Global supply chains are more interconnected and complex than ever. Controllers and CFOs must navigate the various challenges presented by global supply chains to help their organizations achieve optimal liquidity and cost efficiency. Some of the challenges they will encounter include currency fluctuations and geopolitical risks. Varying financial regulations add another layer of complexity.
Effective supply chain financing strategies will help you mitigate your organization’s risks and optimize working capital management. Here’s a look at key strategies for managing global supply chain financing.
Supply Chain Financing 101
Supply chain financing refers to the tools and strategies that optimize cash flow within the supply chain. To effectively manage a global supply chain, your finance department must collaborate with:
- Financial institutions
- Trade partners
- Buyers and sellers
As always, it’s vital to tailor your financial management strategies around the unique needs of your business.
Managing Currency Fluctuations
Currency volatility poses a huge risk in global supply chains. Fluctuations in exchange rates can impact your company’s profit margins and pricing strategies. Dealing with these fluctuations can be especially difficult due to the intermediate to long-term nature of trade contracts. Here are a few ways to address these risks:
Hedging
There are a few different ways to hedge against currency fluctuations. Hedging with derivatives involves using instruments such as:
- Futures contracts
- Options
- Currency swaps
The goal is to lock in exchange rates and provide cash flow stability. For instance, options provide your company with the right to exchange currency at a specific rate.
Alternatively, your business can adopt natural hedging. This approach involves matching expenses and income in the same currency to minimize exposure to exchange rate fluctuations.
For example, if your company operates in the European Union and generates revenue in euros, it should also source materials and pay suppliers in euros when possible. This approach reduces the impact of exchange rate swings on financial performance.
Multi-Currency Pricing
Setting prices in local currencies can reduce transaction risks. However, this strategy can be complex to implement if your organization operates in a wide range of different markets.
Diversifying Your Supplier Networks
If your organization is concerned about currency volatility, it’s time to evaluate your current supplier network. Identify any partners that are located in tense or unstable regions. These areas may be more prone to major currency exchange rate fluctuations, which can undermine cash flow and stability.
Geopolitical Risks and How to Address Them
Geopolitical threats are one of the greatest dangers any organization with a global supply chain can face. Here are a few ways that your organization can address geopolitical risks:
Scenario Planning
Conducting risk assessments and developing contingency plans for potential geopolitical disruptions can be a great way to identify where your business is most exposed. If you identify a major weak point in your supply chain, explore ways to resolve it.
Diversification
Once again, diversification is the key. There may be instances where your organization has to partner with suppliers in tense regions of the world. However, it’s important to explore alternative options to shield the company from the financial repercussions of geopolitical conflicts.
Compliance Monitoring
The current U.S. administration has already shown a willingness to impose hefty tariff increases on any country that is not behaving in accordance with the United States’ interests. With that in mind, it’s important that your company closely monitors the behavior of the nations where its key trade partners are located.
If a nation has a long history of being at odds with the U.S. on important issues, you may want to explore alternative trade options. If trade partners in that nation suddenly face huge tariff increases, your company could be at a disadvantage.
Optimizing Working Capital Management
Efficient working capital management plays a key role in keeping your business financially stable and liquid. There are a few different ways to keep optimal cash on hand while financing critical goods and supplies.
One such option is supplier financing. Talk to your preferred lenders or suppliers about different payment terms so that you can keep as much cash on hand as possible. Extending payment terms may also give your business more time to weather fluctuations in currency exchange rates.
Another option is dynamic discounting. Some suppliers offer discounts for early payments. For instance, suppose that one of your suppliers uses net-30 payment terms on all invoices, meaning the company has up to 30 days to remit payment for goods received. The supplier may offer a discounted rate if your company remits payment within the first seven days.
Be Proactive and Diligent
Your organization needs a holistic strategy to navigate global supply chain financing successfully. Use the tactics outlined above to insulate your business from the risks of currency fluctuations and supply chain disruptions so that international trade relationships remain a key organizational strength, not a weakness.
