Council Post: There’s A Better Way To De-Risk, Finance And Run Your Supply Chain

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Ramachander Raja, Global Head of Finance, GEPa leading provider of procurement and supply chain solutions to Fortune 500 companies.

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It’s hard to believe, but after two plus years of global shortages and supply chain disruptions, retailers, including Costco and Target, have a glut of inventory, It’s decimating operating margins, working capital and share prices.

Retailers are the first casualty of the widespread forced shift from just-in-time to just-in-case (where large amounts of products or raw materials are kept on hand) inventories in response to the shortages and disruptions. Companies of every stripe boosted inventories and locked in contracts with an expanded array of suppliers in a mad dash to build resilience and assure continuity of supply.

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Corporations have for decades worked relentlessly to optimize their supply chains to enable the just-in-time inventory philosophy with an ever-decreasing number of suppliers. In contrast, the just-in-case inventory model erodes the companies’ working capital. Retailers’ share prices are being hit first—and hard—because they operate with razor-thin single-digit margins during the best of times. But the fallout from holding excess inventory is going to spread to consumer packaged goods (CPG), food, automobiles and manufacturers across the board.

Retailers’ solution? Provide consumers with deep discounts expressly to draw down the excess inventory. While it might sound promising to shareholders, here’s the thing: supply chain disruptions and commodity shortages may continue for the foreseeable future, and the resulting lower inventory will just cause more problems down the road.

Food producers are facing dire shortages of wheat, sunflower and palm oil, Auto manufacturers continue to face shutdowns due to continuing chip shortagesand everyone is reeling from sore energy costs and labor shortages, Returning to just-in-time inventories is not the silver bullet, at least not until the world becomes less uncertain and inflation recedes. Reconstituting just-in-time models is just as likely to result in product shortages, frustrated customers and lost revenue and market share as it will in restoring margins.

Companies are caught between the cost of hoarding inventories just in case to the risk of being caught without the right products and parts at the right time. So, what can companies do to reduce financial risks and supply chain risks?

There’s A Third Way: Outsource Your Supply Chain

Leading companies could see some benefits from outsourcing. For example, with inventory, it can shift the financial risk of buying and managing inventory to a third party and frees up the working capital that was tied up with inventories. It lowers risk across the entire supply chain, with key suppliers and distribution hubs, while increasing the cash available to invest in R&D and marketing to drive growth.

It also moved the day-to-day job of running complex supply chains to an AI-driven cloud-based platform, eliminating the need to invest millions and years upgrading in-house legacy platforms. Running the supply chain on one purpose-built platform forces transparency and collaboration across key functions—demand planning, procurement, supplier management, real-time inventory management, overstock and inventory obsolescence—and corporate functions that are typically undertaken by different teams in siloes across global companies. Algorithms then use these real-time orders, inventory, shipments and supplier data to scan for predictive patterns and see around corners.

It’s not a new idea. More than a decade ago, companies began turning to investment banks to finance investments in supply chains. Supply chain financing is taking off now because the world’s leading financial firms teamed up with technology providers to combine software and physical capabilities (from warehousing to sourcing suppliers) to provide soup-to-nuts inventory solutions on a global scale,

Third parties provide a range of solutions. They can hold some of a company’s inventory, providing a buffer between just-in-time and just-in-case. This would provide more favorable payment terms than companies would get directly from suppliers. They may also prepay companies, so the cost of inventory doesn’t impact working capital, or they can outsource entire parts of the supply chain purchase-to-pay process.

Outsourcing supply chains and inventory is not limited to companies with large inventories of direct materials. An agricultural Fortune 100 company may look to outsource its indirect low-value spend procurement and inventory.

In this case, companies don’t typically proactively manage their spending on indirect products and services, such as office products, packaging, travel, professional services, marketing, facilities and temporary staffing. Indirect spend management can be a company’s Achilles’ heel because it typically involves tens of thousands of suppliers and is endlessly complex and time-consuming to manage. By outsourcing, companies can replace all indirect low-value suppliers with just one, achieving year-on-year savings and increased visibility and control.

Just-In-Time Consumption

The choice between just-in-time and just-in-case inventories is false. Neither is suited for a high-cost and slow-growth economy. Instead, companies need flexible inventories. They can’t afford to tie up working capital nor be completely exposed to supply chain disruptions.

In short, companies need just-in-case inventories at just-in-time costs to stay competitive. Outsourcing enables companies to have inventories to meet a just-in-time consumption model. The inventory cost is paid for when it’s purchased by buyers/consumers.


Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


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