Manufacturers from across the world are currently grappling with supply chain challenges, right from ranging from bottlenecks to the bullwhip effect. In the midst of these problems, they are also trying to ensure that their practices are as sustainable as they can be. Let us explore the potential role that banks can play when it comes to streamlining the process.
Do you know what is the common factor among cream cheese, Christmas trees, carbon dioxide, Champagne, computer chips, and chlorine? All of them keep on being available in limited quantity due to supply issues concerned with COVID-19. The war in Ukraine has gone on to cause the well-publicised dearth that the world is currently experiencing. Besides this, the recent Nova Kakhovka dam disaster has further had an impact on production.
In December 2022, 60% of businesses were going through supply chain challenges. Apparently, UK manufacturers’ warehouses were holding goods with an overall value of £23.6bn, which were awaiting completion. These delays were caused because of the supply chain issues, especially the delayed arrival of key parts, ingredients, as well as materials. Supply logjams resulted in an unfinished products number pileup worth nearly £10 billion in steel and metals, £3 billion in food and drink, £2.6 billion in plastic goods, and £2 billion in electronics.
As per Dr. Florian Lucker, one of the Senior Lecturers in Supply Chain Management at Bayes Business School, supply chains across various industries, markets, and also products have gone through disruptions with a broad range of underlying causes. During the lockdown, it is well worth noting that there was a goods pileup due to the restrictions in place. Besides this, one did experience the bullwhip effect, which describes the phenomenon where slight shifts in customer demand result in substantial swings further up the supply chain that are closer to the factories. Like in the case of a slight decrease in demand, factories may go on to take it as a signal to lessen the production of goods. However, they could worsen the scenario by manufacturing significantly less. When demand sees growth, companies may erroneously perceive a higher demand than what actually exists, thus leading them to spike their production. And then it goes on.
This kind of thing has been extensively studied in economics. Lucker adds that it is a well-established practice that took place all across the pandemic. The challenge lies in the fact that a substantial number of these supply chains have been constructed with a robust emphasis on cost efficiency. Let us consider the concept of Just in Time, a management philosophy that is centred on producing goods so as to meet customer demand within the terms of time, quality, and, of course, quantity. That said, the occurrence of variations can go on to pose a high risk to these supply chains. Lucker says that they have observed this phenomenon worldwide.
Mike Conroy, who happens to be the Director of the Commercial Finance Team at UK Finance, describes the significant impact that supply chain challenges have had on the economy. The economy’s reopening post-pandemic led to a surge in demand, while supply chain problems still needed to be taken care of. Because of this, numerous persistent bottlenecks cropped up. As a result, organisations responded by boosting their inventories, which has prominently contributed to the inflation that has been seen over the past 3 years. Conroy says that although he has heard about some indications of improvement, there are still persistent issues that are observed. When it comes to exploring sectors like vehicle manufacturing, it is quite apparent that there are still major hold-ups across the supply of new cars, resulting in a price surge for used vehicles. Businesses and supply chains are, as of now, going through numerous challenges because of many factors, thereby causing additional delays.
Conroy adds that they continue to face significant challenges in which businesses go through excessively long payment periods, mostly exceeding 60 days. All this, therefore, poses a significant amount of strain when it comes to small businesses.
If one breaks down the factors, then there is the war in Ukraine, which is quite obvious. Economic swings also pose significant challenges for businesses that operate within the gamut of the supply chain. Further, there are many issues related to climate change as well. The growing frequency of severe weather events is causing disruptions to supply chains too. This is primarily due to damaged infrastructure, problems with transport, and resource dearth. If certain crops do not thrive, it can contribute to a shortage of resources, making it tough for supermarkets to offer the appropriate goods. Finally, one cannot overlook the growing influence of evolving laws stressing supply chains. There are signs of progress, but there are also many ongoing challenges that happen to be still there.
Pushing Trade Relations
Conroy adds the potential role of banks in facilitating supply chains and bettering trade relations. Trade as well as business finance have been there for over a century now. Its purpose is to assist businesses in managing risks and maintaining constant funding within the trade setting.
He explains that there are several ways available to help cut those risks. They offer two options for financing invoices: invoice financing as well as invoice factoring. The idea has been in existence since the mid-19th century; however, it has experienced substantial growth in the past decade or so. This idea is used in scenarios where someone has made a sale, but the payment is scheduled to be received after a period of 30, 60, or 90 days. This allows for the invoice to be discounted correctly, resulting in the financier offering an amount that happens to be lower than the face value of the invoice. This product is beneficial for those individuals who are involved in B2B sales. Supply chain finance [SCF] is one more product that has been in existence for almost 25 years. This practice is at times referred to as reverse factoring. It is a solution that aims to offer benefits to both suppliers and buyers. Suppliers are able to receive early payment, and on the other hand, buyers can extend their payment terms. Buyers have the option to provide this product to their suppliers, which can go on to serve as a financing arrangement to resolve cash flow hurdles. Additionally, it supports businesses in addressing strategic issues within their supply chains, like optimising processes and making investments within the systems.
