With decreasing revenues and margins, the study also reveals a slightly increasing level of networking capital. The development is mainly due to a fall in trade receivables, as companies are struggling with sales. Furthermore, a small increase in inventories has been detected which would be a sign of a potential recession under normal trading conditions.
Aim for full visibility
Early in the crisis, the sudden halt in manufacturing and decreased availability of raw materials plus restrictions to international trade left companies supply chains suddenly vulnerable in all sorts of unexpected areas. In order to ensure they are more resilient to a sudden change in business conditions in the future, companies will need to fully map their supply chains to ensure extensive visibility.
In many corporate supply chains, professionals and buyers have good visibility of their primary suppliers and their financial health, but they do not necessarily have visibility further along the supply chain into their secondary and tertiary suppliers. It’s only really once a company understands what their full set of supplier’s suppliers are doing and how they’re performing that they can gain the necessary insight, set and analyse key risk KPIs and understand early warning signs of stress. This should then position them to understand where system pressures are building that could subsequently disrupt manufacturing in the future.
Vehicle production provides a good illustration of the challenges faced in controlling supply chains. It might be possible to manufacture 90% of a car, but if you cannot source the steering wheel assembly, then you have not got a finished product to sell. The manufacturer of the key steering wheel components might actually not be a primary supplier, but a secondary or even tertiary supplier where your visibility is limited.
Methods for ensuring improved visibility of the supply chain includes better use of data analytics to fully map interconnectivity and reliance between suppliers in the production network. Also, a more focused approach in understanding supplier relationships is recommended, even if buyers and sellers do not directly interact as the next primary step on the supply chain.
Increasing knowledge of the downstream supply chain means using data not only to predict your own sales, but to predict your customer’s customers sales, as this will of course influence you with regards to ordering volumes and sales forecasts. As companies move further from offline to online sales as a resilience measure, more enhanced and relevant data becomes available to assist planning, meaning companies need to be increasingly mature in their thinking and approach.
Evolutions in supply chain financing can certainly provide much-needed support to suppliers further down the supply chain. The market is beginning to look more into opportunities around purchase order (PO) discounting, which provides much needed working capital earlier in the process. Tokenised SCF is another interesting topic which will continue to gain traction and pace as a result of the COVID-19 pandemic. Data held securely in a DLT environment allows suppliers to discount some or all of a token, passing the rest further down the chain to provide needed working capital to secondary and tertiary suppliers.
A rise in supply chain costs?
As businesses look to recover and grow when the global economy begins to emerge from the pandemic, it is likely that many companies will carefully examine their sourcing processes to establish whether there is the possibility of increasing the diversity of their suppliers. The early stages of the pandemic showed that a heavy reliance on China caused significant production delays. China no longer simply assembles products; it manufactures the components to go in them to further increase supply chain risk and interconnectivity, whilst creating a potential new bottleneck.
The early stages of the pandemic helped illustrate that supply chain concerns are not just limited to those who directly manufacture from—in this example—China, but that disruption could be felt by those companies whose raw materials are trapped in China too. For example, a significant proportion of the factories in Bangladesh source raw materials from China. The drive to establish lean, just in time, low-cost supply chains come with clear inherent risks at times of global systemic shock.
There is clearly a significant dependency on China and this is likely to continue, but it is also likely that we may begin to see buyers looking at a China plus one or China plus two country strategy, to provide more of a hedge for future systemic shock. We often find (particularly around the more complex technology types of manufacturing) companies already operate a China plus Vietnam, China plus Indonesia or China plus Thailand supply chain model, and this is likely to increase in importance. These countries are already established as large hubs for the more sophisticated sorts of manufacturing, and it is probable that we would see a broadening out of the China plus one or plus two strategy to diversify future supply chain risk.