Corporate TreasuryFinancial Supply ChainSupply Chain FinanceResilient supply chains need liquidity planning built in

Resilient supply chains need liquidity planning built in

The complexities of the new global economy have meant that supply chains must evolve as liquidity planning will become a lasting priority

Supply chains are becoming a major headache for treasurers, since the war in Ukraine and global economic turmoil have created uncertainty and disruption. New levels of operational complexity are forcing businesses to prioritize certainty over efficiency in supply chain arrangements that are likely to be non-linear and multilateral for the first time in decades. As supply chains evolve to match the new complexity of the global economy, liquidity planning will become a lasting priority that relies on financial diversification and real-time, quality of data that allows treasurers to manage their financial risk in new and unfamiliar ways. 

The crux of the issue is that supply chains have for decades been structured unilaterally and defined by financial efficiency, mirroring relative peace and economic stability that is now unfit for purpose. War in Ukraine, Covid lockdowns and fluctuating interest rates have had varying, yet marked, effects on whole economies across the world. Unreliable supply chains, compounded by demand fluctuations, are now a major concern and businesses, perhaps for the first time, are having to worry about resiliency and certainty of delivery more than price to keep their supply chains moving.   

This has been borne out in the recent flurry of onshoring and nearshoring, as businesses begin to take on the additional costs of manufacturing closer to home in order to mitigate global geopolitical risk and the fluctuations in demand resulting from Covid-19 protocols. Geographical diversification is also becoming more common, with businesses choosing to operate with many different options in supply chains that span numerous markets, more closely resembling a ‘web’ in which the suppliers can be chopped, changed, stopped and started as needed.  

While supply webs make sense for business operations, they create a significant, if necessary, migraine for treasurers. Truly diverse supply chains certainly mitigate risk, but the payoff is having to deal in multiple currencies with multiple suppliers, potentially for a number of different products or services that, if they have been onshored or nearshored, are also likely to be considerably more expensive.  

In reality, we could coin this a ‘stability premium’, in which businesses sacrifice liquidity for reliability. The risk for treasurers is how to ensure that business does not grind to a halt while numerous invoices, working on different exchange rates and through different banks, are waiting to be paid.   

There are options available, and the problems created by geographical diversification can, in part, be mitigated by financial diversification tools, such as cash flow acceleration facilities. Anecdotally, there has been a significant increase in interest for cash flow acceleration products, which allow early payment on receivables, and is evidence that treasurers are facing increasing cash flow complexity as their supply chains diversify.  

At the same time, geopolitics and payables are not the only risks associated with gummed up supply chains. Undiversified lender risk is increasing. In a pre-Covid world, having one lender with a good track record was sufficient. As certainty and reliability of lenders gradually becomes a greater concern, the reality is that businesses that rely solely on one source of funding have become more vulnerable to illiquidity.  ‘Multifunder’ arrangements can mitigate the risk of liquidity drying up, allowing treasurers access to a number of different lines of funding. 

Yet, despite these financial facilities, complexity has undeniably been added to supply chain operations, and therefore the financials, and that looks set to stay. Having a total view of the finance and operations of supply chains can help in understanding where in the supply chain capital is held up. Real time information and data is improving supply chain resilience and reliability. New systems allowing for widespread visibility and communication across multiple finance lines are a successful means of mitigating financial risks. Treasurers that have access to real-time information across their entire supply network stand a better chance of achieving liquidity in stop-start economic conditions.  

The issue is that, at present, too few are onboarded to technology that provides the capability to grease the wheels of supply chains and unlock capital that can be redeployed or used for investment elsewhere. Treasurers are having to learn and incorporate new practices, such as multifunder agreements and real-time data implementation, to ensure resilience, but the key is that they do this quickly and in great numbers.  

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