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Business Activities / Distribution, transportation and storage

One year on: Global supply chains will need to learn to live with volatility

The lockdowns caused by the Covid-19 pandemic brought chaos to global supply chains. Tradeshift CEO Christian Lanng says that technology can make them more resilient to future shocks.

For decades now, global supply chains built to maximise cost-efficiencies have dominated global trade. Like highly tuned racing vehicles, these complex ecosystems are optimised for performance in familiar and predictable conditions. Then Covid-19 hit and its impact was like asking a Formula 1 car to navigate a series of giant speed bumps.

Tradeshift digitises the exchange of invoicing and ordering information across a global network of buyers and suppliers. When times are good, the ebb and flow of this data follows a largely predictable growth pattern from one month to the next. The picture in 2020 looks a lot more like a churning sea in the throes of a hurricane (see chart below).

 

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China took drastic action to contain the spread of Covid-19 within its borders. In February 2020, trade activity dropped by 48% across the country as factories closed their doors. This short, sharp shock flattened the curve of the virus and delivered the swift return to predictable and stable conditions that local supply chains needed to operate effectively. By April 2020, trade activity returned to growth and continued to build momentum from there.

In the West, a mixed approach to tackling the virus led to a prolonged period of volatility as trading conditions shifted from one lockdown to another.

Almost exactly a year since the first lockdowns came into effect in the West, there are reasons to be optimistic about the outlook ahead.

Barring a brief ‘post-lockdown bounce’ in July, it wasn’t until September that we started to see the beginnings of a return to more regular growth patterns across major supply chain hubs in Europe and the US. China is not immune to volatility in the West, but our data suggests the sheer size and strength of its domestic market has so far proven more than adequate in fuelling a healthy recovery.

Almost exactly a year since the first lockdowns came into effect in the West, there are reasons to be optimistic about the outlook ahead. Positive news about the vaccine roll-out in December led to an unusually high volume of activity on our platform as organisations pressed ahead with purchasing decisions that may have previously been delayed or cancelled.

Beware the bullwhip effect and financial hangovers

We are not out of the woods yet, however. According to our data, month-on-month transaction volumes in the US, the UK and the EU dropped 3.5% between December and January. Supply chains are still bearing the scars of a period of unprecedented disruption and turbulence. A recent article in the Wall Street Journal suggests that US manufacturers are struggling to cope with spiking consumer demand for products as lockdown restrictions ease. The so-called ‘bullwhip’ effect is likely to impact supply chains for some time to come.

Pressure on supply chains is being magnified by the ‘financial hangover’ many are still suffering as a result of the alarming drop in activity during the first lockdown. Orders dropped off a cliff in March 2020, meaning suppliers had no choice but to run down working capital reserves to stay afloat. Orders are now rising at a healthy rate, but invoice settlements have not yet caught up sufficiently for suppliers to replenish cash reserves.

The crunch on liquidity is made worse by the fact that buyers, keen to preserve their own cash flows, are continuing to extend payment terms. According to a report by Forrester Research, the amount of long overdue invoices (still unpaid after 90 days past their due date), rose to 16% of the total in 2020, up from 10% the previous year.

As suppliers seek faster access to working capital, banks have seen heightened demand for structured trade financing, working capital financing, letters of credit and guarantees – but it is an imperfect system that relies heavily on paper-based processes. Many smaller organisations are locked out of these arrangements due to an inability to deliver sufficient proof of creditworthiness. A recent report by Accenture suggests the trade finance industry is ripe for digitalisation. A new wave of technology-driven financing mechanisms are already springing up to plug the gap.

The World Health Organisation is right to point out that true recovery from Covid-19 is not possible until everyone is in a position to recover. The same is true for supply chains. As buyers focus on building resilience to future shocks, suppliers must become a more equal partner on that journey. Technology can provide many of the tools to bridge this gap, unlocking faster, more predictable cash flow, better access for diverse suppliers and increased optionality in the event of disruption. What is good for suppliers will ultimately be good for buyers.

Home page image of Chinese goods being moved along the supply chain by Tafadzwa Ufumeli/Getty Images.

Christian Lanng is the CEO and co-founder of Tradeshift, a cloud-based business network and platform for supply chain payments, marketplaces and apps.