Redesigning SMEs’ supply chain model for the future

Morgan Terigi, CEO and Co-founder, Incomlend

In the pre-pandemic era, the goal of optimising the supply chain has led to the creation of the just-in-time model. Through lean inventories and just-in-time delivery, the model was lauded for its potential to reduce costs and wastage while increasing operational efficiency.

However, the prerequisite for the model to work was predictability and that each process was synchronised with the previous operation. It was unfeasible when COVID-19 severely crippled the global supply chain.

Although the pandemic restrictions are letting up in many markets, the supply chain remains fragile. Moody’s highlighted that the war in Ukraine replaced COVID-19 as the most considerable risk confronting the global supply chain. It is no surprise considering that approximately 15,000 China-Europe freight train trips were made in 2021, with many trade routes running across Russia and Ukraine.

Moreover, the world is still troubled by shipping delays. Global shipping schedule reliability was 36%, which is still lower than the 2021 level. The average delay for shipping vessels globally is over seven days. Other developments increasing the supply chain’s unpredictability include China’s zero-Covid policy.

The resulting shockwaves are felt more acutely by small-and-medium enterprises (SMEs) as they have less working capital and workforce to absorb any shock or inefficiencies. As a result, there is an urgent need for SMEs to transform their supply chain.      

Redesigning the supply chain

Tackling crippling supply chain challenges would require SMEs to shift away from existing just-in-time models and build up inventory stockpiles to prepare for potential product shortages. It allows SMEs to proactively mitigate the impact of disruptions to future production, thus improving supply chain resilience.

Building up reserves can tie up valuable working capital, especially in today’s uncertain economic climate. Moreover, these “safety stocks” can also risk obsolescence due to technological advancements or changing customer demands. These lead to precious resources, waste, and lost revenue if not managed carefully.

Furthermore, SMEs should take this opportunity to assess their entire network of suppliers to identify potential critical chokepoints. With the ongoing supply chain disruption, excessive reliance on specialist suppliers or suppliers in the exact locations created a knock-on effect that delayed production down the line. It puts everyone in the supply chain at greater risk. They will need to diversify their network to mitigate risk exposure and decentralise their supply network.

Building up working capital through trade financing

SMEs will need capital to assemble a well-stocked inventory, diversify their supply chain, and devise a new supply chain strategy. According to the APEC Global Supply Chains Resiliency Survey, the cost is the biggest challenge preventing SMEs in the Asia Pacific from diversifying their supply chains.

At the same time, many are already suffering from high debt burdens due to the pandemic. The war and the subsequent sanctions have also caused soaring inflation and surging energy prices. It dramatically raises SMEs’ operational costs and worsens their liquidity crunch.

Moreover, the uncertainty of macroeconomic recovery due to the war in Ukraine has led to investors remaining cautious and banks focusing their funding on more conservative, established relationships. The “flight to quality” has left many worthy businesses—particularly SMEs —with limited options for financing. 

A recent survey by the Asian Development Bank (ADB) showed the global trade finance gap grew to an all-time high of US$1.7 trillion in 2020, a 15% increase from 2018. Although SMEs are universally recognised as the economy’s pillar, they account for 40% of rejected trade finance requests.

SMEs need to identify and unlock alternative funding sources to ensure resilient cash flows. One option SMEs can consider is a non-recourse approach for off-balance-sheet financing, which essentially takes away the burden of loans. For instance, they can sell their invoice and obtain finance without risk. It reduces the risk of late payments and bad debts, an option that would not be offered with traditional banking.

Unlike commercial lending or dynamic discounting, such off-balance-sheet financing options allow SMEs to keep a low debt-to-equity ratio and preserve their borrowing capacity while diversifying their access to funding and reducing their reliance on traditional financial institutions. It also provides them with the cash to initiate their supply chain transformation and helps them build up economic resilience in these volatile times.

Preparing for a volatile future

To stay relevant and thrive in this disrupted, uncertain climate, SMEs will need to find new ways to pull themselves out of the quagmire of supply chain woes plaguing their operations. While many SMEs understand the need to redesign their supply chain, it is also necessary to build up the financial resources needed to make the transition. SMEs will only truly have an opportunity for recovery when armed with supply chain resilience and fiscal agility.