What is meant by a supply chain cycle and will mine change?

Aman Gill, Corporate Underwriter, Bibby Financial Services

Trade financiers often talk about supply chain cycles – also referred to as trade cycles – to understand the funding gap of businesses trading internationally.

It provides a simple representation of the sequence of operations and transactions that take place, from suppliers producing goods right through to the distribution to final buyers for consumption.

Crucial components of a supply chain cycle

Firstly, it’s important to have a deep understanding of the suppliers involved in a supply chain cycle – where they are based, the payment terms they are agreeable to and the Incoterm® detailed within the supply contract or purchase order.

Another factor to consider is the transport method used to ship the goods.  This will have an impact on the transport time and overall lead time to deliver the goods, which could incur delays. Once goods have arrived at the port of import, businesses need to allow for customs clearance and any delay that may potentially impact the goods in transit period, including due to documentation issues.

Goods may require processing which can be as simple as breaking down or consolidation of goods (perhaps from multiple suppliers resulting in multiple supply chain cycles).  Alternatively, they could require adaptation for local markets, or even fundamentally changes via assembly or manufacturing, which presents its own performance risk in addition to extending the cash outflows for businesses.

The buyer may also request payment on credit terms ranging from as little as a few days to as long as 120, or even 150 days. This period can be as long, if not longer, than the total period of time it has taken the business to source and deliver the products.

The sum of these periods is referred to as the total funding gap and is where finance providers like BFS can assist with funding, plugging the gap until the goods have physically been paid for by the buyers (debtors).

Incoterms®

The Incoterms® that businesses trade with their suppliers and customers on will determine the make-up of their supply chain cycles, determining the primary obligations of the suppliers and the buyer, their responsibilities, delivery times and transfer of risk.

A funder will typically provide funding for goods under a trade finance facility once they are under the control of their client or nominated forwarder (such as a cash against documents payment).

However in some instances, they may be requested to provide letters of credit,  guarantee or undertaking to pay the supplier once the goods have been produced/delivered whereby the client is able to leverage the funder’s credit rating, or in the case of a letter of credit, may be in a position to transfer or discount the benefit of the funds under the presentation.

Supply chain cycles can be lengthy, particularly if a supplier requires any form of pre-shipment funding. We have recently experienced an increase in suppliers in the Far East requesting pre-shipment finance in the form of deposit and 100% proforma payments to credible suppliers as an alternative to the cost and administration that letters of credit incur.

Brexit and beyond

The major global events of 2020 undoubtedly caused global uncertainty, and this uncertainty impacts and forces supply chains to adapt and change.

Businesses importing and exporting have been impacted by Covid-19 and Brexit, which have both resulted in unavoidable disruptions to supply chains and their resilience, leading some businesses to “reshore” at least part of their supply chains to domestic suppliers and buyers.

This has been done either by vertical integration of the supply chain by undertaking manufacture inhouse or, more likely, outsourcing manufacture locally (should margins allow for it) in an attempt to mitigate or reduce as much supply chain risk as possible.

Post-transition

As the UK has approached and surpassed numerous Brexit deadlines, those businesses that have been able to increase capacity and stockpile have done so as a short-term measure, particularly if goods are not perishable or seasonal.

The UK leaving the EU has increased the likelihood of occasional delays for goods travelling to the EU due to new administrative requirements. These delays to goods push out delivery dates expected by buyers, resulting in a requirement for renegotiation of terms under the supply contract or orders.

What is widely accepted is the notion that businesses should be using the services of a reputable and experienced freight forwarder to navigate new documentation and customs clearance requirements. Businesses should map out their supply chain cycles by undertaking an analysis to ensure that their supply chain is as responsive, competent and flexible as possible.

Establish your supply chain cycle

The starting point would be to establish your supply chain cycles and design a supply chain strategy and then plan and undertake supply chain operations accordingly.

It’s key to understand that supply chain cycles are about more than just logistics, they should focus on the overall sourcing, processing and delivery of goods to end customers rather than just the moving and storage of goods.

By evaluating and planning their supply chain cycles, businesses will be best placed to navigate global uncertainty and thrive in the future.