For global trade, disruption is no longer a temporary bug, but instead a persistent feature. To get the products they need to serve customers, and stay competitive and sustainable amid long-term volatility, corporates need to find new ways to stabilise their supply chains – unlocking trapped liquidity in the process.

 

Over the last few years, the world’s supply chains have been reshaped by a series of disruptive events. From the US-China trade war and Brexit to Covid-19 and the invasion of Ukraine, what is fast becoming clear is that, as soon as one crisis fades, another rises to take its place. As a result, the focus of supply chain professionals is no longer on efficiency, but on resilience, agility and robustness – and achieving this is no small task.

“The so-called new normal is highly volatile,” says Mencia Bobo, global head of trade and working capital solutions at Santander. “We’re in a situation of macro-economic and geopolitical instability, which is leading to a complete change in trade flows as corporates seek to diversify production and supply to keep up. The traditional lean supply chain model is no longer fit for purpose, and increasingly corporates need support from banking institutions to enable them to adjust.”

During the early days of the pandemic, supply chains were thrown into an atmosphere of volatility and uncertainty amid logistical challenges and dramatic changes in consumer demand. To stave off instability, one of the most effective supporting measures launched by banks has been the roll-out of supply chain finance programmes, through which struggling suppliers could overcome cashflow gaps by receiving prompt payment without pressuring the buyer’s working capital.

“In just 12 months, our supply chain finance volumes grew by at least 30%,” says Bobo. “However, there were significant differences from sector to sector. In the food retail industry, for example, we saw a 15% growth, while in the automotive sector, our volumes grew by approximately 50%, with several large programmes implemented in record time to satisfy increasing demand.”

While supply chain finance is not a new instrument, bankers and corporates alike are using it in ever-more creative ways, explains Eugenio Cavenaghi, European head of working capital advisory and structured trade at Santander. “Experiencing a precipitous decline in sales during lockdown, one of our clients in the fashion industry was facing the possibility of cancelling all of its orders for the upcoming collection, which would have pushed many of its smaller suppliers out of business. Then an idea came up: they agreed to keep the orders in exchange for extraordinary long payment terms from the suppliers, which would bridge the period until the end of lockdown,” he says. “Santander kept the suppliers liquid by discounting those invoices through a supply chain finance programme, which required the onboarding of several hundreds of suppliers in a short period of time.”

Receivables finance techniques have also been experiencing something of a renaissance. In one interesting example, a multinational corporate that was looking to support some of its more vulnerable clients in Asia approached Santander for help. “That was a complicated debtor portfolio,” says Cavenaghi, “but we mapped out the entire commercial flows of the company and proposed a new concept. We freed up more than US$1bn of cash for the multinational by structuring a receivables finance facility that covered its high-volume customers in the EU and the US. With this cash in their pocket, the company felt comfortable enough to grant extended commercial credit to the smaller Asian debtors.”

Today, supply chains are facing yet another wave of disruption, as surging commodity prices and a global shortage of raw materials have led to supply bottlenecks across all sectors.
“Some of our industrial clients in Europe complain that what used to be a very predictable 60-day replenishment cycle for some key components manufactured in Asia has now become a very uncertain open order with delivery time between 120 and 180 days,” says Cavenaghi.

 

Maintaining an edge when demand outstrips supply

As the Russian invasion of Ukraine halts or slows down many east-west trade flows, the balance of power is shifting quickly in favour of those suppliers that can still deliver reliably.

“More than half the world’s output of semiconductor-grade neon is affected. A big production hub for wire harnesses, which feeds many European automotive factories, has been severely impaired, causing a major production shift to Morocco or other near-shore alternative locations. Many trade routes for coal, iron ore, and nickel have been disrupted,” says Cavenaghi.

Essentially, any company that purchases supplies is competing for the same, increasingly scarce goods with numerous others, and because this holds true at every step of the supply chain, the challenge is now about getting financing as early as possible in the cash conversion cycle.

“This is not a trivial task,” says Bobo. “Most banks would know how to finance an invoice. The question is how many can start financing much earlier, for example using a simple purchase order as a trigger. Over a number of years, we have developed a pre-confirming risk model to enable us to do just that.”

Meanwhile, as manufacturers increasingly seek to diversify their sources of supply and increase stockpiles of critical raw materials, an important opportunity is arising for banks to support them with structured trade finance. “We are very busy negotiating pre-payment deals, for example, which are a great tool to secure critical production capacity from the most sought-after suppliers. The same applies to inventory finance, which alleviates the burden of keeping higher buffer inventory to prevent shortages,” says Bobo.

 

The ESG factor

But building financial resilience through working capital management is only part of the story for corporates. Increasingly, they are under pressure to ensure that their supply chains contribute to – rather than detract from – the transition to a clean and socially just economy, and any failure to do so could seriously impact operations.

Supply chain disruption manifests as a result of vulnerability and exposure to unforeseen events. While there is no shortage of reasons for supply chain disruption at the moment, ESG risk is a growing concern, and one that, if not addressed, could further impact companies’ ability to compete on the global stage.

“Pressure from stakeholders, government and consumers alike is pushing companies to increase transparency and accountability within their supply chains,” says Bobo. “However, this isn’t solely an external push factor. Our clients are alive to the responsibility they have not only to make sure that their own operations are sustainable, but also to help drive wider industry change.”

One way that banks can support their clients along this journey is through sustainability-linked trade and supply chain financing, says Bobo, adding that in recent months, numerous supply chain and working capital mandates the bank has received from clients have included a strategic ESG option. “By linking together working capital with a sustainability element, we can not only bridge cashflow gaps between buyers and suppliers, but also help corporates manage the environmental, social and economic impacts of their products through the entire life-cycle,” she says. “It’s a holistic approach that addresses the rapidly evolving, and increasingly volatile, supply chain landscape.”

Through its fully integrated ESG trade and supply chain finance offering, Santander is working to embed sustainability into bespoke solutions.
This includes sustainability-linked features that incentivise the achievement of ambitious ESG targets across the supply chain, solutions designed to support eligible green and social activities, and tailormade innovative structures to drive sustainability improvements.

“This requires co-operation between the bank, the buyer, and, increasingly, third parties that can certify sustainability efforts within the ecosystem,” says Bobo. “However, when successful, corporates can inject liquidity into their supply chains, free up cash to invest into ESG improvements, and future-proof themselves against new risks to come.”

 

Thriving in the face of volatility

Having witnessed first-hand the speed at which a single event can upend the production and supply of inputs across sectors, corporates’ focus has shifted from leanness and agility to engaging a sustainable, diversified network of suppliers and building up buffer stock for additional flexibility.

“What this means is that the way that we think about working capital needs to change dramatically,” says Bobo. “This is no longer an add-on; this is now a boardroom topic. Global supply chains will be under pressure for some time, and greater partnership between banks and corporates will be needed to keep the wheels turning even in the face of continued shocks.”

After all, the risks may be expanding, but so too is the reward for getting it right.