FX International Payments
By Karen Lynch
Ten years later – and despite the U.S. recovery – we're still not seeing the best of times, observers say, as uncertainty still roils the international trade environment.2 Supply chain managers that survived the global financial crisis took steps that remain highly relevant in managing today's market risks, according to the retrospective, co-authored by Kai Hoberg, professor of supply chain and operations strategy at Kühne Logistics University (Hamburg), and Knut Alicke, partner at McKinsey & Company. "Often, they leveraged innovative approaches to safeguard their internal and external supply chains amid the challenging business climate."3
Most global supply chain disruptions affect supply, but the global financial crisis hit both the demand and supply sides of the equation, according to a detailed account from The Power of Resilience, a 2015 book by Yossi Sheffi, professor of engineering systems at the Massachusetts Institute of Technology.4 In 2009, U.S. manufacturers saw an 18 percent decline in new orders, with some subsectors experiencing drops of 30, 40, and even 50 percent.5 The volume of goods exported worldwide dropped 12 percent.6
Paradoxically, the demand downturn actually created supply shortages in some industries, Sheffi wrote. Order cancellation rates caused suppliers to delay production, and as consumers shifted demand to lower-cost options, suppliers of those generic products sometimes came up short.7
Meanwhile, banks curtailed lending to international businesses, following the September 2008 collapse of Lehman Brothers investment bank, a pivotal event that tipped the world into recession. "Reduced trade finance availability may have accounted for up to one-fifth of the decline in trade volumes in the aftermath of the Lehman bankruptcy," according to the Bank for International Settlements (BIS).8
The impact on trade has been enduring. "Nine years after the financial crisis, global trade is barely growing," the Wall Street Journal reported in March 2017, "and cross-border bank lending is down sharply."9 Keep in mind that the supply chain – more specifically, the raw materials, parts, and business services that go into the production of a final product – accounts for almost two thirds of total global trade, according to BIS.10
Trade growth had appeared to turnaround by 2017, though. By the end of the year, growth in the trade of goods reached 4.7 percent, close to the average rate of 4.8 percent since 1990 and well above the 3 percent average in post-crisis years, according to the World Trade Organization (WTO).11 Still, by the third quarter of 2018, signals were slightly weaker, the WTO said.
Supply chains today are said to be shortening, after years of becoming more global and more complex – partly in reaction to the global financial crisis and post-crisis trade protectionist reverberations but also due to the past decade's rapid digital innovation, changing consumer preferences, and evolving business models.12
In the best of times, when business is booming, companies try to avoid backlogs, align production capacity with growing demand, and ensure raw materials keep flowing – accelerating global supply chains by means including more expensive transportation and logistics. When times are tough, many focus on cutting costs, reducing capacities, consolidating suppliers, and freeing cash by reducing inventory.13
Sheffi, Hoberg, and Alicke have provided an inside look at global supply chains during the crisis. "For most firms, visibility of true customer demand was close to zero at the beginning of the crisis," said Hoberg and Alicke. "Inventories hit the roof across industries in 2009 and increased by up to 70 percent within six months until the trajectory reversed. … While sales and demand reached all-time lows, sourcing departments faced an entirely new challenge – the risk of losing suppliers and entire supply chains due to bankruptcy."14
Sheffi wrote that, "Spending on supplier risk assessment and the frequency of reassessment increased dramatically during the crisis." Transportation costs were also reassessed and throttled back, slowing shipments.
Sheffi also described changes to the "money supply chain" at the time, including the days payables outstanding (DPO), days sales outstanding (DSO), and days inventory on hand (DIO). Over half of companies surveyed extended DPO, which puts pressures on suppliers, while 25 percent worked to accelerate customer payment terms (DPOs), and 44 percent worked on reducing DIO.15
Late and extended payments to suppliers are among the enduring vestiges of the Great Recession – so prevalent that governments have been stepping in to discourage them. In a 2018 report, professional services firm PwC warned that "companies that maintain working capital performance at the expense of suppliers create risks across the value chain."16
As events unfolded during the crisis, successful companies worked quickly to improve communications with suppliers. Sheffi's book singled out ways in which some of them saw extended payments as "a zero-sum game or worse," and instead began arranging supply chain financing programs to help suppliers, giving them easier, cheaper access to bank-facilitated trade financing.17 In fact, the current growth of supply chain financing is another outcome of the crisis.
