Strengthening your supply chain in a downturn

In tough economic times and during periods of industrial slowdown, cash-flow is king and for the UK manufacturing sector, cash management certainly remains a top priority.

Despite signs of green shoots earlier this year, speedy recovery seems to be some way off. Figures recently published by the Confederation of British Industry showed that British manufacturing orders have fallen at their fastest rate since January 1992, with a large proportion of firms citing insufficient access to finance and credit constraints as the main reason. The latest Chartered Institute of Purchasing & Supply index showed activity in the UK manufacturing sector to have declined in August, throwing into doubt any earlier signs of recovery. Although economically less important than it once was, the manufacturing sector is still recognised as a sensitive barometer of wider economic health.  It is therefore crucial that manufacturing companies manage their cash carefully if they are to ride out the storm.

Firms remain positive, however, as the sector continues to show acumen in prudent business management skills.  Over the last decade, almost every area of a manufacturers most critical business process the supply chain - has been subject to strict efficiency measures, extending them into more distant (low cost) geographies, using sophisticated analysis and planning routines to predict and meet future demand, as well as refining international logistics. In fact, they have been streamlined to such an extent that little room is left for manoeuvre and it is often said that the physical supply chain has become just about as efficient as it can be. Yet the current global economic downturn applies increasing pressure on those supply chains, especially in the manufacturing sector.

Furthermore, as the sector tightens its belt and cash-flow thus rises further up the agenda, it is clear that the supply chain is being stretched to breaking point. Increasingly, we see unproductive tugs-of-war taking place between buyers and suppliers over payment terms.  Demicas latest research report, conducted across a thousand finance directors, revealed that 63% of British firms are still looking to extend payment terms with their suppliers whilst on the other side, suppliers continue to demand timely payment.  The situation is evidently reaching a critical stage as 88% of the companies interviewed also believed that some of their key suppliers will not be able to sustain further lengthening of payment terms. Pressure is still heavily on major firms at the end of the supply chain to free up cash, but if that means putting essential suppliers out of business, then the whole manufacturing supply chain can collapse like a pack of cards.

The good news is that the banks have been not been idle, and have been developing a range of Supply Chain Finance tools which release the tension between the conflicting demands of buyers and suppliers, by enabling buyers to get extended terms (for example, from 30 to 90 days) from their suppliers, and suppliers to receive payment as early as days after invoice approval. The financier (bank) facilitates the process by providing funding to the suppliers. But in assessing the credit, the financier looks at the buyer who is the entity obliged to pay the invoices.

At the very time when manufacturers urgently need to improve their cash-flow and strengthen critical supplier relationships, they have the opportunity of harnessing these new tools. Although supply chain finance and non-traditional financing techniques have certainly become mainstream over the last two years, there remains much scope for further take-up and awareness amongst manufacturers.  Undoubtedly, those who embrace these techniques will not only avoid the risk of sustaining serious supply chain damage, but will emerge as the winners once out of the other side of the downturn.