Covid-19 has posed significant challenges for global supply chains, some of which have been stretched to their limits. As companies around the world rebuild their supply chains beyond the pandemic, greater consideration is being given to key factors such as visibility, sustainability, collaboration, and data and technology.
GTR and Barclays gathered industry experts for a virtual roundtable discussion to address what is needed to boost supply chain resilience and protect against future disruptions.
Roundtable participants:
- James Binns, global head of trade and working capital, Barclays
- Alexander Malaket, president, Opus Advisory Services International
- Patrick McAvoy, managing director, corporate banking and trade finance, UK, Accenture
- Shannon Manders, editorial director, GTR (moderator)
GTR: What are the key supply chain challenges and risks that companies – specifically large buyers – have been dealing with over the past 18 months, since the start of the pandemic?
Binns: It has been an incredibly difficult period for global supply chains, and all of the parties involved in those supply chains, because of the depth and breadth of issues that the pandemic has revealed. I don’t think we’ve ever had that kind of revelation in terms of some of the fragilities that exist within supply chains. In particular, large buying companies have realised not only the potential risks related to their own direct suppliers, but also the suppliers of their suppliers, and beyond that as well.
Some of the issues that supply chains have faced include border friction – with slow customs clearance and ports being closed, for example – which impacted the supply of raw materials, and ultimately resulted in delays to end-users. In many parts of the world there were also stay-at-home orders, which meant that factories were closed and much of the workforce was unable to continue production of goods. Strict lockdowns impacted the flow of supply chain finance documentation, which meant parties had to implement digitised methods, almost overnight. The situation also revealed the vulnerability of logistics processes, such as shipping container flows and costs.
Elsewhere, the industry has dealt with events such as the Suez Canal blockage, and the global shortage of semiconductors – used in a wide variety of products.
Throughout all of this, we’ve seen an accelerated move towards ESG criteria and an increased awareness from consumers around the sustainability of the products that they’re purchasing.
McAvoy: It has certainly been a confluence of factors. But global trade has held up well, and the situation has meant that a lot of these issues are now being addressed in a meaningful way. We’re starting to see real, tangible solutions to some of these problems. This has been driven by a combination of evolving technology and co-operation across different regions, as well as the determination to be more proactive in terms of planning for the next potential shock.
Malaket: It’s worth drawing a parallel between the 2008 financial crisis and the current one. The financial crisis did something broadly beneficial for the business of trade finance: it gave it visibility and made it a topic of policy discussion and conversation among more than just its practitioners. What we see today is a similar wide-ranging increase of awareness of supply chains in terms of their fragility. Just recently we’ve seen the communique of the G7 summit give a lot of attention to supply chains and their resilience.
What’s interesting this time around is, unlike in 2008, the financial services sector is very much seen as part of the solution to the crisis. The trade and supply chain finance industry has been very responsive; there’s been a real effort to inject liquidity and a significant push to address deep-tier financing.
GTR: What sort of measures have companies implemented to overcome some of the challenges and risks they’ve faced, and boost their supply chain resilience? We hear a lot of talk about shifts in supply chains, but is this actually happening?
McAvoy: Away from the geopolitical dialogue around China and how that might be impacting companies’ strategies, this is really all about efficiency. For many years, companies of all sizes have invested in their supply chains in China, as well as in other countries that are adept at providing cost-effective manufacturing capabilities, and that will likely continue.
From a resilience perspective, what we’re seeing at Accenture is that large corporates are starting to really react to the growing burden on them to understand more fully what they are exposed to. So not just efficiency in terms of moving raw materials and goods to the end consumer, but also in terms of their finances – implementing systems and controls that allow them to access the necessary funding and liquidity at the right time, and ultimately making sure that all the different parties within the organisation are accountable and contributing to this resilience planning.
We’re definitely seeing that convergence happen and it’s not a one-off reaction; it’s very much a strategy being driven by the C suite of the corporate firms. There’s a need to have resilient supply chains and to have the right processes in place to manage that going forward.
Malaket: I think we’ll soon see how much of the supply chain reconfiguration responds to commercial drivers versus political drivers. I suspect, in the end, the economics will have significant influence on the way companies structure their supply chains. ESG is going to be another important factor that reshapes supply chains, and I think we’ll see more and more conversations about cost-effective, environmentally friendly alternatives in the physical supply chain, for example.
Binns: One of the trends that we’ve certainly seen is around inventory levels and patterns, with some clients stocking up to higher levels than would normally be the case. A lot of that is being driven by border friction issues, such as Brexit. There are questions around whether the old ‘just in time’ inventory model is still relevant in today’s world.
There is a drive towards greater supplier diversification to mitigate concentration risk. But that’s not something that can happen overnight with a lot of supply chains – you can’t suddenly switch all of your suppliers from one country or region to another.
Nevertheless, there’s an increased understanding of what needs to start being done now to plan for what supply chains look like in five to 10 years’ time.
GTR: What are the main trends you’ve seen emerging in terms of the ways that buyers have been seeking to ensure the financial health of their suppliers?
