The COVID-19 pandemic caused unprecedented levels of disruption to the global supply chain, creating major challenges for business of all sizes and sectors. Facing mounting uncertainty, a hopeful assumption for many was that, as the pandemic waned, restrictions would lift, and the flow of goods and services would return to their former levels. There would once again be business as usual.
The current reality has turned out to be quite different. Even as the pandemic has begun to loosen its grip, many supply chain challenges persist. COVID-19 itself continues to be a factor, as shutdowns continue throughout areas of China. Additionally, uncertainty related to the conflict in Ukraine, fears of gas supply interruptions and consequent higher fuel prices and the increased costs of goods and freight due to inflation are also contributors to market volatility. Even as some commodities become more readily available through the supply chain, their increased cost is significantly affecting buyers’ bottom lines.
Managing the Changing Landscape
Over time, global supply chains have evolved to operate with high reliability, at the lowest possible cost, in a steady-state environment. As of late, supply chains have proven unreliable and expensive, primarily because conditions have been anything but steady.
It’s a different landscape today, which can be challenging for companies that came about in an age of globalization and with the expectation of sustained international interconnection. The key is embracing a paradigm shift, according to George Hoffman, a product advisor manager in PNC Treasury Management.
“We can’t expect these challenges to remedy themselves in the next six months,” said Hoffman. “We have to accept that this is what we are now facing on a go-forward basis and start rethinking business models and sourcing strategies through a mid- to long-term lens.”
In the face of geopolitical tensions and rising freight costs, a seemingly straightforward solution to circumventing international supply chain complexities may be to move things closer to home. To this end, many U.S.-based organizations have begun exploring onshoring operations within the United States or nearshoring them in neighboring countries, such as Mexico and Canada. This strategy is not without its drawbacks, however, due to the strain that the current level of demand for such a change has put on available resources, infrastructure and expertise, as well as the significant time commitment involved in establishing these operations. This approach can also create limitations for U.S.-based companies that produce and sell goods in foreign markets locally, as these businesses would incur the increasingly elevated shipping and transportation costs associated with moving operations overseas.
Diversified Suppliers and Partners
Ultimately, a sounder approach may be less about reducing dependencies on specific geographic locations than on establishing a diversified, uncorrelated supply base that can continue to meet needs regardless of regional disruption. This longer-term approach begins with examining supplier base resiliency and diversifying it accordingly.
It is important that businesses take a close look at their suppliers to identify potential new options, Hoffman said.
“Companies need to evaluate their current model and ask themselves, is this a strategic supplier for us, do we have contingencies, have we diversified our supply base sufficiently to be prepared for the next shortage? Because we know that shortages and disruptions will continue to happen, whatever the particular drivers may be.”
Leveraging Organizational Expertise
As companies evaluate their suppliers, contingencies and business models, it’s important that this evaluation takes place strategically across the organization. For many companies, decisions related to vendors or suppliers have historically been the domain of segmented departments that handle supply chain or logistics. However, oversight at the treasury or CFO level may be necessary to protect a company’s bottom line, as factors beyond supply shortage are contributing to market instability.
“Companies need to take an integrated approach to these complex issues in order to have the best possible impact on their cash position,” said Hoffman. “In addition to rethinking who your suppliers should be, there are also considerations like managing overall risk in a volatile environment, renegotiating contracts for better payment terms, looking at supply chain finance as a way to help keep suppliers afloat. These things combined can have real financial impact on a company, so it’s important to look at them from a holistic point of view.”
Solutions for the Short Term
Even while looking to the long-term future, there are actions businesses can take to handle immediate supply chain challenges. Negotiating longer payment terms with suppliers or buyers is key when delays and shipping costs are increasing. Businesses with currency exposure may consider hedging risk with foreign exchange. When there is payment or political disruption risk, letters of credit can incentivize timely shipment, as well as help secure payment. They can also facilitate cash flow by offering favorable payment terms for the buyer and seller.
Ready to Help
PNC can work with you to develop strategies to help you manage issues related to supply chain disruption and market volatility. For more information, reach out to your PNC Relationship Manager, or click here to contact us.