Supply Chain Health: A 6-Point Checklist
30 April 2022 |
The C2FO Team
If there is one thing you can guarantee in business, it is uncertainty.
The better procurement teams are able to prepare for future challenges, the more likely small to midsize enterprises (SMEs) are to be sustainable and to flourish.
Key to this success is strengthening relationships between buyers and suppliers right the way along the chain in order to identify potential risks, deal with cash flow issues and find workable solutions.
“I think that is fundamental to the whole process, and it is something I feel very strongly about,” says Philip King, a former government Small Business Commissioner who has over 40 years of experience in credit management.
“I think small businesses are vital to the economy, and if we can make them more sustainable by getting them to manage cash flow better, then the economy will be better and the world will be a better place.”
The indirect impact of crises
It is hard to imagine a time in which SMEs have been more tested. Following hot on the heels of the global COVID-19 pandemic, which continues to wreak havoc on staffing and international transportation, the Russian-Ukraine war means supply chains reliant on sources from the material-rich countries are left in serious trouble.
“One of the things that businesses tend to miss is the indirect impact,” King continues. “So if you’ve got a supplier two or three steps up the supply chain that is impacted by the Ukraine situation, you may not even be aware that they are getting supplied from Ukraine or Russia and being impacted. But if they are, then clearly that will have an impact on your supply chain.
“Russia is a massive source of critical minerals and metals. Deloitte put out a report recently about the impact on the semiconductor market, and some businesses who had seen it coming and had built up stock are OK for the time being, but most of the motor manufacturers have curtailed production because they just can’t get the materials they need to produce.
“That has an impact on a whole raft of businesses in the supply chain. If you’re a supplier of car seats, let’s say, to a car manufacturer and they are stopping production because they can’t get plutonium supplies, that affects you even though your production is fine. So it is that whole interweaving that has a massive impact.”
Distance between suppliers and buyers has also become more of a sticking point in recent years, as businesses consider moving away from global models to localised sourcing.
Localisation and price increases
“There is certainly a desire and an aspiration towards localised sourcing,” King says. “And we’ve seen the increase in documentation for trading in Europe, for example. We’ve seen shipping costs increase and difficulties with containers being in the wrong ports. All of these issues are making long-distance supply more difficult and more fragile, and therefore the temptation and the aspiration to look at more local suppliers is rising and is becoming more focused.”
These factors have all contributed to increasing prices for in-demand materials. As a result, many businesses will be forced to increase the cost of their products; find cost-cutting solutions, such as using different materials; or simply prepare to absorb the shock themselves rather than risk passing it on to consumers.
“I read that Cadbury is going to reduce the size of its 200g bar to 180g and keep the price the same,” King says. “So this whole shrinkflation tactic is having a resurgence.
“I think businesses are looking at driving automation and efficiency, too, because that’s a way of absorbing cost increases, even though it costs initially.”
The danger of being unprepared
While SMEs are caught up dealing with the present, King says, many are failing to carve out time to plan for a stable financial future.
“A lot are coping with what is being thrown at them, and financial risk planning is one of those things that is nice to have. But there’s a real danger in ignoring it.”
Here are King’s top six tips for a healthy supply chain:
1. Know your suppliers and their potential weaknesses
“That way you can mitigate against them,” King says. “Use the tools that are increasingly available, exploiting the power of AI and machine learning, to monitor what is going on with risks and trends, and make sure you are really close to them and see what is coming down the track. I think that for a big buyer to be caught out by suppliers’ problems suggests they are not really doing what they should be doing.”
2. Change the way you work
“Identify alternative sources and materials, potential different components that you could use in the event that there is an issue with obtaining material or parts somewhere along your supply chain.
“Consider new storage options, find suppliers closer to home, and use technology to drive automation and efficiency. Get smarter about what you do, and explore the alternatives.”
3. Review inventory policy and planning
“Build stocks that are critical. Look at what you do need to have stocks of, and review the way you manage them. Ask yourself: Do you need to get them further in advance? Do you have storage for them? How do you manage getting ahead of potential risks and price increases by having plenty of what you need in time?”
4. Build a playbook to cope with the next crisis
“We’ve seen COVID, we’ve seen Ukraine, we’ve seen cyberattacks. Prepare for disruption. Use scenario planning to be prepared for the worst, and have contingencies in place in terms of finance, supplies, staff and more.”
5. Make working capital available
C2FO’s Early Payment Programme allows businesses to pay invoices for suppliers in advance in exchange for an agreed discount on goods. It is easy to use, low-cost and flexible, and it allows suppliers to manage their cash flow. It’s also a great way to strengthen relationships with key suppliers and make sure they have the capital they need to press ahead with production in a crisis.
“Finance is a really important area,” King says. “If you’ve got to change the way in which you manage your supply chain, and buy stock more in advance, that can have a massive impact on your cash flow. And your suppliers will be in a similar position. What C2FO does, in terms of getting early payments out, getting money into supplier’s hands, is really important.”
6. Communicate with your supply chain
“However big you are, you still deal with people on the other side of the equation. People buy from people, people sell to people, and people work with people. Having good relationships is absolutely fundamental.”