Supply chain management, a strategic pillar in the decision-making of companies

Disruptions in supply chains and uncertainty caused by COVID-19, geopolitical tensions or the climate emergency are reshaping global supply chains.

Disruptions in the production chain at specific times or sudden increases in production costs have become common in many industries. Therefore, maintaining a resilient and sustainable supply chain is now, more than ever, a strategic priority for companies. Beyond cost efficiency and just-in-time production, companies must also look at the supply chain with "just in case" and sustainability in mind.

According to the "The Business Cost of Supply-Chain Disruption" report by The Economist, the supply chain disruptions of recent years have resulted in a reduction in revenues of the responding companies of between 6% and 10% on average, in addition to reputational costs as a result of customer complaints and impacts on brand image and reputation.

As a result, companies are pursuing various strategies to mitigate risks related to supply disruptions, such as: moving production centers closer ("nearshoring") or to "friend countries" ("friend-shoring"), strengthening partnerships with existing suppliers, looking for new alternative suppliers or increasing inventory levels.

Additionally, managing scope 3 emissions (indirect emissions that occur in a company's value chain, such as those generated by suppliers) is becoming increasingly relevant in corporate decision-making, due to the environmental commitments of their boards of directors as well as the regulatory requirements for reporting on emissions from the supply chain.

At BBVA, we are developing different solutions to help our clients strengthen their supply chain. Products such as advance payment to suppliers under a supply agreement ("prepayments") or the monetization of client contracts are increasingly important.

Under prepayment structures, BBVA provides finance to a certain strategic supplier prior to production, as part of an advance payment under a commercial agreement. And it provides coverage for the risk of contract non-fulfillment to the buyer to ensure supply.

As a result, the producer accesses funds under the agreement before the production and/or sale of the merchandise and undertakes to return the advance payment by sending merchandise during a certain period of time, as set forth under the commercial agreement.

From the supplier's perspective, it can be an alternative source of finance in order to undertake different necessary investments prior to production or the execution of a certain supply agreement.

Additionally, suppliers can use these funds to make different sustainable investments in such a way as to help reduce emissions throughout the supply chain.

Prepayment structures are undoubtedly an effective tool in the current context of supply chains, to ensure a specific strategic supply for the company without compromising an efficient management of its working capital.