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How financially secure is your supply chain?

Businesses need to use all methods available to gain a clear insight into the strengths and vulnerabilities of their trade networks.

Last updated: 30 Apr 2021 5 min read

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Understanding your customers’ and suppliers’ financial health has never been more critical, nor as challenging, as it is in the time of Covid-19. For businesses in the UK, they face the dual challenges of a global pandemic and the effects of Brexit.

Businesses worldwide have faced a massive hit, but the pandemic has also affected organisations in one fundamental sense – financial visibility. Mirka Skrzypczak, head of working capital and trade products at NatWest, says: “What customers are finding challenging is that the pandemic has thrown all the conventional ways of understanding how to rate businesses out the window. For example, what is the value of the financial information in annual statements for 2020? It’s virtually useless.”

If a business goes to Companies House to rate a counterpart, it’s hard to assess the pandemic’s actual impact on those on both sides of the chain – customers and suppliers. Skrzypczak says: “If the pandemic has heavily impacted your sector and you think you still have customers that are doing very well, are they really? What makes them so special?” Companies need to do more to understand how each side could have been affected.

The Brexit impact

Meanwhile, Brexit presents a whole host of additional challenges specific to UK businesses trading with Europe.

“People need to adjust and learn about the bureaucracy because while on some things there are no tariffs and there are no duties, you still have bureaucracy implications,” says Skrzypczak.

In January, exports to the EU dropped 40%, according to the Office for National Statistics.

There are also more substantial, nationalistic pressures in specific EU member states, where customers are less inclined to buy British, and the increased bureaucracy adds to that reluctance.

“You cannot underestimate the value of just picking up the phone and speaking to your suppliers. Speaking to as many businesses down the chain as possible can give you a clearer sense of the story”Natalie Harold, head, supply chain finance, NatWest

Jim Bidwell, head of trade services product management at NatWest, says: “So far, the issues around Brexit in the UK have been on the sell side, rather than the supply side, because the UK government has decided to put in place a six-month moratorium on restrictions coming into the UK. What happens in six months when the UK government starts monitoring the inflow of goods coming into the UK from the EU? Will we see a second wave of issues?

“The message from that for UK companies is: if you’re sourcing from the EU, you might want to take early consideration of what might happen.”

The impact of supply failure

The financial fallout of supplier failure can be significant, but its impacts can go well beyond cash flow. Bidwell explains: “If businesses aren’t receiving the goods, then they’re not making any sales. They’re probably unable to fulfil their contractual obligations with whomever they’re selling those goods to, whether they’re bringing them into a manufacturing process or to a straight sale.

“It’ll have an impact on working capital if there are delays on the sales side, and there’s very likely to be some reputational damage. Because if you’re unable to fulfil your downstream sales contracts, the confidence of your buyers will be eroded in you as a supplier because supply chains are holistic.”

There is operational damage to consider too. If a business loses a critical supplier and has to switch suppliers, not only does it cause a delay in production, it can result in the company having to change its manufacturing process. Equipment and machinery may need to be modified because a replacement supplier’s processes are different.

What you can do to mitigate risks

Skrzypczak says: “Spend time analysing your supply chains; understand where your goods come from, and who buys them.”

Insurance companies can help you assess risks: some have planning tools for business, and you do not necessarily have to buy any insurance from them. They can sell you the market intelligence both domestically and for countries you are trading with. Organisations such as MasterCard and Visa, which work with procurement functions in big companies, also have a richness of transactional data that can help you assess counterparty health.

NatWest has launched a Supply Chain Credit Review to help businesses understand counterparties’ financial health. Cherry Ko, the bank’s digital experience manager, says: “The tool enables businesses to check the credit score and average invoice payment time with any UK company they currently have a partnership with, or seek to form a partnership with, by using a simple and digitalised process.” Credit reporting business Experian powers the tool, which is currently in the ‘beta’ phase of testing, when users are invited to try out features and share their response.

“It is a free, unauthenticated journey available to everyone, and customers can access reports on three companies over seven days. Users simply put in the name of the company or company number. The tool is available online until the end of May, and we would value feedback from customers.”

Being proactive is essential. Natalie Harold, the bank’s head of supply chain finance, says: “You cannot underestimate the value of just picking up the phone and speaking to your suppliers. Speaking to as many businesses down the chain as possible can give you a clearer sense of the story. You will definitely discover more than you would from what is publicly available.”

Finally, draw up contingency plans. Supply chains can be challenging to navigate. You can access only a limited amount of information and you need alternative plans when things go wrong. Bidwell says: “It needs to be a plan that you can execute. Don’t just rely on one supplier for particular goods. Have more than one supplier; then if you have problems with one, you can potentially increase your supply from another.”

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