In the end, "managing during the downturn had been difficult, yet managing during the rebound wasn't easy, either," Sheffi concluded. Suppliers' cuts in capacity created new problems as orders flooded in.
Hoberg and Alicke have presented five supply chain lessons from the global financial crisis: understand true demand, monitor and safeguard supply, create a flexible supply chain, align inventories to free up cash, and prepare for any post-crisis upswing. For example, flexibility includes running demand scenarios and identifying which steps to take for each, as well as using "smart contracts" with provisions for demand fluctuations instead of reflexively locking in, long-term, at a discount.
In these and other ways, "it is key to plan for the inevitable and prepare the supply chain to deal with tough times," they concluded.
Global supply chain managers faced some of their toughest challenges ever during the global financial crisis. For many of them, hard lessons were learned that continue to be applied in today's uncertain international trade environment.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
1. “5 Lessons for Supply Chains from the Financial Crisis,” Supply Chain 24/7; https://www.supplychain247.com/article/5_lessons_for_supply_chains_from_the_financial_crisis/one_network_enterprises
2. “Tariffs, Trade Wars, and Planning for Uncertainty,” Financial Executives International; https://www.financialexecutives.org/FEI-Daily/July-2018/Tariffs,-Trade-Wars-and-Planning-For-Uncertainty.aspx
3. “5 Lessons for Supply Chains from the Financial Crisis,” Supply Chain 24/7; https://www.supplychain247.com/article/5_lessons_for_supply_chains_from_the_financial_crisis/one_network_enterprises
4. The Power of Resilience, MIT Press; http://www.supplychainquarterly.com/topics/finance/20151223-the-financial-crisis-and-the-money-supply-chain/
5. “Full Report on Manufacturers’ Shipments, Inventories, and Orders,” U.S. Census Bureau News, December 2009; https://www.census.gov/manufacturing/m3/historical_data/pressreleases/prel/2009/dec09prel.pdf
6. International Trade Statistics 2015, World Trade Organization; https://www.wto.org/english/res_e/statis_e/its2015_e/its15_highlights_e.pdf
7. The Power of Resilience, MIT Press; http://www.supplychainquarterly.com/topics/finance/20151223-the-financial-crisis-and-the-money-supply-chain/
8. “Trade Finance: Developments and Issues,” Bank for International Settlements; https://www.bis.org/publ/cgfs50.pdf
9. “Whatever Happened to Free Trade?” Wall Street Journal; https://www.wsj.com/articles/whatever-happened-to-free-trade-1490800293
10. 87th Annual Report, Bank for International Settlements; https://www.bis.org/publ/arpdf/ar2017e.pdf
11. World Trade Statistical Review 2018, World Trade Organization; https://www.wto.org/english/news_e/news18_e/publ_30jul18_e.htm
12. “Digital Supply Chain: It’s All About that Data,” EY; https://www.ey.com/Publication/vwLUAssets/Digital_supply_chain_-_its_all_about_the_data/$FILE/EY-digital-supply-chain-its-all-about-that-data-final.pdf
13. “5 Lessons for Supply Chains from the Financial Crisis,” Supply Chain 24/7; https://www.supplychain247.com/article/5_lessons_for_supply_chains_from_the_financial_crisis/one_network_enterprises
15. The Power of Resilience, MIT Press; http://www.supplychainquarterly.com/topics/finance/20151223-the-financial-crisis-and-the-money-supply-chain/
16. “Pressure in the System: Working Capital Study,” PwC; https://www.pwc.com/gx/en/working-capital-management-services/assets/working-capital-opportunity-2017-2018.pdf
17. The Power of Resilience, MIT Press; http://www.supplychainquarterly.com/topics/finance/20151223-the-financial-crisis-and-the-money-supply-chain/