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Fighting risk, promoting continuity could be trickier in a high-inflation environment. What are the best procurement strategies for the coming year?
The combined threats of a global recession, high interest rates and persistent inflation will challenge even the savviest procurement teams in the coming year. Not only will buyers be asked to pay higher prices, many of their suppliers will feel continued strain as they try to secure working capital.
It’s no wonder that, when C2FO surveyed global procurement professionals about their key objectives, reducing supply chain risk was the No. 1 answer. 2023 promises to be one long fight to protect business continuity while reducing financial risk.
The survey identified several other priorities, including:
Producing cost savings
Managing inflation-related impacts (including defending access to working capital)
Driving more collaboration with finance, sales and other internal teams
Building stronger relationships with key suppliers
In this post, we’ll break down the best procurement strategies for addressing these challenges and how you can set the table for a successful year.
Because of macroeconomic trends — including inflation, higher interest rates and a lower appetite for credit risk among funders — supply chain finance (SCF) programs will be more difficult to operate. Just as suppliers experience a greater need for financing, many lenders are moving to restrict or eliminate credit for SCF programs.
This problem is particularly difficult if your enterprise runs its SCF program through one specific lender and its proprietary SCF technology. If that lender reduces its credit appetite or introduces unfavorable terms, you may have to reboot your SCF program with another vendor — a process that can be time-consuming and will put your suppliers at risk if you have to do it in a rush.
Smart enterprises are already looking at their options, and many are migrating to SCF vendors that are “funding-flexible” — that is, they give you access to multiple funders for your SCF program, including your own balance sheet. In many cases, these solutions offer a streamlined experience, removing the need for obstacles like KYC and providing a faster, easier onboarding process.
Even if you have absolute confidence in your current SCF vendor, it can still be worthwhile to review your options. You may find that transitioning to another partner could boost your margins.
The supply chain disruptions of the last few years have led more enterprises to consider nearshoring and moving at least some of their operations geographically closer to their end customers. Nearshoring helps reduce the risk that lockdowns, wars and other forces present while also raising the opportunity to improve cost savings in the face of higher shipping costs.
Some experts were skeptical that 2022’s shipping delays would inspire many permanent changes, but several companies are treating the idea seriously:
About 2 in 5 UK companies surveyed by logistics company ShipBob said they were considering a move to UK manufacturers because the cost of shipping has grown so much.
A similar report from commercial real estate firm JLL found that several European companies are looking at nearshoring, with Romania, Turkey and Morocco all standing to benefit.
According to Capterra, about 88% of US small and mid-sized businesses plan to start using more US-based suppliers. About 45% say they will nearshore all of their suppliers.
More analysts are challenging public companies to explain and defend their supply chains’ level of complexity. If a supply chain is viewed as too complicated and, thus, at a higher risk of failure, that could sour analysts’ guidance and ratings of the company.
Preferred payment terms, such as the kind offered via C2FO’s dynamic early payment and supply chain finance solutions, can help give suppliers the financial wherewithal necessary to survive during times of recession, high interest rates and other challenges. By providing affordable working capital when it’s needed most, you clearly signal to your suppliers that you value them and want to make sure they endure over the long term.
Plus, these types of programs often have benefits for your organization, too. Using early payment enables your suppliers to reduce their financing costs — they don’t need to borrow from (and pay interest to) a traditional lender. In most of these arrangements, the suppliers then share the benefit by providing a discount on your invoice.
Having the ability to offer preferred terms can also give procurement organizations the extra leverage they need to hit other goals, such as longer payment terms or environmental, social and governance (ESG) compliance.
To encourage more cooperation between different internal teams, you should schedule regular check-ins with those teams. At first, this might require an executive sponsor — a C-suite leader or director who has the authority to bring everyone together.
These meetings are important because they help other departments understand how their work impacts procurement, and vice versa. For example, the treasury function often oversees SCF programs, which are one of the most powerful tools that procurement can use to build up the organization’s supply chain.
At the same time, you should make the case that procurement creates a tremendous value for the business by sourcing the inventory and materials that allow the organization to function, at a price that benefits the bottom line.
Helping each other understand the impact of these programs — and just as importantly, what could happen if they went away — is critical to evaluating the organization’s underlying supply chain risk and supporting efforts to minimize that risk.
Higher interest rates will complicate life for many procurement teams by making it harder to offer supply chain finance programs. Without that resource, enterprise buyers will need to find new tools and strategies for supporting suppliers that might be struggling in today’s high-inflation environment.
Procurement can continue to provide badly needed capital by shifting to SCF platforms that are funding-flexible and allow enterprises to draw on funding from multiple sources, including their own balance sheets. The best procurement strategies include closer relationships with suppliers, tighter coordination among internal teams and even giving nearshoring a new look.
In this article:
Supply chain finance is here to stay, but emerging regulations and fintech options may change how you approach this funding strategy.
Use these three 2024 procurement trends to guide your planning for the coming year.
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