Currently, there is a lot of uncertainty regarding supply chain disruption, regulatory changes, tax changes, and market volatility. While the number of variables — and attention-grabbing headlines — occurring at once is unique, the truth is corporates have always managed volatility.
Two attributes are key to success: resilience and innovation.
Resilience and innovation for treasury
One of the limitations of investing in volatile markets is the constant balancing act of risk for a given market versus the return. Treasury is a master of resilience during volatility, trading off higher returns for safer options when necessary, diversifying investments to manage overall portfolio risk. The challenge with this balancing act is even the most conservative options — bonds, mutual funds and insured investments — are tied to markets that are outside treasury’s control.
Innovation means thinking beyond markets you cannot control to create a market you can. We founded C2FO in a climate of uncertainty post-recession. It’s in our DNA to eliminate risk and create control.
With the C2FO market, buyers use cash reserves to pay approved supplier invoices early at discounted rates. A company can set their desired return. The result is an on-demand market that allows a materially larger yield than other investments — but with total flexibility and control.
For a company without cash limitations, treasury can steer volume away from low-earning and negative-earning investments while adding a no-risk investment to balance their entire portfolio. For a company that is less than flush with cash, the yield opportunity is significant enough that treasury can leverage more innovative tactics such as arbitrage.
Resilience and innovation for procurement
Procurement, like treasury, has mastered crisis management, evolving with each new challenge. That proactive stance is why supply chain disruption ranks third on the 2017 AFP Risk Survey.
During the economic crisis, corporates shift supplier risk assessment from bi-annual reviews to as often as weekly for first and even key second tier suppliers, monitor supplier staff cutbacks, capacity and any decreases in quality control measures. Other companies work with suppliers for inventory management to minimize potential disruptions. Procurement teams prepare to make tough decisions such as evaluating the impact of replacing a supplier versus the length of time to work with an existing supplier while it recovers.
Corporates prepare by building supply chain redundancy and flexibility as well as defining a portfolio of real options in advance of issues. Diversification of real options, just as with investments, mitigates supply chain disruption and creates resilience.
During the 2008 recession, leading companies collaborated with their critical but at-risk suppliers. Between 9-12 percent of corporates provided financial support to key suppliers, per a survey published in World Trade Magazine. These companies realized that the cost of supporting critical suppliers was less than the cost of replacing part of their supply chain.
The innovation paid off. In some instances, the corporate’s investment in a supplier ended up yielding a post-recovery return in addition to protecting their supply chain.
Post-crisis, in a new regulatory environment, corporates needing to improve their cash management metrics have increased payment terms — and increased stress on suppliers. Rather than build resiliency, this practice weakens supply chains. The result is a liquidity paradox where companies have excess cash on their balance sheets earning a low rate of return in current markets while suppliers need working capital to manage longer payment terms, but have limited ability to borrow affordably.
It is a challenge. And also an opportunity. Like the corporates who supported critical suppliers during the downturn and netted a return, innovative companies can solve the liquidity paradox by offering suppliers programs like C2FO.
C2FO allows corporates to decrease payment terms in exchange for a discount, giving suppliers working capital with no downside: corporates can avoid negative yields, and put trapped cash to work for suppliers needing cash flow. They improve the health of their supply chain at the same time. For suppliers, the cost of a discount that they determine is less than their cost of borrowing funds. Suppliers can also control cash flow and fund growth and stability to weather any economic storms ahead.
Creating a technology solution that doesn’t create risk
Corporates and their supply chains share more than just financial and physical risks. Cybersecurity is a major concern. The StrategicRISK Supply Chain Disruption survey found that a ’targeted cyberattack (internal or external)’ was risk managers’ top concern out of 10 possible disruptive events. The survey noted that corporates consider a cyberattack on a critical supplier to be the most likely risk.
Corporates innovate continually to respond to cybersecurity threats. Security concerns also delay — necessarily — technology implementation and upgrades, especially for systems that handle financial transactions.
C2FO only facilitates the price discovery for early payment on a highly secure platform. There is no transfer of account data. Corporates’ accounts payable systems still make all the payments to suppliers.
As a result, implementation of C2FO requires only 3-4 weeks of technology effort with no complex integration points, and minimal IT effort.
Surviving and thriving in uncertainty
Resilience and innovation are a powerful combination. They are, in a way, the inverse of one another. We build resilience by surviving and learning from experiences so that we can prepare for a similar condition in the future. The process is inherently reflective.
To innovate requires looking ahead to find opportunity amidst uncertainty.