The coronavirus pandemic and Brexit appear to be the final push many corporates needed to begin embracing a resilience-focused mindset when it comes to their supply chains, which will drive a new technology renaissance. Here’s how treasurers should prepare, say NatWest’s Mirka Skrzypczak, Head of Working Capital & Trade Products, and Rowan Austin, Head of Trade Origination and Advisory.
Supply chain management and finance has long needed a technology overhaul, but many businesses have been slow or unwilling to invest in recent years. Scepticism among supply chain managers and treasurers is partly responsible – in fairness, many innovations have promised to ‘revolutionise’ supply chains but fell far short of their potential or created as many problems as they solved. Larger, more bureaucratic firms can make implementing new technologies seem like a Sisyphean task.
But this inertia is also a symptom of corporate mindsets around supply chains more broadly – one that fixates on cost at the expense of everything else.
As a result, tools and techniques for everything from supplier onboarding to invoicing to financing, no matter how inefficient or clunky, are for many businesses preferable to pursuing technological solutions that promise to solve supply chain woes, only to arrive at costly dead-ends.
From cost to resilience: Brexit and Covid are driving big changes
After facing Brexit and the coronavirus pandemic, we may have reached a turning point. Despite a UK-EU trade deal having been agreed, many businesses have struggled to adapt their supply chains to a complex web of new rules and bureaucratic hurdles, which has already led to a big dip in trade between the two regions. As the UK government phases in border controls on imports of goods from the EU, UK businesses heavily reliant on EU imports also need to beware of further disruption – and will need to prepare.
The coronavirus pandemic has dramatically disrupted global trade, first as a series of lockdowns spread unevenly across regions, and more recently as a result of supply chain bottlenecks caused by pent-up demand. About 94% of Fortune 1000 companies say they have seen supply chain disruptions as a result of the pandemic, according to Accenture, with 75% reporting a negative or strongly negative impact on their business as a result.
Both the pandemic and Brexit have shown how the increasing complexity of trade regulation and fast-changing international public health rules can lead to lost income and lower agility for businesses, especially for those that lacked visibility across their supply chains. That is partly why we see both shocks bringing about a big (and we think healthy) change in mindset among a growing number of our clients: a greater focus on supply chain resilience – and with that, digitalisation, to plug important data gaps and cast new light on vulnerabilities lurking in the shadows.
Digitalisation is no panacea. But Brexit, and perhaps more acutely the coronavirus pandemic, have shown how digitalisation across business functions can lead to greater resilience. A recent survey published by Euler Hermes, a credit insurance provider, shows that highly digitised businesses were more proactive at mitigating supply chain disruption than less digitised firms during the first few months of the pandemic – for instance, by hedging through insurance, engaging with lenders, or stockpiling inventory. They were also more likely to say they were improving their understanding of supply chains and increasing their due diligence of suppliers.
Start with good data, end-to-end visibility
Amidst a wave of unprecedented tech innovation, businesses have more opportunities than ever before to address risk and drive new efficiencies through digitalisation and better use of data. Real-time data, or near real-time data, to support everything from order placement to financing is a goal long pursued by supply chain managers. But in a post-pandemic, post-Brexit environment, it has clearly taken on new urgency as businesses look to increase transparency and get better at detecting, identifying, and understanding potentially critical disruptions, cater to changing customer preferences, and address sustainability risks:
- Scenario planning from end-to-end: More than ever, businesses need to understand how disruptions to the legal or operating environment could affect their suppliers – and suppliers’ suppliers – and proactively determine alternative sources for goods and cost-effective contingencies. This is driving many to embrace new dynamic modelling platforms that put artificial intelligence (AI) to work anticipating future supply chain disruptions.
- Everything on demand: What customers expect of companies is shifting at an accelerated rate – ever more so in the past year as working from home became a reality for most. Everything ‘on demand’ is quickly becoming the norm, driving more shops online and requiring them to embrace a digital-first mindset that prioritises scalability across the business.
- Customisation and granularisation becoming the norm: In some sectors more than others, customers are demanding more individualisation and customisation – driving constant inventory changes that require far more transparency and granular tracking (including in some cases LIDAR and RFID technology) across the entire supply chain, from source material ordering and inventory management to logistics and end-product delivery.
- Managing environmental, social and governance (ESG) risks and prioritising sustainability: Businesses must contend with a wide range of ESG risks as customers, regulators, investors and the public increasingly expect them and their suppliers to adhere to social responsibility principles. And with 80% of a company’s emissions coming from its supply chain rather than direct operations, all businesses and their suppliers are increasingly expected to contribute to decarbonisation and climate change mitigation. This is driving businesses towards more proactive engagement with suppliers, better end-to-end mapping of the supply chain, and greater tracking of the regulatory environment where suppliers operate, and pushing them to gain deeper knowledge of each supplier’s ESG risk profile including carbon emissions and the like.
There are a wide range of platforms and technologies that can help businesses address new risks and cater to shifting customer requirements, but crucially, most are underpinned by the same thing: good data and robust end-to-end supply chain visibility enabled by digitalisation.
Trade & supply chain finance play an important role
Digitalisation can clearly help improve risk management and responsiveness.
It can also bring a wealth of benefits to the finance function – and by extension the boardroom – including improved access to cost-competitive funding, more financial flexibility, better regulatory compliance and security. Treasurers should consider how:
- Digital onboarding is helping businesses adapt to new regulations, speed up processing times and broaden funding access: Manual supplier onboarding – the status quo for many – is increasingly weighing on businesses as regulatory requirements force them to collect an ever-increasing stock of records on suppliers. Digital onboarding is essential for businesses if they are to adapt to ongoing changes in the regulatory environment. But it can also help suppliers broaden access to funding through improved data collection and greater transparency.
- Multi-bank financing platforms are making funding more accessible and scalable: Traditional trade or SCF offerings have historically been limited to larger firms and the process of obtaining financing – usually bilaterally with lenders – often cumbersome and admin-heavy. New digital-first multi-bank financing platforms like the Marco Polo Network or Komgo are helping businesses access a wider range of lenders and optimise their working capital more efficiently.
- Digitisation in combination with ‘smart contracts’, enabled by blockchain, is making trade finance more efficient and secure: Trade finance is still overwhelmingly paper-based, which causes a drag across the entire spectrum of funding activities – from credit through to payment guarantees and insurance. On top of the cost and time required to prepare, transmit and check these documents, this also leave businesses exposed to human error and even fraud. The rise of blockchain technology among banks and funding consortiums has led to the emergence of ‘smart contracts’ in trade finance, digital agreements that contain and automate the execution of terms and conditions agreed by transaction participants. These smart contracts help reduce the cost of gathering and processing information, drafting and negotiating contract terms, monitoring and enforcing agreements – and help make trade more secure and transparent. Though nascent and not without its challenges – many legal systems still only recognise the status of paper documents in international trade – smart contracts provide a clear sense of the direction of travel for banks, businesses, and regulators.
Prudence, planning and proactivity
Brexit and the pandemic have shown that treasurers simply can’t afford to confront new risks and customer requirements on the back foot. The tech renaissance currently taking shape has shown that the tools are there, and constantly evolving in favour of greater efficiency, better security, and lower cost. But it can take months, if not years, to properly digitalise supply chains and related financial operations. It will take prudence, planning and proactivity to make sure businesses can take advantage and avoid costly dead-ends.