Techniques for Increasing Supply Chain Resilience

During the early stages of the pandemic, businesses wrestled with the worst shortages the economy had experienced in 50 years. Some companies couldn’t get the materials needed to produce merchandise, which led to empty warehouses and lost revenue. Others were stuck with warehouses full of product after overestimating future demand and trying to get ahead of potential bottlenecks.

Fast forward to 2024: Supply chains mostly rebounded from pandemic shortages. But with geopolitical tension and a shaky economy, industry executives think there’s still work to be done to improve supply chain management and resilience. In a recent American Productivity and Quality Center (APQC) poll, 63% of respondents said they didn’t meet business goals last year due to supply chain impact.1

Improving supply chain management isn’t missed on CEOs either. A Bain study revealed that a combined 90% of business leaders said they’re focused on increasing supply chain resilience and flexibility over the next year.2

What is the purpose of supply chain management?

The purpose of supply chain management is to ensure that consumers and businesses receive goods and services when they need them. It requires careful coordination between components and raw materials suppliers, manufacturers, logistics and transportation companies, and the businesses that buy and/or sell the final goods and services.

Supply chain resilience is vital.

Prolonged supply chain disruptions can cause businesses to lose 30%-50% of earnings before interest, taxes, and depreciation.3 Businesses must secure adequate resources to proactively respond to supply and demand dynamics despite current economic uncertainty. Reducing or eliminating missteps and surprises is key to building supply chain resilience. This will require focus on six elements to improve supply chain management.

1. Develop a model with multiple scenarios.

   Evaluate your product portfolio to identify bestsellers, next best products and future launches. Next, assess current and projected demand, lead times, capacity, production costs, potential profit, operational and financial considerations, as well as potential risks to these areas. Examining various scenarios will help prioritize production and inventory, so that you can appropriately allocate resources to meet the needs of high-value customers and partners.

2. Diversify suppliers.

   As we’ve seen, if one link breaks in the supply chain everything downstream is thrown into disarray. Supplier diversity keeps operations running more efficiently. When businesses are connected to multiple vendors, who are ideally located in various geographic locations, they can better manage raw materials and components availability and distribution, increasing supply chain resilience.
   
   Tim Dewald, director of supply chain at Hercules Inc., finds that multiple partnerships reduced the company’s reliance on China and helps them compete against much larger businesses. Before the pandemic, the outdoor amenities manufacturer, already had strong relationships with partners in Mexico. Exclusive production agreements allowed Hercules Inc. to send underutilized equipment to manufacturing partners there.
   
   “We are ahead of the curve in near-shore sourcing. In one U.S. facility, a product was 95% sourced from China and five percent from Mexico in 2018. Today, the numbers are reversed — 95% Mexico, five percent China,” says Dewald. The relationship also helped Hercules Inc. avoid 301 tariffs, reduce ocean freight, and cut transit times from weeks to days.4

3. Understand and prepare for currency conversion.

   If your network includes global suppliers, you’ll need to make payments in multiple currencies and that carries risk. For example, if you’re buying from an overseas supplier in one currency, that supplier could be buying from a vendor in another currency to make their products. This indirectly exposes you to increased foreign exchange liability, which suppliers will likely pass on to you in higher costs.
   
   If you source raw materials from a country where the local currency appreciated against the US dollar, it can be difficult to switch to a supplier in another country where the exchange is more favorable. This also applies to countries that apply tariffs unexpectedly.
   
   The simplest foreign exchange risk management strategy is to exclusively make and receive payments in your own currency. However, there are risks to this approach as well.
   
   • You could pay higher prices if suppliers with different native currencies time their payments to take advantage of exchange rate volatility.
   • If you receive only US dollars internationally, you might lose customers to competitors who offer dual currency invoicing.
   • You could inadvertently absorb vendor costs to convert US dollars to their local currency. This could also happen downstream.
   
   Increasing costs of materials globally is a significant factor in production. So, it’s important to understand currency conversion, specifically costs and risks that might be involved.
   
