As 2023 begins there is continuing instability and disruption for commercial supply chains. Soaring energy prices, inflation and geopolitical tension are the most common challenges experienced by businesses, as well as potentially more localised challenges.
In many markets, change is the only constant. Once more, supply chain finance is undergoing an evolution driven by the ongoing disruption of trade, growing pressure over sustainability, technological innovation and the changing needs and expectations of customers.
With the above in mind, let us look at some of the fundamental themes from 2022 that will continue to impact the industry as we head into 2023.
Data: market signals, planning and changes to supply chains
Resilience and agility have been issues of the utmost importance for many businesses. Over-reliance on China has become challenging for some, and the idea of nearshoring/friendshoring (bringing supply chains closer to a friendly nation), or building supply chains in parallel to ease potential issues as and when they might occur, has become appealing.
However, for the bulk of businesses, the necessary facilities and logistics need to be in place before building a new supply chain and performing necessary due diligence can happen. While it may address some issues in the short term, it will not be easy. With that in mind, nearshoring, or parallel supply chains, may be a medium-term strategy for businesses.
At the same time, companies are trying to find ways not to be caught by potential supply chain issues, whether a lack of raw materials, port shutdowns or other pressures. Suppliers are more cautious than ever and seek better ways to prepare for disruption. At the same time, importers are trying to find the right balance between just-in-time (JIT) and just-in-case (JIC) inventory to suit their risk appetite.
If anything, we now have a greater understanding of the ripple effects of the supply chain and the challenges disruption can bring. There is a suite of data analytics tools to help with inventory planning and demand management, although we are unlikely to see a silver-bullet solution covering every business or challenge, and there is a considerable amount of work to be done. However, businesses are - and will be - better armed through fast, accurate information, and real-time market-derived data will become a critical competitive advantage in years to come.
If cautious inventory management, nearshoring or parallel supply lines will serve as the vehicles to add agility and resilience to supply chains, then the financial products, services and solutions offered must be reconsidered across multiple jurisdictions, commodities and sectors. The payment terms which underpin them should also be gauged to ensure maximum working capital efficiency for the corporate and its supply chain.
At the risk of stating the obvious, corporates are not at the end of the supply chain but have downstream customers and distributors for their products. Offering extended payment terms to customers and distributors can stimulate demand. ‘Buy-now-pay-later’ schemes can be funded off the corporate balance sheet, or by collaborating with a finance provider.
Deep-tier supply chain financing, ESG (environmental, social and governance) and finance evolved
Further to the above, changes will require investment and the consumption of working capital. Corporates may require additional financial headroom to ensure sufficient liquidity. Asset-based lending, leveraging both receivables and inventory, is a useful financial tool to support this potential funding gap.
Corporates are also faced with pressure to create a healthy, ethical, sustainable ecosystem within their supply chains: one that not only strengthens the supply chain by considering the risk profile and capability of all actors in the network, but also ensures that environmental, social and governance (ESG) requirements are fully adhered to. The negative impact of a supplier with a low ESG rating can have devastating consequences on the market perception of the corporate.
Deep-tier supply chain financing offers unsurpassed transparency, so all disparate parties in the chain can act accordingly through improved visibility. More importantly, it can ease the barriers to financing small businesses deeper in the supply chain and provide a windfall of working capital needed to build and grow their businesses. As small and medium-sized enterprises (SMEs) down the chain have access to working capital, finance can serve as a segue to adopting ESG goals.
While banks and financial institutions get an opportunity to expand their reach, potential revenue and an understanding of their ESG exposures, customer-facing buyers gain social and environmental accountability across their supply chain and complete visibility from the entire ecosystem – allowing them to assess suppliers’ credibility and better understand business operations.
Buyers who create systems and programmes that ease longtail suppliers’ access to finance can help build resilience in their supply chains. The data and increased visibility over the entire supply chain can be leveraged to make better business decisions, and reduce the chance of a supplier becoming insolvent.
It is important to note that there has been a major shift in the accessibility of inexpensive capital in supply chain management. Many businesses that may have managed their supply chains using their own funds have realised it is now too complex and costly to run. Supply chain finance should be the first port of call to this gap in liquidity.
Digitalisation, ecosystems, and greater scrutiny of tech
Economies, markets and supply chains have all experienced some level of change in the last few years, and financing solutions have had to change with them. The need for digitalisation and digital infrastructure that supports agility and the demand for real-time data is growing dramatically.
Perhaps the single-greatest takeaway from recent years is the change in customer behaviour and preferred methods of interaction. Expectations are high, and in many cases a digital customer experience has become the only customer experience.
For businesses, this means that customer touchpoints need to be as frictionless as possible - particularly as customers expect seamless interactions regardless of the channel of communication. While the ‘new normal’ seems to change frequently, as already discussed, flexibility and agility will be crucial to financial institutions' and lenders' success.
Technology is the foundation on which modern finance is built, and it will continue to be the dominant driver of transformation for internal business processes and customer experiences alike. As markets and requirements evolve at pace, many lenders’ technology environments will evolve into an ecosystem of interconnected partners, services and tools, centred around a flexible core financing platform.
Ecosystems rely upon open APIs (application program interfaces) to enable the various participants to interact and provide a complete and cohesive customer experience. Founded on cloud computing, APIs and microservices are brought to life by progressive practices such as embedded finance and open accounting. Ecosystem models give lenders the opportunity to leverage innovation, modernise their operations, and deliver greater value for their customers.
Whether or not they adopt an ecosystems approach, the lender’s ability to keep a competitive edge will be linked to the solutions, skills and experience of their technology partners. Hence, the way in which technology providers plan and operate can have a significant effect on the lender, from how products or solutions are created, to the speed with which they can be tested and launched. The financial sector is eager to evolve. Yet seductive growth stories and promises of emerging technologies need careful consideration. Additionally, lenders should consider if their technology partners are prepared to handle the rapidly-changing demands of information security and regulatory compliance. Alignment between tech providers, lenders and actors in the supply chain will be crucial moving forward.
The road ahead for 2023 will not be easy. Understanding and capitalising on data in supply chains will not come without challenges; and as markets evolve and tougher regulation looms, there may be difficult choices.
However, there will also be incredible opportunities for supply chain finance providers who make better use of data and leverage it to bring change to the industry. Those who invest wisely in their business and technology to provide solutions that potentially reduce the trade finance gap, increase visibility through the supply chain and improve customer experience, will be positioned for success.
Article written by: Kevin Day & Iain Gomersall
First appeared on: World Supply Chain Finance Report 2023