Managing supply chain risk requires much more than addressing logistical issues. The most effective supply chain risk management capabilities align and integrate with related marketing and finance processes and considerations. Two Active International executives—Kevin Farkas, executive vice president of sales and business development, and Hector Rodriguez, president of freight & logistics—recently took time to participate in an email exchange centered on the most effective ways to manage supply chain and asset portfolio risk.
What is the most common misconception regarding the process of de-risking a company’s asset portfolio and supply chain?
Hector Rodriguez: Often, the term supply chain management is equated with the concept of process management—in other words, the logistical issues of moving freight from point A to B cost-effectively—but this is just one piece of the puzzle. Managing the fundamentals of this process effectively is critical from a strategic standpoint, but in order to truly de-risk a company’s asset portfolio and supply chain, this process must be fully aligned with the marketing and finance efforts of the enterprise. This is, by far, the largest misconception in supply chain management.
What are some of the most effective ways to manage supply chain and asset portfolio risk?
Rodriguez: The marketing plan, which will incorporate information like order size and frequency of deliveries for each channel and outlet, is the lifeblood of any company with a supply chain. Mapping out processes in accordance with this plan (i.e., considering how each class of trade should be transported) is a crucial first step.
Often, companies rely on information technology (IT) and automation to manage this process, but this inevitably misses essential elements. For instance, how will the mode of transportation alter shipment times? Are you delivering direct or to a wholesaler? How will that impact the cash-to-cash cycle? Once the plan is mapped out, it’s important to sit down with the finance department so all parties understand the implications of these decisions.
In what situations does corporate trade make sense?
Kevin Farkas: Corporate trade is a financial tool that enables companies to receive value significantly higher than the liquidation value of excess inventory. A corporate trade company purchases the inventory for cash, trade credits, or a combination. In return, the companies agree to make certain common business purchases—such as advertising, retail marketing, and freight and logistics—through the corporate trade company. Through this arrangement, companies can realize more value for their assets than they would using traditional liquidation or discounting methods.
In order to recognize the full benefit, companies must make future, mutually agreed upon business purchases through the trading company. So, corporate trade works best when the caliber and breadth of trading inventory is aligned with a company’s purchasing needs, and it has been ensured that the organization can use these business services.
What is liquidation, and are there situations in which liquidation makes more sense?
Farkas: Liquidation—the process by which companies sell their excess inventory at reduced prices to a liquidator, also known as an off-price buyer—makes sense for companies who need to generate cash quickly. In addition, companies that are pressed to make room on their shelves for new or more inventory—and therefore want to get rid of the items rapidly—often turn to liquidation. Finally, if a company doesn’t have a spend that aligns where the corporate trade company has spread or leverage, then it would be more practical to liquidate.
In sum, while a liquidator will immediately pay the company cash and take the inventory off their hands, they will often pay a much lower price than the goods’ market value. Despite this monetary disadvantage, liquidation is still the most traditional and accepted way of handling excess inventory.
How can corporate trade help long-term planning?
Farkas: The corporate trade model allows companies to strategically manage their inventory, avoiding the opportunity cost that occurs when they don’t produce enough inventory to meet demand. They can also maximize their resources to counteract financial loss from events beyond their control, such as supply chain disruptions, interest rate volatility and natural disasters. Essentially, it allows companies to de-risk their asset portfolio and gives them the financial stability and flexibility to plan for the future.