Bringing procurement into the financial fold
In the wake of COVID-19, procurement and treasury departments need to work together towards the aim of healthy supply chains.
Corporates are rapidly applying lessons learnt from COVID-19 business disruptions. Strengthening of links between physical and financial supply chains in their procurement strategies should now be at the top of this list. Such links should drive more visibility across supply chains, create foundations that help protect against future disruptions, and ultimately support the financial health of supplier ecosystems.
Major disruptions inform the evolution of procurement strategies. In the 1980s, for example, businesses in certain industries stockpiled inventory to deal with a boom cycle. When things went bust, a lean, just-in-time approach prevailed. During the 2008 global financial crisis, disruptions to the flow of liquidity and credit led to new insights. Now, the COVID-19 pandemic has revealed weaknesses in procurement structures and approaches.
As procurement strategies adapt, there needs to be a focus on strengthening links between physical and financial supply chains. “When physical goods, cash and liquidity, and information flows work in tight synchrony, it improves the resiliency of the supply chain ecosystem,” said Ritesh Ajmani, Head of Supply Chain Finance and Commercial Banking Trade Products at Standard Chartered.
Such strong links serve to increase visibility as the basis for collaboration within an enterprise and across supplier networks – one that reflects a shared responsibility for the financial wellbeing of the supply chain ecosystem. This should then enable procurement business leaders to mitigate the risk of future disruptions.
And despite the short-to-medium-term impact of COVID-19 supply chain disruptions, key areas of opportunity to build these connections have also emerged.
Communication and collaboration
Corporates often struggle with internal disconnects between their procurement, treasury, and finance teams – and lack a shared understanding of supplier expectations and relationship goals. Yet cross-functional dialog is vital to understanding supply chain risks and identifying the best way to support suppliers.
According to Travis Mitro, Director of Payments & Financing at SAP Ariba, many supply chains have been moving towards a collaborative model of interconnected enterprises that work closely to align production. However, historically much of the associated investment has focused on physical supply chains, to drive cost effectiveness. “Getting direct insights from suppliers is important to stabilising the supply chain. This allows for better evaluation of a supplier’s current situation and future risks,” said Mitro.
These insights can provide a clearer picture of the vulnerabilities that suppliers face, such as concentration risk embedded in deeper tiers of a supplier’s network and deep-tier working capital needs, to inform a holistic approach to managing supplier relationships.
Collaborative platforms enable simplified communication streams. This facilitates visibility through shared information, insights aided by analytics, and tight coordination between procurement, treasury, finance and supply chain members around shared objectives.
Such platforms can increase transparency by using data to map and monitor a company’s end-to-end supply chain. The amount of data available today is making it feasible for corporates to increasingly anticipate vulnerabilities. Corporates can then utilise platforms and technology to address gaps such as the need for alternative sourcing locations. Longer term, machine learning will help to flag risks and identify the best ways to agilely shift physical and financial supply chains.
Using data, Standard Chartered and SAP Ariba are collaborating to deliver a platform that supports the entire supply chain for their shared clients. “Through our partnership we help procurement and treasury teams to make better, more impactful decisions,” noted Mitro.
Ecosystem financial health
When the right information is available within a procurement platform, banks are best positioned to provide end-to-end financing solutions. For example, once goods are shipped, solutions can link pre-shipment financing to post-shipment financing by shifting risk to the buyer.
Greater visibility for banking partners also supports a higher risk appetite to finance smaller, downstream suppliers. To stabilise supply chains, more needs to be done to support the financing needs of multiple tiers of suppliers. “This is part of a growing sense of responsibility around addressing the financial health of the supplier ecosystem” noted Ajmani.
“Conversations have shifted from how we can protect our bottom line to how can we support our suppliers,” said Mitro, who spoke at a roundtable of procurement business leaders sponsored by Standard Chartered in May. The focus is noticeably moving away from stringent cost targets and key performance metrics that only address buyer needs.
Along this line of thinking, payment terms are another area that warrants consideration. According to one study, companies show less concern about DSO in periods of GDP growth and typically increase their discipline around payment timing when global growth weakens.1 Cash flow and working capital needs, along with financial risk considerations, are often at the centre of a buyer-seller tug-of-war around payment terms. Buyers seek the longest possible payment terms, while sellers desire the shortest possible terms. Visibility can foster a shift to using payment terms as a collaborative tool to optimise working capital across the ecosystem.
Cultural shifts
Looking ahead, it’s also important to consider the impact of the preferences and cultural values of the next generation of business leaders on procurement and trade finance. Generation Z, the generation now entering its early 20s, is fluent in digital commerce, expect payments to be instant, and value social networks — a concept that translates easily into the supply chain domain. Will attitudes precipitate a cultural shift in how businesses invest in their network of supplier relationships? The future likely will deepen the collaborative model of an ecosystem of interconnected enterprises.
Over the last few decades, global supply chains have emphasised procurement efficiency and a focus on optimising the cost dynamics that underlie competitive pricing. Beyond exposing vulnerabilities in physical supply chains, the latest shocks have heightened awareness around weak links between the financial and physical aspects of procurement.
As procurement business leaders evolve their thinking on how to ensure supply chain continuity and resiliency, it’s important to bring the financial piece into the fold. Key to this will be a collaborative network that includes treasury and finance colleagues, banking and technology partners, and supplier networks.
1 “In line with the economic slowdown, companies preemptively reduced payment delays, except for Mediterranean countries,” by Marc Livinec and Maxime Lemerle, May 9, 2019, Euler Hermes Global. (https://www.eulerhermes.com/en_global/economic-research/insights/In-line-with-the-economic-slowdown-companies-preemptively-reduced-payment-delays-except-for-Mediterranean-countries.html)