The impact of supply chain globalization on working capital

Since the end of World War II, with the rebuilding of industrial parks in Europe and Japan, the supply chain has become increasingly global. Initially very slowly, but during the late 1980s, with the introduction of PCs and later the Internet in the business world, the speed of internationalization of chains became very high. A global supply chain ends up facing a variety of obstacles, including: language, distance, increased transit times, currency fluctuations, profit repatriation and an incessant need to control the working capital of companies; and it is precisely the latter that is the object of this text.

Management and control over working capital is already an essential topic when we talk about company management, in particular their financial health, in the case of companies with global supply chains this topic becomes even more essential, due to an aggravating factor . Below is a comparison between the cash flow model of a company with a local supply chain and a company with a global supply chain:

Figure 1 – Simplified cash flow model for a company with a local supply chain

The working capital that the company must finance, due to the lag between paying suppliers and completing the sale, is given by:

Working Capital=DOS+DSO – DPO

In the case of global supply chains, products are generally transported by sea, and therefore, the aggravating factor mentioned above ends up being the transit time of the raw material. Transit time impacts negatively in two ways: adding in-transit inventory, adding raw material safety stock due to uncertainties.

Figure 1 – Simplified cash flow model for a company with a global supply chain

By increasing transit time, we also considerably increase working capital, a fact that could significantly compromise the company's ability to make new investments. There are a few ways to deal with this and avoid the negative impact on working capital from the globalization of supply chains:

1. Increased payment terms for suppliers, often making use of partnerships with financial institutions to guarantee advances to suppliers;
2. Buy-back contracts with suppliers;
3. Shorter manufacturing cycle, with the production of smaller batches;
4. Less inventory of finished products, producing according to orders;
5. Reduction of customer payment terms, with customer segmentation, and using discounts to guarantee anticipation;

In any case, the intensification of the internationalization of the supply chain brought great challenges to those responsible for the financial and supply management of all the companies that entered this scenario and business models adaptable to this reality became necessary.

References

'https://ilos.com.br/web/analise-de-mercado/relatorios-de-pesquisa/supply-chain-finance/