Supply businesses – like manufacturers or distributors – that ignore international trade risks invariably fail. And when suppliers fail, it puts the buyers that rely on them for goods in jeopardy. Over a span of three years, 84% of businesses reportedly suffered supplier failure – and many of those buyers eventually failed as a result.
So, how can businesses involved in international trade protect themselves? The first step is understanding the risks that ultimately lead to failure.
Supplier networks are complex. Companies constantly seek new ways to compete, leading them to a dynamic web of international suppliers. Many of these organizations depend on their supplier network to grow their business. If that web breaks, the rest of their business can collapse.
And yet, 47%of traditional buyer-supplier contracts fail. What makes this very important relationship so fragile?
Lack of trust.
It takes time to build trust in any relationship. But in the race to globalize, buyers rushed into relationships too quickly expand their footprint. Now, they are paying the price when their suppliers fail.
Without taking the time to form a real partnership with suppliers, companies only act in the best interest of themselves.
For example, large buyers influence the supplier for their own benefit by demanding extended payment terms. They don’t trust the supplier enough to expect their needs to be mutually met, so they impose their needs through aggressive negotiations instead.
Additionally, if a buyer doesn’t truly trust a supplier, it may micromanage operations with excessive monitoring and inspections.
These actions send signals to the supplier that it is not trusted, and the relationship is insecure. They also lead to poor communications and decreased service levels, which causes the relationship and operations to falter even more.
Without mutual trust, commitments waver, both parties are over-cautious and continue to act protectively, instead of cooperatively.
Further, a very large buyer may not even know how big its supplier base is, and simply estimate the size of its network. This means that the organization as a whole lacks transparency into its relationships. It can’t establish trust at all because it doesn’t know exactly who it’s working with.
In theory, suppliers and buyers can’t exist without each other. To produce or sell a product, a company needs a supply. But in reality, the relationship is not as clear cut.
A buyer has many suppliers to choose from (some larger organizations even work with over 75,000 suppliers), and suppliers have to be more competitive to get business.
Every company has different goals and objectives. In an imbalanced power dynamic between a buyer and supplier, though, objectives are not consciously aligned – which means one of the companies is bound to lose.
A large buyer, for instance, has more power to make demands of a smaller supplier. It has the ability to pressure the supplier into lower prices or take longer to pay invoices.
On average, companies take about 68 days to pay invoices, creating problems for suppliers who, as a result, suffer from stifled cash flow.
This misaligned objective ties back to a lack of trust. Companies that only act in their own best interest don’t prioritize the needs of their counterpart.
So, when a buyer’s best interest is put first in a contract (longer payment terms) and a supplier’s needs and business objectives are not being addressed, the relationship and the supplier’s operations become more fragile.
Further, the longer the payment terms, the more the supplier has to worry about the buyer not paying at all.
This dynamic is unsustainable. At a certain point, suppliers can’t operate without the cash they need to run. But they don’t have the power to make demands of their own.
As a result, the international supplier fails.
Lack of trust and misaligned objectives – both outcomes of an imbalanced power dynamic – explain the internal reasons why international suppliers fail.
However, there are also external factors to consider. This includes geopolitical risks that neither the buyer nor the supplier can control.
As 2019 moves forward, international leaders are concerned with the geopolitical climate and the risks it poses towards global trade in the years to come.
As the excitement of globalization once led buyers to hastily expand their network of international suppliers, the threats of more isolationist policies, tariffs and trade war arguments are now causing buyers to tighten their network and exposure to foreign operations.
While the outlook for 2019 is positive in the long run, short term volatility that has carried over from the end of 2018 can prove costly to the growth of the global economy.
And since supply chains are so interconnected, even a minor disruption could heighten their vulnerability to failure.
International trade risks are ever-changing and unpredictable. But companies can make strides to avoid failure – even when the global economy is at its worst. Here’s a quick checklist:
Last but not least, work with a third-party trade financing partner.
Fast, secure trade financing exists to protect buyers and suppliers from the types of situations reviewed above. It helps keep you aware of geopolitical risks and can safeguard trade activities by guaranteeing payment and delivery of goods.
In accounts receivable financing, for example, buyers can enjoy open account terms and suppliers can receive immediate payment: a situation that would not be feasible without a third-party financing partner.
The right trade partner can connect you to a trusted network to find the right buyer or supplier for your business, secure your financial supply chain and prove advantageous to both sides of the deal.
Stenn helps buyers and suppliers mitigate international trade risks with fast, flexible trade finance solutions. Contact us today.