Volatile conditions continue to rattle global supply chains, forcing business leaders to re-think their approach to managing the documents, data and capital that drive global commerce.
Retailers and consumer goods companies face rising costs on multiple fronts, from raw materials to specialty chemicals, labor and container shipping. There's growing concern of inflation and CFOs are already feeling an impact upon their gross margins.
Some companies are considering raising prices, others are looking to re-negotiate with suppliers. But there is a massive opportunity that exists to digitize trade to offset these rising costs and risks- and in some cases, even spur growth.
Crashing waves continue to impact shippers
Many of the hurdles to profitably and reliably delivering goods have grown larger in recent months.
Shipper costs have skyrocketed, with little relief on the horizon. Container demand remains high, port congestion continues to mount, and a string of well-reported delays and disruptions adds to the stress on container shipping costs.
This was evidenced when the 20,000-container ship Ever Given ran aground March 23 in the Suez Canal, blocking canal traffic and grinding maritime shipping to a halt at one of the world's busiest waterways.
Additional costs from priority-loading premiums are exacerbating the problem. According to S&P Platts, these premiums can add $2,000 - $3,500 per FEU (forty-foot equivalent unit).
In addition, IHS Market reported that its PMI (Purchasing Managers' Index) increased to 59 for the first half of March, compared to 58.6 in February. Production and materials costs are being driven up, in part, by labor shortages at factories. In industries such as automotive, the shortage of chips is adding to complexity, with a recent factory fire at a Renesas Electronics plant adding more fuel to the fire.
The Wall Street Journal recently reported that the cost for petrochemicals that are inputs to various consumer goods have spiked 22% in the last month, following a shut down in production caused by the recent deep freeze in Texas.
Manufacturers and retailers are faced with absorbing these excess costs or passing them along to their customers. A third option is to re-think and re-map production and logistics to remove costs and risk from the supply chain and protect margins.
A white-boarding opportunity
One of the major lessons from 2020 has been the resilience of the global workforce to adapt and redefine how business is executed in a remote environment. Innovation spawned from necessity in the last year. As a result, digital collaboration, outside-the-box thinking, and a redefining of processes and tasks proved to be primary success factors. Digital transformation has led to many changes that will be permanent. Many underlying success factors in the re-definition of work highly resonate within the world of supply chain.
Supply chain platforms that digitally connect buyers, suppliers and service providers, such as banks, create new opportunities to navigate challenges such as rising costs and inflation. For example:
Offsetting rising sourcing costs through transaction digitization, thereby removing the need for point-to-point portals, 3rd party service providers (e.g., agents) or unnecessary bank fees.
Alleviating capital burdens through digital supply chain financing. As raw materials costs rise, suppliers are further stretched for capital. Capital costs are baked into the cost of goods sold by suppliers. A buyer-driven supply chain finance program can help alleviate that burden and optimize working capital for supply chain participants.
Leaders in the digitization of buyer-supplier collaboration can reduce cost of goods sold, improve margins and improve working capital. Proven impact includes:
98%+ touchless invoice processing
100% chargeback recovery
10-30% Days Payable Outstanding improvement
3X growth without adding internal resources (sourcing & accounts payable)
Re-thinking documents, data and capital
What does a digitally transformed supply chain look like? David Lafitte, COO of Deckers Outdoor Corp., maker of UGG, Teva and Sanuk brands, describes it as such:
When you have orders that change frequently, you end up with long trails of emails and ever-expanding distribution lists. If you don't have a central location, a cloud-based portal to communicate with vendors, you can spend a huge amount of time reconciling invoices. Now, one person spends 30 minutes a day checking on a handful of invoices.
Deckers spends a small fraction of a work day handling accounts payable, with less than 1% discrepancy.
Digitization of the financial supply chain enables additional programs such as First Sale or invoice discounting that lower COGS (cost of goods sold). Many fashion brands and retailers find it too complex and time consuming to collect on chargebacks or deductions, choosing to write off the cost and take a hit on margins. Document and workflow digitization on a single network removes these barriers and enables seamless chargeback re-capture.
A recent discussion with Puma's treasurer Frank Waechter explained how the sneaker leader was able to handle the extension of payment terms by Puma's retail customers at the onset of the COVID-19 pandemic. Rather than absorbing the impact of delayed payments on its own or passing the delay on to suppliers, Puma arranged for 3rd party financing to be available to its suppliers (based on Puma's credit). This allowed Puma to hold its cash longer, while ensuring suppliers were paid early. Suppliers wouldn't have to seek out expensive capital in their local market tied to their own creditworthiness. The pain of the pandemic was mitigated due to Puma's use of a digital supply chain platform that links data, inventory and capital across the supply chain.
Several retailers are seeking strategies to bring more control over their supply chain costs - from buying or helping suppliers finance the purchase of raw materials, to eliminating reliance on agents and scaling private label brands. In each of these examples, the ability to execute starts with having a handle on orders, trading partners, inventory and capital. A single supply chain network that ties all of these together becomes a mission critical system to operate the supply chain. Without network connectivity, retailers and manufacturers are left chasing orders and inventory, and playing defense against eroding margins and inflation.