The treasury team is now critical to making supply chains more flexible while mitigating risks.
Global supply chains can be affected by many different pressures and events. Political strife, civil wars, macroeconomic developments, liquidity events and even the weather can all affect suppliers’ ability to deliver goods to their corporate customers.
Managing these risks is a key concern for companies operating internationally. But some risks can be mitigated more easily than others. Notes Sam Sehgal, EMEA head of trade finance at Citi: “Even if companies have only two or three months’ advance warning of a situation, they can be fast to react.”
Civil unrest and currency crises may sometimes be foreseen or accommodated over time, but other types of disruption can strike without warning. Adverse weather and flooding often affect production and sourcing costs—but they also affect suppliers’ ability to transport goods to customers. In 2011, for example, the widespread floods in Thailand led to a 40% rise in the price of computer hard drives and dented production for automotive companies such as Honda. From the Japanese earthquake and tsunami in 2011 to recent blizzards in Boston, natural disasters are becoming a greater concern for companies. According to the 2014 Chief Supply Chain Officer Report, published by SCM World, concern over natural disasters increased by 8% between 2013 and 2014—the second-biggest leap after geopolitical instability.
At the same time, companies that have focused on expanding their businesses into emerging markets may find that they are more exposed to supply chain risks than in the past. Research published in March by Verisk Maplecroft identified the 100 cities that are most exposed to natural hazards and found that over half of these cities are located in the Philippines, China, Japan and Bangladesh. The risks considered in the research included tropical storms, floods, earthquakes, tsunamis, wildfires and volcanoes.
Conscious of the impact such events can have on their businesses, companies are carrying out sensitivity analyses and modeling the impact of specific disruptions on both themselves and their suppliers. “What really counts is the resiliency of the supply chain when subject to unexpected disasters,” says Enrico Camerinelli, senior analyst at consultancy Aite Group. “That is, how fast does the company recover from the situation and return to a certain percentage of original working conditions.”
Some multinationals are deputing their own people in the offices of their key and core suppliers. “It’s a practice found in the banking industry, too,” says Sehgal, “where banks like Citi depute their own employees on a day-to-day basis to their vendors for efficient governance and to make sure that everything is functioning in the way they need it to. It’s the best way to ensure adequate contingency planning is in place at all times.”
When a natural disaster occurs, companies need to respond as quickly as possible. This might mean switching from one supplier to another to ride out a supply chain disruption. But to do so quickly, companies first need to have built some flexibility into their supplier base. Joao Luiz Galvao, head of trade and financial supply chain—Americas, GTB, Deutsche Bank, notes that at the corporate level, companies are mitigating risks to some extent by diversifying suppliers, holding larger inventories, ensuring a firm grasp on their market share or being aware of points of vulnerability.
But such standard risk mitigation practices have a downside. Increasing inventory levels, for example, involves costs for production and warehousing—and can result in waste. On the other hand, just-in-time inventory strategies (keeping on hand no more than the levels of inventory the company forecasts will be needed over a short, pre-specified time) allow companies to minimize waste and maximize productivity, but can leave them exposed when a disruption occurs.
“Some production techniques are now in place to partially offset the buildup of inventory—such as postponement, whereby the assembly of the final product is delayed as long as possible,” notes Camerinelli.
TREASURY TO THE RESCUE
Companies that want to be nimble yet prepared are increasingly turning to the treasury department for help. Says Galvao: “A carefully designed and agile treasury setup—with centralized control, up-to-the-moment data granularity and strong liquidity and working capital management practices—can be crucial to, quite literally, weathering the storm,” he says.
Strong treasury analytics, pulling together data from across the physical and financial supply chains, are increasingly central to improving supply chain risk management.
Having strong suppliers is also key, notes Galvao: “For example, supply chain finance programs inject liquidity into the chain... which can be of strategic importance in a crisis scenario.”
Supply chain finance can be an effective way of supporting suppliers during a disruption—but from a contingency planning point of view, it’s important to make sure that any platform used has the necessary flexibility. “If a company had to switch from a supplier in the Czech Republic to one in Hungary, the question is whether the new supplier could be activated and ramped up very quickly?” Sehgal concludes. “The question then would be, for example, does the platform allow for payments to be done in Hungarian forints? These issues are becoming very important for companies when issuing RFPs [requests for proposal] and while considering who their core supply chain partner would be.’’