Maureen Sullivan, head of supply chain finance with MUFG, explains how current product shortages are driving a shift in inventory management away from “just in time” to “just in case.”

The “mantra” of successful supply chain management is “having the right product at the right place, time and price,” Sullivan says. Yet that objective has been stymied by surging demand for goods and services, coupled with factory shutdowns and port disruptions caused by COVID-19. As a result, transit times have been longer and more expensive, which drives up inventory levels and weighs down corporate balance sheets.

In response, companies are building up buffer stock on a “just-in-case” basis, to mitigate the impact of future disruptions. But that strategy is placing a strain on working capital, especially at a time when inflation and interest rates are on the rise. And that has a detrimental impact on manufacturers’ and distributors’ total cash-conversion cycle, further eroding margins.

Companies that are able to quickly convert inventory into cash are seen as possessing better financial management, Sullivan notes. To achieve that, they’re embracing various supply chain finance options that can ease the impact of higher inventory-carrying costs. In the buyer-supplier relationship, that might mean drawing on the liquidity of one partner to provide the other with a lower cost of capital, or extending payment terms to suppliers who can then turn to banks or third parties to convert their receivables into cash in a timelier fashion.

When it comes to coping with higher levels of physical inventory, “there are products under investigation around inventory management and financing, but they’re still in the nascent stage,” says Sullivan. In the meantime, buyers and suppliers can avail themselves of existing option, although there’s no one-size-fits-all solution. It all depends, she says, on the individual supplier and nature of the spend.