   David Grimaldi, foreign exchange sales consultant, Synovus Treasury Management, believes structuring payments advantageously can create a hedge against foreign exchange volatility and enable your company to make decisions with more certainty. “Dual currency billing, forward contracts and multicurrency accounts are good ways to manage foreign currency exposure risks and reduce the uncertainty of dealing with foreign exchange in the supply chain,” Grimaldi says.

4. Increase collaboration across the organization.

   Few industries haven’t been impacted by labor shortages over the past few years. Now, the International Longshoremen’s Association, whose contract with the U.S. Maritime Alliance expires on September 30, 2024, is threatening a strike that could impact Eastern and Gulf Coast ports. While both parties are working to avert such disruption, uncertainty makes importers nervous.
   
   “This strike could affect ports from Maine all the way to Texas,” says Tom Loffredio, managing director, Synovus Capital Markets. “So, it’s not only important to have contingency plans, but also to work across the entire business to connect appropriate people, resources and tools.”
   
   Developing a cohesive internal strategy that includes Treasury, Procurement, Finance and Product Development to analyze the supply chain and its implications in other areas of the business is essential to increasing supply chain resilience. These teams provide valuable insights on materials, manufacturing costs, and schedules that could affect profitability.
   
   “Working with these internal groups, Finance can determine how to fund purchases and mitigate price variability to reduce uncertainty, including hedges on commodity inputs,” Loffredio says.

5. Invest in technology to increase visibility.

   At minimum, all supply chain documents and processes should be digitized. However, there are many software options, including integrated solutions with capabilities from supplier management to demand forecasting. Advances in artificial intelligence and machine learning augment industry software, enabling businesses to manage the supply chain from end to end. You’ll be able to “right size” inventory levels, as well as identify vulnerabilities and opportunities.
   
   With high transaction volumes and values, fraud is a recurring problem throughout the supply chain. Progressive data analytics, inherent to AI and machine learning, pinpoints suspicious orders, payments, billing and other potentially fraudulent activities.

6. Carefully oversee cash flow, liquidity and risk.

   In manufacturing, you might not be able to wait even a few days to secure funding for purchases needed right away. Liquid assets are critical. Carefully managing cash flow ― from operations, investing or financing ― ensures there is adequate liquidity to meet your organization’s financial requirements.
   
   While your immediate focus might be covering daily expenses, also consider future capital needs even if project timelines are shortened. Martin Puleo, chief financial officer at Struktol Company of America, believes agility is a must in a fluctuating economy. Two years ago, under Puleo’s leadership, Struktol shortened its financial forecasting to a rolling 18 months instead of the traditional three-to-five-year period.
   
   “Even the 18-month forecast has high volatility — both in cost and revenue — that causes us to make short-term decisions that will impact long-term development,” he says.5
   
   Barbara Mulligan, director, Alabama region, Synovus Middle Marketing Banking concurs. “Many businesses are now focusing even just a few months out,” she says. “They’re looking ahead maybe four to six months so that they get some control over the short term.”
   
   Struktol’s long-term strategies now revolve around capital replacement. Puleo says, “ABL debt is an alternative for funding but with interest rates rising, you still may find affordable funding with a credit line without securing your AR and inventory. Also consider supply chain funding (discount your AR) as another liquidity source.”6
   
   “There are many solutions available to help hedge and stabilize rate exposure, such as interest rate swaps, and caps and collars,” Loffredio notes. Loffredio recommends including your company’s banking partner and financial advisor, as part of an internal team, to provide customized input and expertise on how to protect and preserve capital.

Strengthening insights, relationships and capital are the keys to a resilient supply chain.

Business leaders can take steps to improve supply chain resiliency. Maintaining long-term global trading relationships means your organization’s risk exposure will require continual monitoring. You’ll need to collaborate with suppliers and customers to understand and alleviate potential risks.

Detailed analysis provides vital business information and advanced technologies will help to streamline operations, as well as reduce threats to the supply chain and costs. If you need to increase liquidity or secure additional funding to accomplish these goals, we can help. For more information contact a Synovus Commercial Banker for details or stop by one of our local branches.