October 17, 2022 Managing Global Supplier Risk Heading into 2023

Risk management for manufacturers should include flexible supply chain financing for global suppliers to help protect business continuity.

By Jeff Rohe, Vice President, Infor Nexus           

To assure business continuity in an increasingly turbulent and uncertain world, companies need to pay closer attention to the critical supplier networks they rely on to provide the goods coming into their warehousing, manufacturing and distribution operations.

With a global economic downturn looming due to inflationary pressures, fiscal policies, and geopolitical strife, many businesses will  extend their supplier payment terms to preserve capital and support greater financial flexibility. Already-fragile import supply chain networks and overseas suppliers will be stressed, further increasing total business risk for the enterprise. Adding to the financial strain of extended payment terms from major customers, the inflationary pressures on their own material costs,  on labor, interest rates and the burgeoning US dollar puts further stress on critical cashflow for suppliers. 

Supply chain finance (SCF) programs are an increasingly popular solution to mitigate the risks of supplier failure and sourcing disruptions during periods of economic turbulence. These programs make it possible for suppliers to get paid for an invoice before the invoice due date, either by the actual buying party — often called “dynamic discounting”  — or by a third-party financial institution, in exchange for a payment discount. The discount amount is often based on the financial well-being and resources of the buyer, so that suppliers can benefit both from lower financing rates than they might find with their own banks, and from earlier access to capital.  

The size of the payment discount required by the financing company can vary significantly, especially for suppliers overseas whose access to competitive credit markets is limited. For smaller suppliers working with North American or European buyers, the most favorable invoice financing options are often those based on the credit-worthiness and risk of the buying company.

In the past three years, greater attention to mitigating supply chain risks has resulted in more focus on supplier financial health. With the flow of essential parts and products across oceans frequently disrupted by regional lockdowns and inbound delivery times stretching to unpredictable lengths, businesses want to eliminate any additional sources of supplier shipping delays due to financial problems.

To improve global supplier compliance to quality, sustainability and other environmental, social, and governance (ESG) goals, supply chain finance platforms can also provide additional incentives, as well as the means to track and confirm activities. Innovative companies are now offering more favorable financing options just for their ESG-compliant suppliers.

Supplier funding programs backed by a single bank may no longer meet the needs of a newly expanded global supplier network. Some banks may not be able to service suppliers in a particular country, limiting the financial security net that a buyer has to mitigate some of the business risk with new suppliers. 

This is where platform approaches to SCF make better sense. These platforms provide the central data hub for buying companies to engage a number of banks with their global supplier network, automating and standardizing critical data flows for transactional efficiency and transparency, with flexibility to add other banks in the future, or provide hybrid programs involving self-funded (buyer-funded) early payment along with third-party options.

When SCF programs are deployed through the same procurement systems already used by suppliers for submitting invoices and shipping documents to the buyer, there is added convenience and also incentive for suppliers to provide more accurate and timely information. 

Even a basic packing list takes on new value when it is generated and submitted on a network platform that uses the data to automate the creation and submission of a commercial invoice from the supplier. On the platform, the invoice can be automatically matched and approved on the buyer’s side and rapidly released for earlier financing, if required. Suppliers benefit with simplified access to earlier payment while buyers gain improved compliance and financial accuracy — a true win/win solution.

It is critical that buying companies also streamline and automate the supplier invoice approval process internally, or they significantly reduce the value of finance programs for suppliers, who may have to look elsewhere for their capital needs. Manual document matching and invoice approval processes that can take 20 to 25 days to finally approve a supplier invoice won’t help reduce supply chain risk.

Supply chain finance programs can directly reduce uncertainty and business risk in global supply chain operations, assuring the steady and reliable inbound flow of goods and components to warehouses. By looking beyond single-bank funding solutions, and deploying financial services that are well integrated with current direct procurement operations and supplier networks, companies can better protect their business continuity.   

A financially sound supplier network is essential to the supply chain resilience needed to face the challenges certainly coming in 2023.

Jeff Rohe is Vice President for the Infor Nexus Supplier Collaboration and Supply Chain Finance solution suite. Jeff has designed, implemented, and sold supply chain finance products to banks, small business, and multi-national corporations in the US, EU, Middle East, and Asia. His focus has primarily been on how the use of supplier collaboration and supply chain finance tools can reduce costs, improve compliance, and enhance supplier relations. www.infor.com

Subscribe to Industry Today