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COVID-19: the time to support your supply chain is now
Actions taken now to mitigate impacts on supply chains from coronavirus will build resilience and ensure a faster economic recovery.
Head of Treasury Strategy & Advisory
Sam MacPherson is Head of Treasury Advisory & Strategy at Earlytrade. Having previously spent a number of years at Qantas with a specific focus on liquidity, foreign exchange and interest rate risk management, he is passionate about providing working capital solutions to corporates and their suppliers alike.
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As the COVID-19 pandemic wreaks havoc on global healthcare systems, the economic impacts are likely to be even more severe and will endure for years to come. In the short-term, a global recession is almost certain, but longer-term implications will create significant supply and demand-side issues.
For big businesses this has meant immediately laying off workers, temporary shutdowns and recalculating earnings expectations. In the longer-term, these businesses must work to ensure the health of their supply chain does not negatively impact their customer proposition.
Key to this is the ability of small businesses within the supply chain to continue operating. More than 3 million small businesses operate in Australia, representing the engine room of the domestic economy and when they hurt, we all hurt.
The Australian government recognises this, responding with a $320 billion stimulus package largely aimed at helping small businesses, subcontractors and sole traders. The combination of payroll tax waivers, interest-free loans, and specific cash payments will help, but this is not just a government issue. The time for big businesses to collaborate with their suppliers for the greater good is now.
Helping suppliers in their time of need
Minimising supply chain default risk is a necessity in any large organisation's risk management strategy, but this takes time. In the immediate future, companies should implement a three-step approach:
- Identify small businesses within your supply chainWith greater credit constraints and sensitivity to weak consumer demand, small businesses are often hit hardest in economic downturns. In Australia, the combined impact of the disastrous bushfire season and impending COVID-19 recession is uniquely damaging to them, especially those relying on foot traffic. Where possible, assist these suppliers in generating business, through social media or other channels.Correctly identifying these small businesses within your supply chain represents a sizeable challenge. The use of technology platforms, such as Earlytrade Verify, should be considered to provide this feedback immediately.
- Pay these suppliers immediately, or on preferential termsAccording to Xero, late payments to Australian small businesses total $115bn each year. Paying these on time will deliver an enormous stimulus package, whilst paying early will provide exponentially greater value to the broader economy.This is not lost on Prime Minister Scott Morrison who insisted, “we need you to support your small business suppliers by paying them promptly. Pay your suppliers not just in time, but ahead of time, especially now.”For companies who give lip service to the idea of helping their small business suppliers, now is the time. Never has there been a greater need to give them immediate access to cash they are owed.Companies such as Unilever, AGL and BHP recognise this and have moved quickly to implement faster payment times for their small suppliers. For others, technology like Earlytrade Verify can again provide the solution, ensuring that small, local and indigenous suppliers can immediately access preferential terms.
- Shift orders to secondary or tertiary suppliers to accommodate for missed deliveries or demand spikesPanic buying has created sourcing issues within the supply chain. Big businesses should engage with other small suppliers to guarantee they can secure additional inventory. Whilst this may come at a cost premium, the longer-term benefits will far outweigh the extra few cents in the short-term.
Liquidity metrics are important in the immediate future, but big businesses must view the broader picture. By reducing cash flow concerns for small suppliers, these businesses:
- Minimise impact to their customers
- Provide stimulus to the domestic economy
- Ensure some consumer demand remains intact
Although it’s impossible to predict the ultimate cost of the pandemic, big business should take COVID-19 as an opportunity to learn the costs of under-preparation and value the benefits of collaboration to ensure that, next time, the damage to supply chains is much less.