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How to diversify your import supply chain

By ATB Financial 15 July 2020 9 min read

Months before supply chains were disrupted due to the global pandemic, Anton Bellot Senior Manager, Entrepreneurship, Business & Agriculture with ATB was on the phone with one of his clients in modular construction that imported parts from China.

“I suggested they look at evaluating their supply chain around imports and finding alternatives just in case,” he recalls. The client agreed, so Bellot ran them through an exercise to identify which parts could be sourced from new suppliers. After finding a Taiwan alternative and securing a relationship, the client went on to start a $10 million construction project. “Then COVID-19 hit,” recalls Bellot. “And their Chinese supplier was halted. They were able to get the Taiwan supply chain up and running with little impact to their large project.”

As your small and medium-sized business grows, diversifying your supply chain is a critical, proactive step that protects against both large and small risks that can derail your success. Yet, many owners overlook it. Deloitte says 47 per cent of companies do not have a strategic backup plan for factory or distribution center shutdown despite 20 per cent saying they would go bankrupt within 24 months of a moderate-to-severe supply chain disruption.

Diversifying your import supply chain starts with learning to spot the risks, finding the right suppliers and then starting those new relationships in a way that protects your growing business.


How to know if you need to diversity your supply chain

The best time to diversify your supply chain is when your business is stable and successful. “When things are going well, business owners often think they don’t need to review their supply chain. But you have the capital, the knowledge and the time to do the research when things are good,” says Bellot. “If you wait and do it when you’re hurting that’s not diversification — you’re trying to restart your business.”

Thomas W. Derry, Chief Executive Officer, Institute for Supply Management, says one early indicator that your import supply chain needs a review is changes in lead times from your suppliers. “While lead times lengthening can mean good things for the economy, in some cases it means your supplier might have an interruption in their supply chain. If you have a two or four week lead time and it’s suddenly doubled, that’s an indicator you have some risk exposure,” he says.

If this happens to you, the first step is to talk to your supplier to learn who their suppliers are — these are your second and third tier suppliers. Then ask the supplier for solutions to any short-term delays while also starting a process to review your supply chain diversification. Derry recommends allocating about 20% of your spend with a supplier and putting it with a second, qualified supplier. “In the case of a very severe disruption, you can ramp up with that second one. It might mean you might get a less preferred price, but in the long run your business is insulated. Owners often fall into the trap of trying to get the best price, but you don’t realize you’re putting the business at risk,” he says.

For small and medium businesses ready to review their supply chain, Bellot suggests starting with a geographic concentration analysis of your supply chain. This means looking at every part of your supply chain and identifying where each of the vendors are located. Then ask yourself if your suppliers are too concentrated in one country, region, province or city. This may quickly reveal that your supply chain may be at risk of being disrupted by a regional event, like a natural disaster, labour interruption, or social and political unrest. If you’ve uncovered a geographic concentration in parts of your supply chain, it’s time to explore alternative vendors for those suppliers.

 

Finding new import suppliers for your growing business

When you know what kind of parts you are looking for, it’s time to start the real legwork: finding a supplier. Q Rasi, Director Strategic Markets, ATB, says the Alberta international offices are a tremendously helpful place to start. Alberta operates 12 offices internationally in Asia, Southeast Asia, Europe, and North America. The teams at the offices are eager to help your company pursue its trade goals and by providing market intelligence, vetted supplier lists, and organizing trade missions.

In addition to international offices, other ways to find reputable suppliers include:

  • Referrals from fellow importers in your business network.
  • Online directories of suppliers in your industry or target geography.
  • Trade shows that include suppliers so you can talk directly to potential partners.
  • Industry association websites can be a source of information on suppliers. One starting point is this list of wholesale distributor associations.
  • Use the product’s NAICS code to search for suppliers. NAICS stands for North American Industry Classification System, which is a way of organizing products by industry. Find the code for the product you need code on the Government of Canada website.

 

Domestic vs international suppliers for your supply chain

A major consideration when importing is whether you chose domestic or international for your goods and services. There’s no clear cut answer here. Every business owner must weigh the risks and benefits of each supplier.

Domestic suppliers can mean higher prices on products, but the trade off is often higher quality products, faster shipping, support for the local economy — which you can use in your product marketing.

For many, international suppliers are appealing because prices are more competitive than domestic options. However, costs can add up in unexpected ways. According to the Forum for International Trade Training, there can be additional shipping costs, such as tariffs, duties, unanticipated customs costs or charges, documentation or audit fees. There can also be extra charges when delays happen. For example, transport delays might mean your materials need to be stored overnight before clearing a border the next business day. “When you take the overall cost from an international supplier, it might be better to go local,” says Rasi.

