As the economy slows, corporate buyers are taking action to align to lower demand levels.
Diageo’s destocking due to slowing sales brings to the fore the impact this can have on entire supply chains Diageo’s destocking hangover puts new chief under pressure (ft.com)
Destocking has a whiplash effect on the supply chain as companies reduce ordering from their suppliers. These very same suppliers may have geared up their own production capacity and inventories as a result of what seemed a robust order book which then suddenly dries up.
In that scenario, suppliers still have bills to pay whilst they are adjusting their businesses to reduced orders. That may include the cost of redundancies and indeed inventories that they have themselves purchased in anticipation of what seemed to be solid demand.
A corporate can handle that adjustment period with its own cost reduction programme most likely underpinned by a strong working capital position enabled through treasury reserves or access to facilities.
Suppliers typically do not have such easy access to working capital, so a significant reduction in demand can be fatal to them if they do not have access to working capital to ease the transition to different levels of demand.
Corporate Impact
The impact on the corporates supply chain can be:
- Reduced product availability- If suppliers cease operations- so that product or service is no longer available
- Price inflation- as suppliers move their focus to new customers or products
- Increased shipping costs- if there is a significant geographic remapping of the supply chain e.g. alternative supplier is in China instead of Thailand.
Mitigating Actions
Mitigating the impact of destocking is clearly a priority for corporates if they want to sustain their supply chains. Key to that mitigation is:
- Transparency with the supplier on changes to order volumes.
- Working with the supplier on a cashflow forecast on how that impacts them
- Putting in place working capital facilities that will help smooth that adjustment to volumes
Supplier access to working capital
Crossflow can work with corporates to mitigate and smooth the impact of reduced order levels through destocking. That can include enabling:
- Cash injections to the supplier- through payment of all outstanding balances owed to the supplier providing them with a working capital injection from globally competitive financial institutions at a lower costs than those suppliers have access to through their local bank. This will support suppliers transition costs, as a result of destocking, including e.g. redundancy costs.
- Immediate payment on approval of the invoice- without waiting for payment under the buyers usual 30-90 day terms. This will have no impact on the corporate own working capital, creating positive relationship between the buyer and the supplier.
- Payment on order- enabling the supplier to be paid a percentage of the order based on trigger points, with the final balance paid on approval of the invoice.
Result
Enabling access to working capital through Crossflow can transform outcomes of destocking, maintaining the supply chain network and avoiding costly shocks that can otherwise be caused through a destocking process.
For information on our four week rollout programme to help mitigate the impacts of destocking contact us here
Tony Duggan - Tony is one of the founders of Crossflow. He served as Supply Chain Director at Wickes and B&Q prior to serving as Product Development Director at SWIFT, the global banking network. He also managed an outsourced fintech development project for HSBC in Hong Kong.
