Supply chain disruptions during the Covid pandemic highlighted risks for Australian trading businesses that rely on global suppliers.
While the pressures have eased, NAB’s research shows 22 per cent of wholesale trade SMEs are still suffering very significant supply chain impacts.
To improve their resilience to future shocks, many Australian businesses are diversifying across multiple suppliers or different countries – with concepts such as near shoring and friend shoring gaining prominence.
But switching offshore locations has financial and risk management implications that businesses looking to secure their supply chains should consider.
Benefits of change
Near shoring sees businesses work with suppliers they are geographically close to, allowing them to still take advantage of lower labour costs while reducing the risk of lengthy shipping delays. Other benefits include lower shipping costs, time zone alignment and easier access to suppliers when making in-person visits.
For Australian companies, good examples of near-shoring countries include Indonesia, Vietnam and Malaysia.
Friend shoring moves offshore production and supply to countries that share values with the importing business. This approach is often used to reduce the risk of disruption due to geopolitical events; for example, sanctions imposed on Russia over the war in Ukraine or the import sanctions put in place by China on certain Australian products.
Friend shoring can provide a business with greater control over its supply chain in the face of world events, as well as the security and transparency that come from trading with a country with shared values.
To maximise the benefits of near shoring and friend shoring, trading businesses need to mitigate risks that can arise when forming new partnerships overseas.
Building trust with new offshore suppliers can take time. Suppliers may initially be unwilling to provide payment terms, instead requiring a deposit or cash up front. For businesses used to more generous terms, this can have a big impact on cash flow.
To smooth the transition, businesses can use specialist working capital or trade finance facilities. For example, NAB recently worked with a large Australian retailer of outdoor recreational gear on a trade and working capital solution which allowed the business to increase the number of suppliers it used, increase stock orders, and allocate enough cashflow to cover increased consumer demand.
The business had previously imported all products from suppliers in China, which created significant supply chain challenges during the Covid pandemic given ongoing lock downs.
Other instruments include Documentary Letters of Credit, which give a conditional guarantee of payment by the buyer’s bank to the seller in advance of shipment, subject to the exporter meeting the terms of the Letter of Credit, on the agreed due date. This can protect buyers and suppliers from the risk of fraud or financial default by the other party and are still common structures in longer term relationships.
NAB also has a digital trade solution in place for some customers to facilitate electronic bills of lading and it’s investing in technology to make such solutions available more broadly. This is an exciting space for global trade finance, with Digital Container Shipping Association taking the lead on digitising bills of lading across its member carriers.
Foreign exchange fluctuations can bring challenges but there are tools available to counter the risk. Foreign currency accounts and market hedging products, for example, can support businesses trading in other currencies.
Transacting in the supplier’s local currency can provide a natural hedge arrangement to manage currency risk in situations where this type of facility is appropriate as foreign currency account allows for natural hedge.
More sophisticated tools are also available, such as NAB’s trade platform which allows businesses to establish multiple trade loans to transact in 18 major global currencies.
Beyond the financial implications of changing suppliers, businesses need to ensure consistency for the end consumer. Sourcing new products or components should be of similar quantity, functionality, and quality to those they are replacing.
Businesses should thoroughly vet the new supplier – ideally by visiting the country to meet them in person, or by appointing an agent to act on their behalf. It’s also imperative to research the supplier country’s laws and regulations, and whether it is subject to sanctions from Australia or the US.
Trading businesses should seek good advice when changing suppliers. A trade and working capital specialist, along with a markets specialist, can help to identify the most suitable structure for maximising benefits, and minimising risks in global supply chains.
Jackie Cooper is NAB Executive of Trade & Working Capital, Business & Private Banking