 

Know your payment terms

The biggest mistake Anani Klutse, Senior Manager, Trade Finance at ATB, sees small and medium-sized business owners make when entering into new importing contracts is not thoroughly understanding the payment terms associated. Owners focus often on the price tag when they need to understand their duties and responsibilities under the contractual agreement they are signing with their suppliers. Standard payment terms in the same industry could vary based on supplier size and the geographic region where the supplier is located, he says, adding “for example, the geographic region sometimes determines the payment terms flexibility.”

For example, suppliers in countries where export financing and receivable insurance are easily accessible could accommodate flexible payment terms, while suppliers in countries with less financing opportunities and risk mitigation solutions would try to get some or full payment before shipment. If you misunderstand an element in the payment terms, it can be problematic for your business. “As soon as you sign the agreement, you’re locked in. So be sure you understand the payment terms and any bank instrument the supplier is requesting under the contract or purchase order,” he says.


Be aware of currency risk & plan for it

When using an international supplier, small and medium-sized businesses must get comfortable with working in international currencies, says Bellot. “The first of several steps is understanding what jurisdictions are working in what dollars. You will likely be paying your supplier in U.S. dollars, or Euros, or in some cases, Japanese Yen,” he says.

Paying suppliers in different currencies means navigating the ups and downs of currency markets. Without the right financial tools, this kind of volatility can make it difficult to effectively manage your cash flow or plan your long-term business growth.

ATB’s currency hedging provides a level of certainty and predictability for SMEs working in foreign currencies, says Bellot. Currency hedging options can take different forms. For importers one way a bank can help, he says, is by first understanding how much a business is spending per month with a foreign supplier. Then doing a 12-month moving analysis of the currency to understand its fluctuations. From there, the bank can lock in an exchange rate for a set term for the business. “This helps you have certainty of your cost when importing, which can keep costs controlled or protect profit margins,” he says.

 

Ease import risks with financing tools

Importing can expose your company to real financial risk, but there are ways your bank can help protect you. “Leveraging trade finance solutions that allow financial institutions to help mitigate commercial risks involved in transactions is an option open to small and medium-sized businesses, but many companies are not aware these tools exist,” says Klutse. These solutions help protect your business and also gives your new supplier confidence as you start the relationship. “Don’t forget that whoever you are buying from the first time, doesn’t know you either. They aren’t going to just ship you products,” he says.

The two most common trade finance tools used currently by banks to support their clients are: import letters of credit and a supplier bond:

  • Import Letter of Credit: Also referred to as a documentary credit is a financial instrument issued by the bank on behalf of a buyer to pay the supplier if they meet all the terms and conditions outlined in the letter of credit. “This helps mitigate the performance risk of the supplier as they must show documented proof before getting paid ,” says Klutse. For example, a letter of credit could specify that the supplier has to finish and ship the products before payment of invoices. They will have to provide the shipping documents for example to prove the product is on the way before any money is released to them . “Since letters of credit are credit instruments, issuing banks rely on the credit-worthiness of importers and security provided when issuing import letters of credit,” he adds.

  • Supplier Bond or Supplier Guarantee: This is a performance instrument issued to a supplier in exchange for more favourable payment or credit terms, says Klutse. This kind of tool is used to mitigate losses if a transaction doesn’t go as planned. While it might seem similar to an import letter of credit, the bond is very different and is not a payment tool.

 

Some Financial Institutions will also provide, based on the nature of the transaction a Documentary Collection product. In this case the transaction is executed by banks through the exchange of documents.

“Once you have a quote from your vendors, start a parallel conversation with your bank,” says Klutse. Your bank can advise you on their financing appetite or risk mitigation tools applicable to your transaction. This will equip you with great negotiation tools and tactics before signing a contract or P.O.

 

Invest in your supplier relationships

Once you’ve found a supplier, Institute for Supply Management’s Derry recommends investing in that relationship. “Have an ongoing, open dialogue with your supplier so you can get to know them, and they should get to know you,” he says. Keep them in the loop about how your business is doing and share sales forecasts — whether good or bad. Then, learn the same about their business. This can help both of you identify potential opportunities early and spot challenges before they hit. “If your supplier relationship is purely transactional, it will be more difficult to navigate when there is stress on either of the businesses,” he says.

If you’re looking for a deep dive on everything you need to know around how to grow your business, our ATB X Accelerator program might be just the place for you. Alternatively, feel free to reach out to one of our entrepreneur strategists to explore where you are with your business, where you want to be, and how to get there.

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