Malaket: Clearly, the crisis has resulted in a widening trade finance gap. But it has also given corporates additional motivation and imperative to ensure the health of their supply chains from a liquidity and finance perspective. There’s been an unexpected benefit of forcing companies to look at the bigger picture and see supply chains as an ecosystem. If all players in the ecosystem do well, then so does the buyer, who sits in the centre of it all.
Binns: We have certainly seen a shift in the reasons why large buyers want to use supply chain finance. Whereas in the past, they might have been more interested in their own working capital ratios and cash generation, there’s now a greater awareness of how supply chain finance can be harnessed to improve the sustainability of funding throughout the supply chain, and therefore the resilience of suppliers. But equally, they’re looking at how supply chain finance can be used to reduce the cost of funding across the supply chain, and therefore lower the cost of production, which ultimately makes that supply chain more competitive than others.
The other element that we’re seeing is a greater awareness among buyers in terms of the long tail of their supply chain and how to support that. Historically those smaller suppliers have not been supported by traditional supply chain finance because of the burden and costs around KYC. As a result, solutions like dynamic discounting in supply chain finance have really come to the fore as buyers choose to use their own funds to pay suppliers early, and therefore spread the benefits more broadly across the supply chain.
GTR: What is the role that data and technology play in creating more resilient supply chains?
Binns: One of the things that corporates are battling with is understanding the availability of all the data that exists, how they can start to join that up, and then utilise that information to improve resilience in their supply chains, and make better decisions.
For example, RFID tracking has been around for quite some time, and yet that data is very rarely harnessed for use in the financial supply chain.
McAvoy: A substantial challenge lies in the fact that even though we have access to hugely valuable data related to significant trade flows, there needs to be a complete, almost exhaustive, view of supplier networks to be able to fully understand where the risk sits, whether it’s through ESG-related issues, for example, or in access to financing.
We are seeing supply chains manage some of those risks more effectively because of the data that they are able to access. But at this point, it’s not yet clear who will aggregate all this data going forward. Will a new corporate player emerge? Will banks partner up?
An important part of this conversation is identifying the enablers to making this work. Key factors include interoperability and standards – and multilaterals have a role to play here in terms of providing support and frameworks.
It’s also worth noting that the role of banks is shifting, and they are well placed to have conversations beyond purely the financial side of the relationship. Whereas in the past, banks may have been limited in terms of their legacy technology systems, that’s now being mitigated as they actively seek to work more closely with fintechs.
Malaket: We’ve been talking about the dematerialisation of documentation since at least the mid-1990s. Finally, we’re well into a situation where the technical capability, the market acceptance, and the supporting infrastructure are coming together to make that a reality.
As a result, conversations around the three different types of supply chains – physical, financial and data – are now taking place in much more practical terms. We’re seeing these plans come to fruition in ways that we couldn’t achieve even five years ago.
Discussions about digital islands and the need for technical architectures to be able to talk to each other are underpinning these conversations. The interoperability point is very critical.
It’s also interesting to look at what’s coming next. As an industry, we talk a lot about 3D printing and the disruptive effects that it will have on logistics and supply chains. We’re also seeing a lot of progress being made in drone delivery efforts. These interesting dynamics in the physical supply chain space are going to have huge implications for trade.
There’s a whole slew of technology enabled innovation that’s coming, and the market is ready to accept it. We’re also seeing some good headway being made in terms of legal reforms to support the use of digital trade documents. All of this will converge very nicely over the next 18 to 24 months to create some really transformational opportunities.
GTR: How can we apply all of this – the understanding of the risks, the data, the technology – to benefit the long tail of the supply chain, and start to close some of the existing financing gaps?
Malaket: One of the things that Covid has taught us is how fragile the overall global community is, not only from a health standpoint, but also from an economic perspective. In 18 months we’ve lost years of progress in poverty reduction and international development. We need to get back on top of that, and one way of doing so is through supply chains, by looking at the long tail and adding net new financing capacity.
We’ve seen some recent promising signs indicating the realisation of the importance of multilateralism, which is one of the things I would highlight as being part of the solution in terms of driving a collaborative response.
McAvoy: Stakeholders within corporates and banks understand the problem, but I think it becomes a question of how do you carve it up? And how do you make sure that you’re doing so in a way that addresses the way in which we operate in five to 10 years’ time, which will be very different from today, and highly supported by data and analytics?
Binns: As Patrick says, it’s about focusing on clear, identifiable actions and objectives, not just in the short term, but with a long-term view. This is a multi-decade exercise, not something that’s going to happen overnight, or in six months. What is vital is to start this journey collaboratively, working together with others to help solve some of these problems. This isn’t about a few people winning; everybody can win if we can get this right.
That convergence of the physical, financial and data supply chains is so important. If we can start to address that, and enable a good view of the supply chain from end to end, we can then tackle the funding requirements of multiple tiers of the supply chain simultaneously. This could potentially give banks and other financiers the ability to drive funding much deeper into supply chains and start to close some of that financing gap, which could make a huge difference to global business.
