Six ways to strengthen your supply chain
2020 will go down in history as the year that the Covid-19 pandemic caused chaos and devastation around the world. For businesses, one huge impact of the coronavirus was that the global supply chain broke down. With many companies reliant on China for materials, the closing down of Wuhan province at the beginning of the crisis meant that the impact to the supply chain was immediate and drastic.
For the UK, it was an unfortunate coincidence that the pandemic was closely followed by the implementation of Brexit. This introduced supplementary problems, with increased administration and regulation for the import and export of goods across the channel.
This did however make supply chain resilience a hot topic for 2021. With COVID and Brexit highlighting the fragility of businesses and breaking down the importance of supply chain management.
Therefore, as we emerge from the shadow of the pandemic and look forward, having a robust strategy to guard against adverse macro events is a top agenda item for managing supply chain risk.
Supply chain strategy is often driven by cost reduction rather than risk management. Streamlining suppliers has long been seen as a way of negotiating better prices as well as cutting administrative costs, and as a result, there has been a loss of diversification. Finding a balance between a streamlined supply chain and one that is robust enough to withstand external pressures, will be key to future resilience.
Know when to pay
Cash flow forecasting is still more art than science. Logic may dictate that paying as late as possible makes sound business sense. But a more flexible approach to both payables and receivables can help maximize all available discounts or allow you to take advantage of fluctuating exchange rates. Many businesses extend their â€˜days payable outstanding' (DPO) to help maximise their free cash position. This strategy reflects that sometimes, paying sooner is beneficial.
Have all the information at your fingertips
Key to a successful account payables strategy is having visibility of all your outstanding cashflows, so you can respond to opportunities when presented. A current view of cash on hand, and all payables and receivables due, helps you understand potential costs and which opportunities you might be able to take advantage of.
Minimise the amount of cash tied up in inventory
Inventory optimization is typically viewed as a function of right-sizing inventory level and supply-chain responsiveness. This includes balancing inventory on-hand with near-term demand to keep as little cash tied up in idle inventory as possible.
Look at the bigger picture
Instead of describing right-sizing in terms of inventory units alone, consider the cost of acquiring the inventory and the corresponding payment terms. If you can acquire the same amount of inventory for less money, and hold the funds for longer, you may be able to reduce the cash trapped in inventory and improve your free cash position. The variables are similar when using domestic or international suppliers; quality of the product, cost of the product and time to deliver.
Put a currency risk management strategy in place to minimise currency risk
Companies that sell their products in international markets can also optimize their working capital. Once agreements are signed with clients you know what revenue to expect from fulfilling the contract. If you haven't paid for the inputs to your finished product prior to making a sale, your profits may be exposed to currency risk. Time delays between when you need to pay your supplier and when you receive funds for the product sold, are intensified by currency fluctuations, and can erode your margins. As part of your pricing strategy, employing a suitable hedging policy can protect profits against unfavourable market movements.
The time to act is now
We can't see into the future, and no-one knows what world events lie around the corner. But we can see some of the threats and anticipate the scale of their impact. Climate change and natural disasters could devastate infrastructures; political decision-making and the increase in populism could lead to trade barriers; and of course, we are not free of the threat that another pandemic could emerge at any time, from anywhere in the world. Readiness is all, and now is the time to be putting action plans in place.
Commenting on the impact of Covid-19 on supply chain risk, Rebecca Howlett, Commercial Partner at Freeths said, â€˜The past year has exposed how vulnerabilities in the supply chain can halt operations and cause major interruptions to international trade. Planning ahead and having a mitigation management system are key to minimising risk in case of unexpected events. Many lessons have been learnt, and our clients are more focused than ever on having meticulous contracts that outline all the possible outcomes in case of unforeseen supply chain disruptions”.
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