Growing up in the Irish countryside, the majority of our food was supplied by the shop just down the road, delivered by local workers and usually sourced from small producers with roots in our town.
Today, supply chains are far more complex. Local production has been replaced by global operations. Once-linear supply chains are now complex operations that rely on intricate logistics and derivative inputs, making them more vulnerable to disruption.
The current issues within the industry – from labour shortages and commodity price inflation, to HGV drivers moving to the gig economy and general product shortages – are causing food businesses to rethink their global operations.
The UK imports about 80% of its food, making it particularly exposed. Companies seeking to take a different approach will need to rethink their financing options.
There is now a recognition that a ‘just in time’ approach brings with it certain risks to availability. This is increasingly being met by a ‘just in case’ strategy.
This, in turn, can lead to much higher stock levels and a need for more working capital to manage them. Stock financing, which provides working capital against the products in a company’s inventory, can help manage this. In some cases it can be drawn down on a just-in-time basis.
Yet stock financing only goes so far and a longer-term view would be for companies, in particular retailers and large manufacturers, to work closer with smaller businesses in the supply chain to ensure demand is steady, rather than vulnerable to peaks and troughs. That’s not easy.
As such, we have seen a significant rise in demand for supplier financing, which helps smaller businesses struggling with cashflow to benefit from the credit rating of bigger companies in the supply chain. By leveraging the credit profile of well-established firms, smaller companies can benefit from the safety net of ensuring their working margins aren’t squeezed to the point of unviability. It also offers big companies the opportunity to work closer with suppliers to address ESG issues, by building them into the covenants they need to meet to benefit from the financing.
Inflation also poses problems and means some retailers and suppliers are having to soak up price increases. With commodity prices high and future increases possible, manufacturers are increasingly looking at their exposure. Historically, contracts have been negotiated through procurement departments and are heavily reliant on the fortunes of suppliers, but this also brings risks. Hedging through a financial institution provides an alternative and bypasses the dangers that come with relying on supplier stability.
Complicating matters further is the growing focus on sustainability, specifically Scope 3 emissions. Consumer foods companies are aiming to be net zero somewhere between 2030 and 2050. But this won’t be easy, given around 90% of the emissions they produce are Scope 3 and about 70% of those come from their supply chains.
Solutions for redeveloping supply chains in a more sustainable way exist, such as regenerative farming, but will require investment. Support for this transition will require dedicated capital as well as knowledge. Blended finance – which pools investment from a range of sources, including state funding – is one way. This, in turn, can stabilise supplies, spread risk and bring about a more climate-friendly industry.
Complex supply chains can be improved as the risks are understood. We will probably never get back to the simple supply chains of my youth, but we can help mitigate the current risks and new circumstances and provide financial solutions for the transition.
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