You are here

Futureproofing your supply chain

14th September 2018

Matthew Hurst, supply chain expert, global transaction banking at Lloyds Bank

Matthew Hurst, supply chain expert, global transaction banking at Lloyds Bank explains why developing an effective supply chain can be a delicate balancing act of priorities

It is heartening to see the global outlook for the oil and gas sector bouncing back after difficult times. Revenues are rebounding, firms are looking to invest more, job creation
plans are returning, and production forecasts are increasing.

But, since the oil price crash of 2014, firms have worked hard to make themselves leaner and more efficient, and despite their growing confidence, they are keeping a firm hand on costs, perhaps anticipating a ‘new norm’ where activity levels may never return to their pre-2014 heights.

At the same time, ongoing global political and economic uncertainty, including Brexit negotiations, moves to deregulate the US energy sector and geopolitical tensions between OPEC members, means risk mitigation remains a top priority.

Many firms will have found that moves to find cheaper sources of procurement have seen their supply chains become longer and, as a result, increasingly vulnerable to these
ongoing unknowns. This could compromise their ability to move quickly to take advantage of any new opportunities or respond to evolving threats.

Despite the improving business environment for oil and gas firms, these twin challenges of cost pressures and uncertainty will remain key concerns for the foreseeable future.

Balancing those conflicting pressures is tough and managing the supply chain can help address them. With this in mind, how should oil and gas businesses across the globe futureproof their supply chains?

Develop a bespoke supply chain strategy
Every supply chain is unique, so any strategy designed to manage one should be bespoke and defined by your business’s objectives.

It should be able to adapt to support both immediate and future priorities, whether that’s risk management, margin improvement or responding to a new opportunity quickly.

As a first port of call, businesses should spend time comprehensively mapping out their supply chain to find any weaknesses that could compromise their organisation’s drivers for success. After this, they should take a holistic approach to addressing any inefficiencies they find, working alongside partners and with financial provision and operational improvements considered together.

Use specialist supply chain tools
Once a supply chain’s priorities and risks have been mapped, there are a range of tools available to help optimise it. Supply chain finance is one such tool that can help firms improve their working capital, and that of those in the supply chains. 

Our latest Working Capital Index discovered UK businesses have £680 billion tied up in excess working capital. By unlocking capital within the supply chain, businesses could be better placed to invest in growth or weather turbulent economic conditions, all at short notice.

Supply chain finance can support this by allowing suppliers to leverage the buyer’s credit rating and access an agreed percentage of their due payment up front, meaning the buyer can benefit from early settlement discounts, or a more substantial payment gap, without impacting the supplier’s cash flow. 

It can also be used in the reverse, helping corporate sellers by giving them the opportunity to retrieve payment quickly by selling off receivables from a portfolio of approved debtors to their lender, enhancing cashflow, strengthening the businesses balance sheet and adding security to the supply chain as a whole.

Outside funding, there are propensity modelling tools that can give corporates an overview of which suppliers will respond well to management techniques and help them anticipate how successful a supplier finance programme is likely to be. 

Create win-win relationships
Of course, supply chains are also built on relationships. Ideally, any solution should be arrived at and implemented in collaboration with suppliers.

For example, many businesses first decide to use supply chain finance to provide preferential payment terms for key suppliers, while also allowing them to boost working capital.
Its uses can be far more nuanced than this, but the way it is traditionally introduced demonstrates how any tactic aimed at optimising a supply chain – and indeed the whole supply chain strategy – should be about creating a win-win arrangement for both parties.

Manage risk exposure
The oil and gas sector is truly global. That scale can potentially generate cost savings but operating across borders can also increase risk around using new suppliers based in
unfamiliar geographies. 

This could be caused by everything from geopolitical uncertainty to the level of working capital available to local suppliers. Then there are risks caused by dealing with small and medium-sized suppliers, who might be particularly vulnerable to liquidity pressures, particularly in the current environment. 

What is important is that these hurdles are considered and planned for. By allowing key suppliers to secure an earlier injection of cashflow on better-than-normal credit terms, supply chain finance can help reduce a buyer’s exposure to the risk of suppliers becoming insolvent, while also encouraging loyalty between buyer and trading partners. 

Speak to a trusted adviser
Taking advice is critical. The right lender will work hard to understand the whole business before delivering tailored solutions geared to meeting its specific needs. At Lloyds Bank, we  think this holistic approach is best and we work closely with our oil and gas clients, their suppliers and other non-financial bodies, such as the Department for International Trade, to inform our recommendations and support.

Experience is also key. We were the first bank in the UK to syndicate a supplier finance programme and our expert teams have access to equipment that can give businesses full
visibility and control over all their supply chain interactions.

The global oil and gas industry is currently in something of a state of flux, with a global outlook that is becoming more positive despite many firms still reeling from the pain inflicted by the price crash.

There are still many factors that could upset the apple cart on its road to recovery, but vigilant firms that take a proactive approach to managing their supply chain will find themselves well placed to tackle whatever slings and arrows the future may hold.

Related topics: