Watch: How can distributors manage tight working capital?

Maureen Sullivan, Supply Chain Finance Manager at MUFG, explains how current product shortages are driving a shift in inventory management from “just in time” to “just in case”.

The “mantra” of successful supply chain management is “to have the right product in the right place, at the right time, and at the right price,” says Sullivan. Yet this goal has been thwarted by the growing demand for goods and services, coupled with factory closures and port disruptions caused by COVID-19. As a result, transit times are longer and more expensive, driving up inventory levels and weighing down corporate balance sheets.

In response, companies are building buffer stock on a case-by-case basis, to mitigate the impact of future disruptions. But this strategy puts a strain on working capital, especially at a time when inflation and interest rates are on the rise. And that negatively impacts the total cash conversion cycle for manufacturers and distributors, further eroding margins.

Companies that can quickly convert inventory to cash are considered to have better financial management, notes Sullivan. To achieve this, they are adopting various supply chain finance options that can mitigate the impact of higher storage costs. In the buyer-supplier relationship, this may mean tapping into cash from one partner to provide the other with a lower cost of capital, or extending payment terms to suppliers who may then turn to banks or third parties to convert their cash claims into a more expedient mode.

When it comes to dealing with higher levels of physical inventory, “there are products being explored around inventory management and financing, but they’re still in the nascent stage,” Sullivan says. . In the meantime, buyers and suppliers can avail of the existing option, although there is no one-size-fits-all solution. It all depends, she says, on the individual provider and the nature of the expenses.

About Donnie R. Losey

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