By Alistair Baxter, Head of Receivables Finance at Taulia.

It is widely predicted that we are heading for another global recession. However, each recession is different and requires a different approach to best navigate it and to eventually return to periods of growth. In order to overcome this one, we need to tackle the two types of inflation currently being experienced. Firstly, there is inflation at the macro level which is being tackled traditionally through raising interest rates, encouraging saving and promoting stability. Secondly, there is cost-push inflation that is playing out at a more micro level and affecting businesses.

It is this micro-level of inflation that requires the most attention, as often macro indicators, such as interest rates, fail to pick up on the minutiae of inflationary events. Businesses need to take risk-mitigation measures to protect against the cost-push inflation that is currently being ignored. There are key ways this can be achieved: restructuring supply chains to help ease liquidity, ensuring access to multiple lines of funding and the role of real-time data to support critical decision making.

Easing Liquidity through supply chain restructuring

Supply chains were under pressure before the pandemic, but the heightened focus following global shortages of containers, silicon chips, wheat, and even mustard, has brought forth a supply chain reckoning in which the management of supply chains and the financial flows that support them are being scrutinised like never before. Economic indicators are all pointing towards an imminent recession for most nations. Commodity prices have dipped as a result of a change in consumer demand brought on by high inflation and interest rates. This promises tough times ahead, but there is real opportunity to learn from past recessionary mistakes.

One of the best methods for targeting cost-inflation and reducing the pressure caused by ongoing difficulties is through freeing up liquidity by restructuring your supply chain network. This consists of incorporating a number of ideas and technologies, such as improving ‘security of supply’ and implementing ‘just-in-case inventory management’ solutions. This can come in the form of re-shoring, near-shoring or friend-shoring, which means bringing links in the global supply chain closer to home to reduce the risk of world events, such as a war, from stalling operations.

These methods may bring about a reduction in efficiency or even cost more, but are vital in terms of resilience and reliability, the now-priority following recent events . This is a shift that is already evident, not only in the supply chain industry, but in the broader financial system. This shift is bringing numerous benefits to the end customer; reducing supply shortages and uncertainty, ultimately reducing the need for prices to rise, but also to treasurers searching for ways to generate working capital velocity to make up for reduced margins. By focussing capital at key points in the supply chain, treasurers can create ESG incentives, embolden key suppliers and create a more efficient capital model and increase liquidity in order to survive and even thrive in the current economic climate and beat cost-push inflation.

Multi-funders offer breathing room

In their attempts to reduce inflation, central banks are increasing the cost of capital. As a result, there is less of an appetite to finance riskier assets as well as increases in the cost of borrowing. Smaller companies, therefore, are finding it hard to source liquidity. A solution to this is through having multiple funders, which provides greater diversification and flexibility to supply chain businesses. Diversification, coupled with new technology, is the best way to hedge against liquidity risk, especially during times of economic uncertainty such as what we are seeing today. In essence, a working capital management program that is supported by multiple funders is far less exposed to far less risk from the effects of geo-political and economic pressures than one with a single source of funding.

Real-time data promotes real-time solutions

Today, with a recession on its way, what is clear is that this recession will be a different beast to the one seen in 2008. The financial crisis was a flash flood with a clearly identified source. This time around, multiple sectors and industries are facing unique challenges stemming from a structural change in demand, supply chains, and inflation. This leaves businesses facing the decision to either weather the storm or find growth to outpace inflation. This is where restructuring supply chains to help ease liquidity, ensuring access to multiple lines of funding and incorporating real-time data to support critical decision making can make a big difference.

The incorporation of technological innovations will help ease the effects of cost-push by increasing efficiency and reducing speculative behaviours. Supply chain businesses ought to explore technologies that allow for real-time insight, as these could give them the capacity to see trends as they unfold and not too late. Through the sharing of real-time information, supply networks can be better prepared for potential disruptive phenomena, react accordingly and prevent negative impacts.

Looking Ahead

We know that tackling inflation at a macro level is crucial to stable economies, but as discussed, inflation is two pronged. Cost-push inflation, which is affecting businesses, needs to be addressed with greater haste and seriousness. Restructuring supply chain models and diversifying liquidity through multi-funders to reduce risk and improve capital management is crucial to businesses facing this challenge. Similarly, having real-time access to data and information, which supports crucial decision making, will be essential to reducing high levels of cost-push inflation and bouncing back better following this looming recession.