By Christian Lanng, CEO and Co-founder, Tradeshift
Tradeshift’s Q4 Index of Global Trade Health suggested yet another changing of the tides for supply chain operators as consumers and businesses alike readjust their spending habits in anticipation of a long-forecast recession.
Shipping giant Maersk, a useful bellwether for global trade, has said that it expects container shipping volumes to fall by around 2.5% this year. Taken at face value, Maersk’s forecast seems incredibly gloomy. But we should also remember that it wasn’t so long ago that shipping costs were skyrocketing. In other words, such a fall in volume is, in part, at least, a sign that supply chains are beginning to normalize again.
And yet, for all the outward signs of gradual normalization, supply chain risk remains the most significant concern among senior leaders heading into 2023, according to research by Capgemini. It’s easy to see why this might be the case. Business leaders, having spent the best part of two years trying to plot a course through a period of extreme demand volatility, now find themselves in the middle of a period of economic volatility.
A clouded economic picture makes long-term planning very challenging. That’s a problem for supply chains, which tend to be slow-moving and slow-reacting to external stimuli. Demand certainly seems to be falling as consumers tighten their belts, but the degree to which it is likely to continue falling is still up for grabs.
This puts supply chain leaders in a highly precarious position in terms of inventory planning. If demand does decrease, you risk a warehouse full of expensive inventory going unsold. If demand doesn’t decrease, you may well run dry, missing revenue, upsetting customers, and losing market share.
Supply chain operators will often be tempted to hedge somewhere in the middle. This approach is rarely successful, however, as evidenced by the disruption to supply chain during the past 18 months.
So what’s the answer? Rob van Ipenburg, Managing Partner at Quyntess, put it very nicely when he said that businesses should be ‘...looking at ways to increase the clock speed of their supply chain.’
“The basic principles of resilience, including agility, remain fundamental in any given scenario,” says Rob. “Digitalization enables businesses to be savvier about managing risk through the supply chain as opposed to applying crude financial policies to such decisions.”
Niels Boersema, supply chain integration director at Danone, makes a similar observation about the link between digitalization and agility: “Even at the best of times, forecasting will never be 100% accurate. Instead, we need to focus on building agility into the system to take the right actions when deviations start to surface.”
Embedding agility into supply chain management begins with the connection between buyer and supplier. And the benefits of digitizing these relationships on a global platform like Tradeshift extend far beyond forecasting and planning.
Recessions make even dependable suppliers unreliable. Moving away from single-source supply chains towards digitally connected, network-based models ensures businesses have alternatives available if a key supplier starts to struggle. Analyst firm IDC believes cloud-based B2B e-commerce marketplaces can help organizations build resilience by providing easier access to a large selection of pre-vetted suppliers in multiple locations.
The same model can also help businesses to reduce costs by as much as 15 to 20 percent across categories, thanks to a combination of better bulk-purchasing discounts and increased competition between suppliers.
As economic conditions sour, effective working capital management and cost control will become the top priority for finance teams. In a digitally connected supply chain, accounts payable teams can harness increased invoice processing efficiencies to negotiate early payment discounts with suppliers.
Increased visibility across the supply chain also allows organizations to build a deeper understanding of individual suppliers' financial health. They may even step in and support a supplier facing financial difficulties. The flow of transaction data between buyers and suppliers can also be used to underpin embedded finance services, such as early invoice payments or buy-now-pay-later services, that keep vital liquidity flowing across the supply chain.
A number of commentators have said that a slowdown might not be a bad thing for supply chains. You can see the point they are making. After a crazy couple of years, a recession at least offers some breathing space to get back to normal. But it’s a fairly extreme form of medicine and smacks of treating the symptom rather than the cause.
Change is coming at us in waves - economically, environmentally, sociologically, politically, and organizationally. After two years of near-constant cycles of disruption, there is no reason to think this pattern will not continue into the future. So push normal to the back of your mind for now, and focus instead on becoming agile.
To learn more about global trade trends from Q4 2022, take a look at the latest Tradeshift Index of Global Trade Health.