How a financial partner can help with supply chain bottlenecks
How can financial partners ease manufacturers’ vulnerabilities that have been brought on by the COVID-19 pandemic?
Kelly BarrickJan. 19, 2022
The COVID-19 pandemic resulted in rising prices and caused a multitude of logjams in global supply chains. Manufacturers are especially vulnerable, and some have been forced to pare product lines — and seek alternative sourcing solutions for production inputs — leading to client-relationship strains.
How can their financial partners play a role in easing these difficulties? At CIBC, we have a long history of using various tools to help our clients ride out crises and find opportunities in the environment.
Financial flexibility: preserving reputations
Recently, 2 of our clients faced supply chain and inventory-related problems. One, a purveyor of specialty steel products, was limited in purchasing adequate inventory volume to meet customer demand due to increasing steel prices. The other, an industrial distributor, completed a strategic acquisition, was working to integrate the company and was experiencing record growth that required additional investment. However, with the ongoing pressures in the market, both needed more flexibility. Our clients and their customers both had concerns about the intermittent supply shortages, which was disrupting production and holding back annual sales. Both clients began increasing inventory positions to meet their customers’ needs.
Increasing inventory levels to the extent demanded by these circumstances also altered normally steady cash flows and reduced the availability in their revolving line of credit (RLOC). In circumstances like these, companies may become concerned that an increase in accounts receivable, compensation distributions and capital projects, among other areas, will begin to limit their financial flexibility at the time it is needed most.
Furthermore, as companies review their internal efficiencies and processes, they also are aware of their external reputations and the need to find ways to maintain client and vendor relationships that have matured over long periods of time. They may have to begin allocating products to clients differently, or prioritizing work differently, during this time. However, a more permanent solution is needed so as to not lose business.
A permanent increase in an RLOC may be merited by a number of factors, including an improvement in the company’s long-term growth prospects or a suppressed borrowing base availability. A temporary or seasonal increase can help a company through a unique period of growth, seasonality in the business or a short-term, difficult market environment. After further consulting with each of the clients, and assessing the environment, we chose to do a permanent increase, factoring in future strategic initiatives and the still-outstanding question of when the pandemic and supply chain challenges will be resolved.
In the first case, we did an initial increase to the RLOC in the spring of 2021, but later we stepped in again, bringing the total increase to 30%. In the other case, the company’s multipronged market strategy was clearer, and one increase was sufficient to accommodate the client. Today, these companies are better equipped to deliver customers’ orders and maintain their relationships with satisfied clients.
The importance of a relationship
What made these solutions a good bet? Relationships. Whether we are providing a variety of services over many years or just beginning to work with a company, building a strong rapport between our teams is key.
Ongoing, open, transparent conversations cover strategy, potential ups and downs, and what-if scenarios that could take a business in one direction or the other. By knowing each other and the businesses, and keeping open lines of communication, we are able to more easily evaluate which risks are worth taking to help set our clients up for success.
Cross-sector connections: fixing a supply chain snafu
Of course, modifying a lending facility to help a client maintain the flexibility and appropriate levers to run their business is just one solution. As an international, multifaceted financial institution, CIBC has a wide range of tools in its toolbox. Our network of clients is one tool that is often behind the scenes. Relationship managers and executive management play a key role in making connections in the market.
In 2021, CIBC began working with a rapidly growing digital manufacturing client — a company with the ability to develop customized prototypes for a variety of end markets. Across the country, a client of ours in aircraft manufacturing was missing a critical component needed to complete its manufacturing process. We put the CEOs of these 2 companies in touch, providing them a potential opportunity to work together to create a solution.
These instances illustrate that banking at CIBC is about relationships: building partnerships that last by focusing intently on your business and making your company goals our own.
We serve U.S.-based corporations and multinationals across a variety of industries, combining deep mid-corporate banking expertise with sophisticated credit and financing strategies. Our services encompass the full range of financial solutions for companies — banking, credit and syndications, capital markets and investment banking, global markets and risk management, corporate liquidity services and treasury management — just to name a few.
In the near term, we continue to look for ways to help our clients in this difficult environment by finding financial solutions, connecting clients with future partners and providing access to other resources to pursue goals with ease — in the United States, across Canada and around the world.