Amid the Supply Chain Woes, Supplier Wellness Takes Center Stage
There have been plenty of headlines about how backlogs in the supply chain are causing headaches for both companies and consumers. Those challenges concern the physical supply chain, but it’s also causing ripple effects on the financial supply chain, which is essential to keeping the physical supply chain humming.
Think about a washing machine. It includes steel, motors, circuit boards, wires, and resin to make the wires, among other components. The costs for many of these inputs have increased in the current environment, making it more costly for each supplier throughout the chain. If any company in that chain—including the small resin supplier—can't stay afloat financially, that could cause disruptions that make their way upstream to the end manufacturer.
Many of the companies we speak with are turning their attention to the health of their suppliers. They’re looking for ways to keep their suppliers robust, which, in turn, will prevent disruptions to their operations.
Supplier health worries
Concerns about the supply chain first emerged when the pandemic struck. Many corporate treasurers and CFOs were afraid that a wave of companies would go out of business, which meant their organizations would not get paid for the goods and services they provided. Those fears turned out to be largely unfounded. But nearly two years later, the supply chain woes have come to a head.
We saw many companies reach out to their financial institutions to make sure they had enough liquidity to make it through the shock. Mostly, they wanted to make sure they could stock up on inventory to get ahead of potential supply uncertainties.
Companies that typically called for 10 quantities of a particular product during a business cycle, for example, suddenly found themselves ordering 50 or 100. But their supplier only had enough cash flow to provide 10. That supplier also needed to pay their downstream suppliers, and so on. The dilemma many companies face is how to support their suppliers in this current environment while thinking more strategically about their supply chains overall.
A proactive strategy
What we’re seeing now are more companies putting the adage “buy the umbrella before it rains” into practice. In our conversations with clients, supplier wellness is a major consideration. They’re concerned about keeping their supply chains healthy, and they’re becoming more proactive about making sure suppliers throughout the supply chain have sufficient working capital.
Many companies have ample liquidity for their own operations. And given their experiences at the beginning of the pandemic, they’re now looking for ways to deploy their cash on hand to support their supplier ecosystems. They’re realizing that making an investment to limit vulnerabilities to any link in the supply chain is an investment in the long-term health of their own businesses.
They’re expressing interest in solutions such as Approved Payables Finance, or APF, which can benefit both suppliers and buyers. It enhances the buyer’s cash flow by extending supplier payment terms. At the same time, suppliers can choose when to receive early payment, enhancing supplier wellness. The end result is a reduction in supply chain payment disruptions—and it doesn’t necessarily require a substantial investment in cash or staff resources.
Disruption at the ports gets the headlines, but the financial impacts up and down the supply chain are just as critical. The key is to be strategic about your entire supply chain.
Many businesses are contending with supply chain challenges, whether your suppliers are mostly local or from multiple international sources—the differences are only in scale. And as the current situation demonstrates, you never know when the next shock to the supply chain is going to occur, which is why it’s better to be prepared by having the right strategy and tools in place.
Vineet Bahri, Vice President, Global Trade, Nicholas Ray, Vice President, Global Trade, Isabela Mendes, Director & Manager, Global Trade and Dean Gillis, Managing Director & Head, Global Trade, contributed to this article.
Director, Global Transaction Banking and Lead, Supply Chain Finance for BMO Capital Markets
Reginald Butler serves as Director, Global Transaction Banking and Lead, Supply Chain Finance for BMO Capital Markets. In this role, he leads a team responsible for…(..)View Full Profile >
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