Xenia Xtra Series: Point 5 - The importance of guarding against supply chain disruption
With supply chains, one disturbance can have a devastating effect on a business further down the line. Here, Roberto Simone, risk development executive at Xenia, explains the importance of guarding against disruption as all companies in the chain - not just yours - can be impacted too.
At first sight, credit seems to be a simple business. Grant credit to good businesses, decline the bad ones and ensure you remind customers to pay. Easy, right?
That is until the moment something goes wrong.
In reality, credit risk is a mixture of many variables. It requires time and effort, along with experience, as it’s a critical part of the business operating model. As many businesses face a wave of credit risk - some for the first time in this current period of economic instability - it is essential that organisations are aware of the indirect impact a late payment or insolvency can have on their business, and a ladder of creditors in the process.
There are often two issues that arise when a business (that’s a customer) fails. How do we get paid and who can we replace this lost business with? Furthermore, if it’s a supplier, how do we acquire the necessary components or raw materials to ensure continuity? They are such obvious dilemmas, but often opaque to the eye and mindset.
The efficiency levels of a supply chain have the potential to make or break businesses, which can be reflected in the manner that competitive differentiators such as price, speed and experience are naturally controlled by supply chain management. A single chink or disruption in such mechanics can lead to a whole series of distortions and complications as we are increasingly seeing in the world today, including a deterioration in cash flow and liquidity.
Some of the troubles are naturally out of the business’s control, as seen in recent supply chain challenges such as COVID lockdowns, though most can be addressed and tackled by exercising good risk management and amplified foresight.
Good cash flow and resilience go hand in hand
Insolvencies aside, late payments have a definite impact. A significant pattern of payment delay, which can be a very common indicator of financial difficulties, can also lead to difficulties for the affiliated business and consequently trigger a mechanism of contagion through the whole cycle.
More so, any extensive payment delays can affect even the strongest of suppliers or businesses. Ultimately the correlation between failure and late payment is likely to impact all companies regardless of age, size, financial standing and situation. When late payments are intensifying, and they are combined with the precarious challenges and macro environment we are all observing, it becomes an obstacle course.
In essence, payment hold-ups in a chain can expose many businesses to cash flow disruptions, whether the relationship is direct or indirect. While markets will eventually adjust, they can be slow and the impact on producers and consumers can be costly, as we are seeing with the rapid spike in input costs driven by uncertainty and exponential inflation curve.
So, to counter such challenges, a business can focus its attention on enhancing certain areas of its risk strategy and exploring a variety of methods and actions to both strengthen and coagulate the base.
This can only increase resilience and enhance the ability to deal with any form of crisis, which can spark and eventually cement sustainability.
Supply chain management and preventing complications
Conversely, the latest supply tests will draw some advantages because repurposed and reshaped supply chains of the future will need to be characterised by both resilience and responsibility, which will obviously prevent the scale of challenges we see today. These will also help industries manage short-term crises and enable businesses to build around their customers and help economies rebound.
For now, though, supply chains are more integrated than ever and this can add complications to the equation. What appears a seamless, efficient and specific endeavour can suddenly translate into a catastrophic predicament. So how does one mitigate the risks to the business?
For a start, have a balanced spread of clients and suppliers to ensure continuity. And exercise greater risk awareness when talking to contacts, clients, suppliers. Have critical thought and undertake full-scale analysis of the product or component’s life cycle, which can raise things or introduce elements to a potentially troubling equation. At the same time it is advised to make efforts to identify and deal with fundamental business risks, which can not only hamper cash flow and growth but sometimes viability.
However, while many businesses exposed to this chain reaction will naturally have concerns about the prevalent risk, different firms will also have very different priorities, transaction volumes and business goals.
So while there are basic measures you can take, there is no one size fits all approach when it comes to advising and setting an appropriate strategy. That is why it's a good idea to use a specialist who can take the time to understand the business and give you the ideal support based on years of knowledge and experience.
Xenia’s team has extensive product and sector knowledge, enabling us to help clients tackle their business challenges. To find out more about our services, click here.
Risk Development Executive