What will the supply chains of tomorrow look like?

Amid recessionary concerns and currency market volatility, the nature of global supply chains is changing. A new report reveals what organizations are doing to ensure more resilient and adaptable operations.

• Concerns over a recession and a trend towards deglobalization mean organizations are putting an increased focus on the reliance and sustainability of their supply chains
• Corporates are seeking to rationalize their supply chain partners and are prioritizing payment speed and financing terms
• Currency risk, inflation risk and liquidity risk are the priorities topping the global risk management agenda
• Organizations are turning to digital solutions to track supply chain transactions and seeking ways to optimize working capital
• Businesses outside of Asia Pacific are leaders in implementing sustainable policies across their supply chains

Canada’s manufacturing sector is the bedrock of our economy, contributing around $174 billion to GDP, more than 10% of the total. We also export more than $354 billion every year; representing 68% of all exports.¹ Canadian manufacturers play a key role in global trade, which reached a record US$32 trillion in 2022.

However, to maintain our position in international trade, Canadian businesses need to find efficient and sustainable ways to scale their operations and deliver further growth. To do so requires gaining an understanding of the shifting priorities of global manufacturers amid recessionary fears and the risks posed by deglobalization.

A new HSBC report, Global Supply Chains – Networks of Tomorrow: Navigating the future of trade, assesses the priorities of management teams from 787 corporations across 14 markets in Asia Pacific, Europe, North America, Latin America, and the Middle East. It found that organizations are expanding to new markets, however, many are also realigning their supply networks to be closer to their headquarters.

The report also found that companies outside of Asia Pacific (the majority of which are in North America and Europe) are seeing greater levels of change. It identifies the top three macro factors driving supply chain changes: counterparty risk, expansion to new markets or trade corridors, and regulatory and border restrictions.

The report finds that 67% of organizations inside Asia Pacific and 60% of those outside the region are seeking to reduce their number of supply chain partners. One CFO from an Indian consumer manufacturing organization reports a 40% reduction in partners, and an increase in resilience. However, HSBC customers in Asia Pacific are slightly more inclined to increase supply chain partners than average (31% compared to 27% among non-HSBC customers). Outside of Asia Pacific, more organizations (36%) are seeking to increase their supply chain partners, compared to those within Asia Pacific (27%).

When reviewing partners, corporates are prioritizing speed of payment and financing terms, with organizations outside of Asia Pacific paying their suppliers faster than those inside the region. When it comes to settling payments, the majority (83%) of organizations still prefer the US dollar. However, a large number (80%) are willing to settle using their suppliers’ local currency. The top three markets where buyers are considering this are Mainland China, the US and the UK.

Payments are being settled through a combination of digital and traditional channels, with electronic bank transfers and purchase orders (POs) topping the list respectively. Large corporates are showing a preference for POs whereas mid-market enterprises (MMEs) prefer electronic transfers.

“In today’s world, payments need to be fast and flexible,” says Michael F Klopchic, Head of Global Payments Solutions, HSBC Bank Canada. “We are helping Canadian businesses access intuitive online tools to give them control over their finances and cash flow.”

There are three risk management concerns topping the agenda globally: currency risk, inflation risk and cash flow/liquidity risk. Outside of Asia Pacific, organizations are also more concerned about interest rates than those inside the region (17% versus 13%). At a time when global currency markets are experiencing increased volatility, companies are seeking to hedge against financial risk by prioritizing the use of forwards (83%) and interest rate swaps (56%).

As they build the supply chains of tomorrow, organizations are confronting a wide range of challenges, such as the after-effects of Covid-19 and volatile freight rates. They are also preparing to protect against future disruption. To mitigate these risks, 83% of corporates are holding excess inventory and 39% are increasing their holdings above normal levels.

Organizations are also seeking new ways to fund their supply chains as they consider expanding into new markets and trade corridors. Traditional funding methods like trade finance and available working capital remain the most popular, however inventory finance and receivables finance are increasingly being used.

Globally, organizations have five top priorities:

1. Increasing the visualization of supply chain transactions
2. Accessing and optimizing working capital
3. Seamlessly connecting to banking solutions via online platforms
4. Implementing advanced cybersecurity protection
5. Increasing understanding of their markets and industry

In a bid to become more resilient, organizations are seeking to use digital solutions to get a better picture of the multiple transactions happening along their supply chains. They also seek improved access to comprehensive banking systems and effective solutions for managing working capital. On a regional level, organizations outside Asia Pacific are less focused on optimizing working capital than those inside the region, where there is a greater focus on cybersecurity.

“Manufacturers in Canada have a reputation as safe and reliable suppliers of goods,” says Andrew Skinner, Head of Trade and Receivables Finance, HSBC Bank Canada. “By helping them gain a better picture of transactions across their supply chain, we can help ensure our customers remain global partners-of-choice.”

Organizations outside of Asia Pacific are leading the way in adopting environmental policies to make their supply chains more sustainable, whereas companies inside Asia Pacific have a greater focus on policies that target health and wellbeing. Respondents both within Asia Pacific and outside Asia Pacific show an equal measure of enthusiasm when it comes to implementing health and wellbeing policies in the next two years.

A significant number (43%) of organizations based outside of Asia Pacific have already implemented environmental policies, compared to 37% of those inside the region. HSBC customers are also more likely (80%) to have implemented environmental policies than non-HSBC customers (74%).

“Sustainable supply chain financing is a key support mechanism for companies on their transition to net zero. This transition looks different for each of our customers, which is why we’re always working to provide a complete suite of sustainable financing products that help businesses with both their sustainability and business goals. Large corporates will also need to collaborate with their suppliers as they move towards circular business models and rethink product design. They can co-invest, share knowledge and resources; encourage innovation and adoption of new technologies.” says Andrew Skinner, Head of Trade and Receivables Finance, HSBC Bank Canada

As sustainability becomes an essential component of supplier relationships, organizations are looking for ways to track sustainable transactions. The most common metrics are regulatory compliance, competitor benchmarking, and sustainability ratings. Organizations outside of Asia Pacific are leading the way in implementing sustainability tracking metrics, with 64% adoption compared to only 37% adoption inside Asia Pacific.

The report reveals that organizations have an increased interest in investing in more sustainable supply chains, with 47% having already invested and 37% planning to do so in the coming period. Key sustainability areas include energy efficiency, environmentally friendly plants and machinery, and sustainable buildings.

“We can help organizations identify opportunities to improve their sustainability performance, implement sustainability best practices, and access a range of green finance solutions,” says Angie Lamarsh, Head of Sustainability, Commercial Banking, HSBC Bank Canada. “Together, we can help Canadian businesses build the sustainable and resilient supply chains of tomorrow.”

Read the full report, Global Supply Chains – Networks of Tomorrow: Navigating the future of trade

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