatility

Corcentric helps finance leaders at some of the world’s largest and most successful companies mitigate the risks of macroeconomic, supply chain, and market volatility through a combination of managed services, consulting, and finance.

Implementing new technology, such as automation software, to streamline accounts payable processes can provide some degree of improvement in the visibility of supply chain changes and support the decision-making that business leaders require to address these impacts. But technology alone is not enough.

Through the application of managed services and funding, rather than just technology and fixed human capital, Corcentric can help rapidly improve scalability and process resilience. We suggest that digital transformation to address supply chain volatility should be centered around creating a B2B commerce control tower, for real-time visibility and control over the impact of supply chain volatility.

By increasing cash flow and working capital through DSO and DPO optimisation programs, Corcentric frees up capital to fund other initiatives such as local sourcing, safety stock increases, and indeed the aforementioned digital transformation required to improve visibility and control over supply chain volatility.

Through supply chain finance we can also bring much needed support to your supply chain partners, strengthening relationships to reduce volatility. And our strategic sourcing experience can be leveraged to improve supply chain resilience alongside addressing ESG objectives and controlling spend.

In an increasingly uncertain and volatile world, Corcentric works to help you gain more control and stability throughout your supply chain and unlock the capital to do this from DSO and DPO optimisation initiatives. Get in touch to find out how we do this for other clients, and see how we can help you reach your objectives faster today.