With the onset of COVID-19, many factors contributed to disruptions in the global supply chain – such as factory closures, uncertainty in shipping routes as well as border delays and closures. And while some of these factors will remain in play for a while, there are ways to reduce the risk of continued impact to your business. Here are four ways to manage your supply chain in today’s business environment.
1. Establish a diversified supply chain network
For some time now, many businesses have adopted linear, Just In Time inventory models for their efficiency and easier oversight. In these models, inventory is ordered on an as-needed basis from a set group of suppliers. While there are merits to these models, they are not well set up to manage disruptions: If there’s weakness at one point, the whole line can easily break down.
That’s why many experts suggest establishing a supply chain network versus a linear model. “With a cloud-based network, you can source new suppliers quickly should there be a problem in one area. You have real-time visibility into your data and can make decisions quickly,” says Marcel Rokach, Senior Director, Global Solutions at RBC.
“Diversification within your supplier network is also key to supply chain stability,” says Lucy Li, National Director, Supply Chain Client Segments at RBC. “Review your procurement strategy through a lens of stability. It’s important that your network consists of multiple sourcing options, for instance, suppliers from different regions or different contractual arrangements,” she says, adding that diversification can absorb future shocks to global trade.
2. Constantly monitor your network
Once your network is established, the goal is to stay on top of the entire value chain. “You need to know, even for your second tier suppliers, how diversified and resilient their businesses are,” says Li. Two ways to achieve this “control tower” view is through data analytics solutions and closer collaboration with your partners.
New data analytics solutions focus on integrating data points throughout the enterprise to enable more real-time decision-making. For instance, you can monitor every point of operations, identify bottlenecks and even predict buyer trends, enabling you to adjust your business quickly to future demand.
But data is just one side of things, as people who are experts in your business and throughout the value chain need to share and evaluate the data and assess the broader impact. Establishing data analytics capabilities in your team as well as your partners will help create a healthier and more robust supply chain. “The more you and your partners invest in data analytics,” says Li, “the better prepared you will be for supply chain risks.
3. Regularly update demand forecasts
Demand forecasting is the process by which historical sales data is used to estimate future customer demand. Of course, COVID-19 has turned this on its head, as businesses around the world can attest to the fact that past sales no longer accurately predict future demand.
But that’s not to say that demand forecasting shouldn’t be done – in fact, it’s more important than ever. It’s still the driver of most supply chain related decisions – when you know whether demand is up or down, you can make decisions before crunch time sets in. If anything, demand forecasting needs to be done more often now and adjusted constantly.
4. Structure your transactions using risk mitigation tools
Trade Finance instruments can give you peace of mind that you will either receive goods or payment as per the terms of an existing agreement, and give all involved parties confidence in a transaction.
There are several tools that can facilitate trade, which can play an especially crucial role in a volatile trade environment. Marcel Rokach offers this advice for Canadian importers and exporters:
Use a letter of credit to ensure you or your suppliers get paid when the agreement is fulfilled
An import letter of credit is a document issued by a major bank on your behalf that guarantees your international supplier gets paid upon the successful delivery of goods or services. Using an import letter of credit for international purchases protects your company’s cash flow by eliminating the need to make advance payments or deposits. It can also strengthen relationships with international suppliers by demonstrating your company’s creditworthiness and by helping suppliers access bank credit. An export letter of credit, meanwhile, is a document issued by a major bank on behalf of your customer. This letter of credit constitutes an irrevocable undertaking to pay you, upon receipt of your goods or services, provided the terms of the letter of credit have been met. In this case, you protect your business by ensuring that you are paid exactly on time. Even if the buyer fails to pay, the bank that issued the export letter of credit is obliged to pay for your goods or services if your documents comply. The COVID-19 crisis has laid bare the need for buyers and suppliers to protect themselves to ensure the delivery of goods and secure payment, especially when supply chains are disrupted. Trade finance instruments have been proven as essential tools for businesses to mitigate the risks of trading internationally.
Get EDC backing for international transaction
With EDC credit insurance protection, your financial institution will typically lend against your insured invoices for 90% of their value, significantly increasing your access to cash. Insuring your sales allows you to offer more competitive payment terms to win contracts, without the risk. With EDC backing, your bank will also have comfort that your international transactions are protected, which can help with lending and other needs.
Use a bank guarantee
If you’re bidding on domestic or international contracts, you’re often required to demonstrate your ability to perform or to meet your contractual obligations. With a bank guarantee, you can feel confident bidding on large projects or contracts. With the backing of your financial institution, you can guarantee your lease payments on a commercial property or equipment or secure financing for a subsidiary with a bank in a foreign country or in Canada and the US. A guarantee assures your business partners of your financial integrity without tying up working capital, and helps you build credibility with the companies you do business with.
Manage your foreign exchange risk
Dozens of factors can affect exchange rates, and they can change very quickly. For instance, 1 million Euros can be worth something different today than when you started your transaction. No one can forecast exchange rates with absolute certainty, and timing the market isn’t a reliable practice either. However, not managing your foreign exchange risk can affect your profitability, as foreign exchange (FX) losses come straight out of your profits, often without tax deductibility and the possibility of recovery. Developing a good FX hedging strategy can protect you against wide swings in currency valuation and therefore shield your business from foreign exchange losses.
Take a look at the RBC Foreign Exchange Services page to discover ways to manage your foreign transactions - Foreign Exchange Services.
While the pandemic has led to stronger consideration to bringing production on-shore, Canadian businesses don’t need to forego international trade, even with continued uncertainty. Businesses should be thinking about how to diversify their chain, establish a robust network that is monitored and analyzed regularly, and continue to plan for contingencies and disruptions in the trade environment.
There remain exceptional opportunities for Canadian businesses to import and export with countries around the world. The additional challenges brought on by COVID-19 can be managed with the right planning, processes and tools in place.
1 – Source: https://www.accenture.com/us-en/about/company/coronavirus-supply-chain-impact
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.