Brexit and Covid-19 have left a lasting mark on global supply chains. Now, runaway inflation – combined with rising interest rates designed to curb it – is weighing on businesses and their suppliers.

 

Luckily, there are things treasurers and procurement professionals can do to cushion the blow, and supply chain finance plays a leading role. NatWest’s Mirka Skrzypczak, Head of Working Capital & Trade Products, and Rowan Austin, Head of Trade Origination and Advisory, share their views.

As if global supply chains didn’t have enough disruption to deal with. As we’ve written elsewhere, Brexit and the Covid-19 pandemic have conspired to produce big changes in global supply chains.

Holding more inventory, diversifying suppliers (to some extent nearshoring, onshoring or ‘friend-shoring’), and leaning on a broader range of transportation methods are just some of the things that have become enduring features of doing business in the post-pandemic world.

The increasing complexity of trade regulation, fast-changing international public health rules, and more recently a sharp rise in geopolitical risk only reinforce the importance of end-to-end supply chain visibility and a resilience-first mindset among corporate treasury and procurement professionals.

Now, as the global economy continues its escape from the pandemic’s grip, supply chains are confronted with yet another challenge: red-hot inflation – and linked to that, rising global interest rates.

 

Impact of rising interest rates on supply chains

For the better part of a decade since the great financial crisis, western economies have mostly enjoyed structurally low interest rates. And yet despite this, many of these countries struggled to generate inflation, a phenomenon that even prompted one notable economist to openly declare that inflation is dead.

But as we all know today, including the economist alluded to, inflation is – for most regions – now very much alive and well. The economic reopening following the Covid-19 pandemic has led to price rises not seen in decades – compounded by pandemic-driven supply chain disruption and the war in Ukraine.

This has prompted central banks to finally start lifting interest rates from historical lows.
Rising interest rates and high inflation can dramatically effect supply chains and create new risks – and it’s essential to understand how suppliers could be impacted in order to effectively manage these risks:

• Margin pressure could rise: rising interest rates likely mean that both bank and non-bank lending could become more costly. This means many suppliers will face additional margin pressure, which could be exacerbated as higher costs are passed on through the supply chain.

• Smaller suppliers could struggle to access capital: some smaller businesses in the supply chain may find it more difficult to access lending and working capital through existing sources. This could prompt delays among suppliers as they search alternative sources of capital.

• Businesses could face a “just-in-case” dilemma: Brexit and the Covid-19 pandemic have pushed many companies to secure more inventory as a buffer against regulatory or logistics disruptions. But this ties up working capital that many businesses may need to re-deploy in the current environment, making some companies less flexible by forcing them to prioritise working capital optimisation over inventory buffers.

• Prioritising short-termism over long-term risk management: some companies may consider shelving or eliminating investment into managing longer-term risks that are seen as non-financial – for example, achieving environmental, social, or governance (ESG) objectives – in order to shore up additional capital near term.

• Insolvency risks are rising: higher borrowing costs, especially following two years of severe economic disruption and uncertainty, could push smaller or more vulnerable suppliers towards bankruptcy.

 

What can treasury and procurement professionals do to manage these risks?

Ultimately, every company will be impacted differently by rising inflation and interest rates. Traditional financial instruments to hedge interest rates (interest rate collars) and currencies (FX swaps) remain available to larger and more sophisticated organisations looking to contain rate-related costs.

Longer term, a combination of digitalisation and supply chain finance can also have a profoundly positive impact on the ability of companies to secure cost-competitive funding and mitigate rising risks.

 

Know your supply chain

Increasing end-to-end visibility and generating rich information on suppliers is the essential starting point for swiftly identifying and managing this rising tide of risks.

For many businesses, supply chain management is still dominated by manual processing, paper and spreadsheets. But businesses have more opportunities than ever before to ditch paper, address risk and drive new efficiencies through technology and better use of data.

Supply chain management (SCM), supplier management and supplier information management solutions all help companies generate rich data on suppliers and create more visibility around relationships and transactions between suppliers.

New and innovative supply chain network platforms can also help businesses create a single view of key transactions and supplier data. These are digital platforms connecting vast webs of suppliers, buyers and third parties and where transactions take place in a single, shared ecosystem.

 

Greater visibility and supply chain networks can unlock new financial capabilities

Better supplier visibility and the use of supply chain networks and other digital SCM platforms can help businesses proactively manage risks before they have a chance to spiral out of control. They can also enhance supply chain finance capabilities and reduce risks:

• Faster access to capital and lending: with all transactions and data residing in a single digital platform, financing providers can make decisions sooner than they would otherwise.

• More attractive rates on capital: better visibility on financial and trading data enables finance providers to cut through noise and assess risk more accurately using far more relevant factors than just credit rating, leading to lower funding costs.

• Better access to capital earlier in the transaction lifecycle: greater visibility of the transaction lifecycle can allow buyers, sellers, and third parties to structure supply chain finance programmes in ways that unlock cash earlier in the transaction lifecycle. This can help companies avoid the “just-in-case” dilemma.

• More room for supply chain finance innovation: access to a broadening range of supplier data creates new opportunities to structure supply chain finance programmes in ways that help networks achieve unique objectives.

One nascent but growing example is ESG-linked supply chain finance, which offers suppliers financial advantages such as lower pricing, improved access to credit or reduced working capital needs in exchange for hitting sustainability performance targets. Finding structures that reward suppliers for making progress on managing long-term risks can help ensure against excessive short-termism in times of stress.

 

Building resilience in times of financial and economic uncertainty

Businesses have more opportunities than ever before to leverage the power of data and networks in ways that build resilience in the face of heightened economic uncertainty and rising costs.

Early engagement with stakeholders and partners is a crucial first step. With careful planning and targeted investment in digital infrastructure across the supply chain, businesses can really bring the resilience-first mindset to life.

With the right foundation in place, and alongside traditional financial instruments, supply chain finance can be an effective tool against many of the risks and challenges that higher inflation and interest rates bring.