Listening to the speakers and finance leaders at the 15^th CFO Innovation Summit in Hong Kong, I noticed a common theme emerge: CFOs’ focus has shifted to a defensive, risk-averse stance when it comes to the supply chain — regardless of whether they are a producer or a consumer of goods.

This move from just-in-time inventory to just-in-case inventory is significant. Companies are no longer focused primarily on optimizing cost savings to eliminate any possible waste. Turning years of business school education on its head, for FP&A, it means that bottom-line profits are not driven by cost — they’re driven by risk diversification.

What drives this “new normal” of unpredictability? There are several factors:

1. Lack of reliability of existing supply routes. The past year has seen problems at the two most important canals in the supply chain: Panama, due to low water levels that prevented ships from passing, and Suez, due to war and hostilities in the Red Sea.
2. Politics is more intertwined with economics. Political changes, such as changing presidential administrations, will likely lead to new trade and tariff policies — and some countries will have more or less favorable terms than others.
3. The world seems to be moving into two different camps, with barriers arising. The two camps are Greater China (Taiwan, Hong Kong, Macau and mainland China) and Asia ex-China (all other Asian countries). The potential of an Asian regional conflict looms as an extreme version of this risk.
4. Companies will be asked to scrutinize elements located far up their supply chain — for political reasons, as well as to prove their sustainability and social commitments.
5. The memory of the COVID-19 pandemic is still fresh in everyone’s minds, as is the idea that a new pandemic could shut down supply chains in the same way.

If I were to name an upshot from all of this, it would be that the cost of working capital, particularly inventory, AR and AP, is now less important than the cost of sales (e.g., potential price spikes of raw materials, shipping costs, storage). And it is also less important than the potential loss of sales from product not arriving!

To address this, the speakers recommended that CFOs and their FP&A teams maximize flexibility. Some options for doing so include:

• Making multiple, smaller bets. For example, instead of establishing one mega factory, set up several smaller factories, thus allowing the company to shift production over several sites. This could also apply to storage facilities — set up multiple facilities rather than one single-point warehouse.
• Sourcing based on tariff advantages is counterbalanced by the type of good and depth of expertise. For example, some companies tariff hop — they set up shop in a country based on its tariffs and administrative export/import controls. However, tariff hopping may work for “shallow goods” but not for capital-heavy and expertise-heavy bets.

Shallow goods are those that do not take much capital or expertise to produce. An example would be socks — no one wants $30 socks at Walmart, right? Deep goods are those that are capital or tech/expert intensive. This supply chain is difficult to change. For example, moving equipment to another country is more difficult than just packing it up and relocating it. Plus, changing the country of origin could impact the cost to ship and import.

It’s also important to consider your timeframe when investing. Tariff regimes change, so if your needs are short-term, you might just get away with hopping.

• When it comes to alliances, consider the route of your supply chain. Some countries may try to remain non-aligned — or are fortunate to be physically distant from the flashpoint — but you may not have that option based on your circumstances.
• Full transparency can become a competitive advantage in the supply chain — and doing this first could even allow for premium pricing. Transparency can also help you to align with important requirements, such as “no materials from XYZ country” or ESG.
• Be prepared to invest in the local workforce, especially if you move to locations with less developed infrastructure and know-how than existing suppliers.

Related Articles

• How Finance Deals with Supply Chain Challenges
• FP&A’s Role in Managing Operational Risk