Risk & Economy » Disruption » How CFOs can prepare, tackle, and mitigate supply chain risk

How CFOs can prepare, tackle, and mitigate supply chain risk

If CFOs are to tackle and mitigate supply chain disruptions, risk identification is key. Utilising scenario planning and supply chain mapping are likely to become everyday tools in a CFOs toolkit

The global economy has become increasingly interconnected, and supply chain risks remain a major concern for CFOs around the globe. These risks can come in many forms, from natural disasters, political instability to cyber-attacks and fraud.

One of the biggest challenges for CFOs is identifying and assessing the extent to which these supply disruptions will impact their business. This is because supply chains are complex and often global in nature, making it challenging to track and monitor all of the potential risks and vulnerabilities.

Also, many companies rely on a large number of suppliers and partners, which can make it difficult to identify and assess the potential impact of disruptions to any one specific part of the supply chain.

Over the past few years, however, CFOs have managed to expand their toolkits to include new risk assessment models, scenario planning and supply chain mapping to make mitigating supply chain risks more manageable.

According to U.S. Bank’s 2022 CFO insight report supply chain disruptions were among the top 10 new business risks. Worryingly, the report which had surveyed 750 finance professionals noted finance leaders lacked confidence in managing these risks.

Supply chain disruptions can be caused by a variety of events – most recently, the Covid-19 pandemic and the Russian-Ukraine conflict have caused significant supply chain issues for many global businesses.

But disruption can be caused by a variety of events including natural disasters, trade disputes, political sanctions, labour strikes, and event cyber incidents. In 2017, the WannaCry ransomware attack affected over 10,000 companies across the US, rendering near 300,000 computers unusable.

According to U.S Bank’s report, there is ample opportunity for CFOs to address supply chain risk, most notably through evaluating stock and inventory levels, reducing dependence on single-source suppliers, and improving supply chain visibility. The common denominator to these models is to utilise new forms of technology.

Using technology to mitigate supply chain risks

CFOs can evaluate potential supply chain bottlenecks and dependencies by embracing new digital technology. New supply chain finance tools are just one such option for the finance function.

“Supply chain finance brings performance and liquidity benefits that you can measure, but there are also multiple relationship benefits,” says Michael Stitt, head of trade and supply chain finance sales and origination at U.S. Bank.

“As suppliers, you get much more visibility into your cash flows because suppliers and purchasers are connected via a technology platform and have much more control over the timing of your payment,” he says.

Stitt notes that suppliers that help their buyers with their working capital objectives often become “preferred suppliers” in the long run. “In most cases, the buyer has a better cost of capital than the supplier, and the supplier can leverage this through this form of finance,” he says.

Developing the right strategy

Risk assessments are a crucial part of how CFOs manage supply chain risks. Once the risks are understood, finance teams can take steps to mitigate or transfer these risks.

This can include diversifying suppliers, implementing new technologies, or purchasing insurance. But there are a number of approaches CFOs can take with regards to risk assessment.

One such approach is scenario planning. This involves creating detailed plans for how a company would respond to different types of supply chain disruptions. CFOs can use these plans to create response strategies in the event of disruption.

Supply chain mapping is another approach that CFOs are using to address supply chain risks. This involves creating a detailed map of a company’s supply chain, including information on suppliers, logistics providers, and other key partners.

By understanding the full extent of their supply chain, CFOs can identify potential points of failure and take steps to mitigate these risks.

CFOs are also taking additional steps to improve supply chain visibility. For example, many companies are investing in technology solutions that can provide real-time visibility into the movement of goods and other key supply chain data. This can help CFOs identify potential issues more quickly and respond more effectively.

Lenovo deputy treasurer Joseph Chua in a conversation with Standard Chartered’s Gurdeep Singh recently stressed the need to embrace digitisation when it came to managing supply chains.

Chua said Lenovo had gone through the process at the start of the Covid-19 pandemic with most of their processes now digitised from the most mundane tasks such as signatures.

Lenovo was among many companies that had been hit by supply chain headaches. The disruptions had been worsened by a protracted shortage of chips, business disruptions from the Russia-Ukraine war and China’s efforts to stop the spread of Covid.

Strengthening the resilience of supply chains

In addition to these strategies, CFOs are also taking steps to build more resilient supply chains. This can include diversifying suppliers, implementing new technologies, and investing in logistics infrastructure.

By building more resilient supply chains, CFOs can be better prepared to weather disruptions and maintain business continuity.

According to U.S. Bank’s report, finance leaders can also diversify stock through inventory audits, or exploring reshoring or nearshoring opportunities. However, the report warns that only four out of ten finance leaders do this.

“There are significant sector variations,” the report notes. “For example, 44% of finance leaders in the automotive and transportation sectors are using new digital technology for supply chain planning and analytics, which is more than double the number in banking (20%), insurance (17%), and professional services (17%).”

U.S Bank further suggests that shoring up would create closer and more strategic relationships between supplier and purchaser and improve the visibility of payment schedules.

“It involves a bank or other provider paying suppliers in advance of when they might have otherwise been paid by the purchaser, creating working capital benefits for both,” the report says.

The value in outsourcing

Though supply chain disruptions are top of mind for CFOs, some may lack the necessary resources to address the risks.

Some organisations may also have limited resources available to invest in risk management and supply chain resilience. But to address this, CFOs are turning to third-party providers for help. The use of third-party data analytics and visualisation tools are just one option.

Third-party providers can offer a range of services, from risk assessments and scenario planning to supply chain mapping and logistics support.

With the right approach and the right tools, CFOs can help ensure that their companies are prepared for whatever supply chain risks may come their way.

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