Supply chain risk is not something on the long-distant horizon, but a feature of the risk landscape that is very real and developing in 2021 so far. The first quarter of the year has seen the Turkish lira fall by up to 14% in one day, the Suez Canal blocked by a grounded ship, the collapse of Greensill, the ongoing shortage of containers driving up ocean freight charges and the continued disruption to trade caused by the changes enforced by Brexit.
Companies operating in Turkey are seeing a significant increase in import costs. The blockage of the Suez Canal affected various commodity prices including oil. The fallout of the Greensill issue is likely to mean further scrutiny for supply chain finance in balance sheet disclosure and the transparency of financing and credit insurance.
Moreover, the impact of various trade spats around the world is a continuing headache for companies trying to maintain their supply chain flows and fulfil customer requirements. The issue of supply chain risk is a very live one and changing almost every day.
The big lesson of 2020 was that the global single-source model that has made so many people prosperous in the past 30 years carries considerable risk. We saw the impact of COVID-19 on Chinese supply chains in the first quarter of 2020, and we see a continuing shortage of semi-conductors as world demand has surged – and with very little capacity outside South Korea and Taiwan.
But things are changing. Intel has recently announced a significant increase in their production capacity in Europe and the US. Many companies have already re-sourced supply away from China to South East Asia. The Regional Comprehensive Economic Partnership (RCEP) should also allow further opportunities to set up alternative supply sources across the Pacific Rim, further diluting the risk of having all our eggs in one basket.
There is a long way to go, but supply chains are now in that period of diversification that may lower the risk. The thing to be careful of is that we have insured ourselves for the event that happened in the past and not the ones that may happen in the future.
Changing the supply chain structure takes time and is fraught with additional risks. For example, building a modern semiconductor plant can take several years. Whenever we change suppliers, there may be issues about continuity of supply and quality of product, especially during the period of transition.
Then there is the danger that political factors may upset the plan. A recent example is the economic effect of the coup in Myanmar. As a result, foreign direct investment in the country has stalled and those foreign investors who had already piled in are left in a quandary about what to do.
There are other notable risks when supply chains move across borders. What will be the impact of dealing with different currencies, banking regulations and potential currency controls? How will this affect treasurers’ ability to move funds across the globe to where they are needed and can get the best bang for their buck? How can you be sure that new transaction flow is not facilitating financial fraud – or the exploitation of children?
The good news is that the changing landscape of trade has some really bright spots. The paper nature of trade documentation has been a scourge for companies across the globe for many decades and has largely resisted the move to digitisation. This has meant that international trade is exposed to costly and slow paper-driven processes, is prone to manual errors and is susceptible to fraud.
Thankfully, moves are being made to solve this issue. In the UK and Singapore, legislation is in the process of formulation that will allow for digital transmission and acceptance of trade documents. This needs to spread further across the globe, but at least a good start is being made.
The only answer to all these risks and opportunities for treasurers is to have flexibility. Many who had secured generous lines of credit to cushion the most unimaginable blow had those facilities easily consumed during the pandemic. While others suffered little pain in 2020, the cautionary tale is that events can change financial circumstances very quickly. The fact that these events were unprecedented is no solace to the company that went bust and to its stakeholders that have been left high and dry. We must learn to think the unthinkable. And even then, we will have only mitigated against some of the risks that may be out there. The one certainty is that hoping for the best and not doing your homework is a very dangerous path.
Brian Shanahan is founder and CEO of Informita, a consultancy focusing on working capital and procurement