It is only reasonable to state that some supply chain management systems that are in use today are outdated and have not received significant investment for a reasonable period of time. However, the banking sector offers possibilities to assist individuals in upgrading their skills and also provide funding for various systems as well as processes.
Taking Care of The Problem Related To Late Payments
Late payment has been a persistent challenge within the SME part of the supply chain market for the majority of the period. In 2022, as a matter of fact, more than half of small businesses faced this issue. Conroy remarks that governments and other organisations have made significant efforts to take care of this issue. That said, there are still substantial challenges where businesses experience highly long payment periods, often crossing 60 days. This happens to put a significant amount of pressure on small businesses. As per recent research conducted by the Federation of Small Businesses, it was found that around 20% of their members experience delays in receiving payment, with invoices being taken care of more than 60 days after they are issued. Small businesses face significant obstacles when attempting to analyse cash flow predictions. For small as well as medium-sized enterprises (SMEs), cash flow happens to be crucial. They ideally offer 30-day payment terms and are upbeat about receiving the funds within the expected timeframe. However, if someone takes twice as long to process payments, it can create issues for them in terms of settling their own suppliers and also keeping track of any existing overdrafts they might have.
As per the Chartered Institute of Procurement & Supply (CIPS), the number of suppliers utilising SCF services to receive monthly early payments has doubled since 2018. According to a report by CIPS, which surveyed almost 80,000 companies, it was found that these technologies have led to suppliers having more power when it came to receiving early payments.
Lucker goes on to elaborate on how SCF can go on to offer support to smaller businesses. This tool is particularly useful in situations where a major buyer has a SME as a supplier. SMEs often face challenges when it comes to securing funding. The buyer could potentially be an AAA-rated company such as Jaguar Land Rover. Mostly, JLR follows a payment schedule where they settle their invoices with suppliers within a period of 30 to 60 days. The supplier will face the challenging task of securing the necessary funds to fulfil JLR’s requirements. Smaller SMEs often face a mismatch, which makes them seek solutions like reverse factoring for their own benefit. However, if the case involves two large companies, reverse factoring is not of much value as both companies have the ability to raise funds through a capital market.
Assisting SMEs Navigate The Realm of ESG
SMEs are facing another roadblock in their supply chains, which is the need to make sure that they prioritise being environmentally, socially, and governance-friendly. Conroy explains that it can be quite challenging, particularly for very small as well as micro businesses. Many individuals will not be so familiar with this plan and may also not be aware of the requirements set by their major suppliers as well as lenders. The reason they may not be willing to engage is not because they are unwilling, but rather because they require helping hands in traversing this scenario.
At present, electric vehicles are significantly more expensive as compared to their petrol or diesel counterparts. Investing in this kind of tech will substantially decrease a small business’s carbon footprint. However, it is crucial to note that this funding may end up being higher on expenses and costs compared to their rivals. As a result, they have to increase the prices of their goods and services. It is possible that they may discover shifts in the requirements and measures of a specific supplier compared to others. This is particularly true due to the different measurement systems and carbon calculators that are right now in use. Managing this across the board poses a significant challenge for some of the SMEs. Making an investment decision in today’s green technology can be very difficult, as there is a risk of it becoming redundant within a relatively short time. So, should they be favouring battery-operated vehicles, or are they considering the possibility that hydrogen is the future?
Conroy says that just a tiny percentage of very small businesses are aware of or have the ability to obtain products like green or sustainable bonds. There is an increasing range of financial products available that aim to reward businesses actively seeking to decrease their ecological impact. However, when it comes to the path towards achieving net zero, it can be quite difficult for many small companies that are not fully engaged in this concept to understand their available options and properly plan for a shift.
Staying updated on the situation can be challenging, but the sector has begun efforts to assist as well as guide affected customers through the present situation.
Nature-Based Finance And ESG Considerations
Considering the importance of ESG elements as well as the potential challenges faced by smaller firms when starting green initiatives, what measures are governments taking to encourage sustainability in supply chains? Nature-based solutions happen to be actions and policies that utilise the resources offered by nature to protect and recover ecosystems, all while tackling the issues faced by society.
Nature-based solutions come with an aim of decreasing greenhouse gas emissions, developing the health of ecological systems, and mitigating the risks associated with flooding, soil erosion, drought, and other climate-related extremes. In March of this year, the UK government outlined its goals to expedite investment in nature as an essential part of its effort to achieve net zero emissions by 2050.
The Green Finance Strategy outlines the government’s plans to promote green finance for nature-based solutions, which has in it tree planting as well as peatland restoration. It also looks to assist farmers in accessing new revenue streams from the private sector, and at the same time guaranteeing the protection of the natural environment.
The government has set a goal to secure mothing less than £500 million in private funding annually by 2027 in England, with the aim of supporting nature’s restoration. This target will then increase to over £1 billion per year by 2030. All this will promote greater biodiversity and contribute to the accomplishment of the strategy’s environmental targets. There is no doubt that financial institutions will play a leading role in offering green finance options to businesses, guaranteeing the seamless operation of supply chains.