Intercompany’s Latest Challenge: Overcoming Supply Chain Issues

Intercompany is feeling pressure from all sides—lingering impacts of the pandemic, global unrest with expanded trade sanctions, and the recent decision by the International Accounting Standards Board (IASB) to fast-track the effective date for new mandatory disclosures on supplier finance arrangements.

Given that supply chain is a crucial part of intercompany day-to-day business—70% of international trade involves global value chains—the squeeze is on. So, it’s no surprise that many multinationals are reassessing how they manage their supply chains and intercompany accounting processes.

According to a recent Dimensional Research survey of intercompany stakeholders, 100% of respondents said current global conditions make intercompany harder. When asked which aspects of intercompany require the most operational changes, the greatest number of respondents (59%) cited the instability of traditional supply chains. 

What do these shifting strategies look like? They’re more proactive and cash flow focused. Let’s examine the reasons behind these changes and look at fresh solutions that can shore up intercompany so it’s more resilient to these challenges.

Not too long ago, cash management wasn’t a big topic circulating through multinationals’ boardrooms. Companies were doing relatively well, the cost of capital was low, and it was fairly easy to get access to cash.

Fast forward to today, when a new host of challenges threatens multinationals’ bottom line, forcing cash flow concerns to the forefront and requiring that organizations no longer delay adoption of intercompany financial management practices.

Here are examples of the most pressing supply-chain challenges and how organizations are using a proactive, cash-focused approach to respond to them.

• Inflation. As the costs of materials and labor increase, companies are mitigating those increases by anticipating how these shocks affect downstream demands.

• Supply-chain shortages. To respond to logistics challenges that extend the time companies are used to buying, receiving, producing, and delivering products, businesses are prioritizing product planning and availability to ensure they're making the right inventory decisions.

• Talent shortages. The current labor environment is forcing teams to redefine ways of working in compressed timeframes. The response is to focus on upskilling the workforce, augmenting with technology, and aligning metrics and incentives to attract and retain the talent needed to keep pace.

• Geopolitical risk and disruption. While not a new phenomenon, the current scale of geopolitical instability is causing disruptions across multiple value chains, leading multinationals to seek alternative sources of supply, redraw the shape of demand, and engage in alliances to maintain operations.

• Disconnected, ineffective technologies. Multinationals are realizing that traditional means of tracking data, such as trying to work with dozens of ERPs that can’t communicate with each other or manual spreadsheet processes, must be replaced with automated technologies.

While technology isn’t a silver bullet to solve intercompany issues, the fact remains that decision intelligence around forecasting, inventory management, borrowing, and other tasks is at the core of an optimized intercompany system, and the only way that those tasks can be managed efficiently is for multinationals to adopt the right data-management solution.

As it is now, many organizations are losing money because their data management systems are so inefficient that they must overcompensate for problems, such as restatements, misclassified profits, foreign exchange delays, and tax leakage.

Adopting a best-of-breed solution, such as what BlackLine offers, improves decision-making by leveraging key capabilities. These include centralizing processes so that all functions are leveraging what amounts to a global intercompany subledger with real-time data that enables insightful analytics and reporting.

These tools allow multinationals to have unprecedented visibility throughout the intercompany ecosystem and manage data on a granular level, so that data entering the system is correct, averting messes downstream that can hang up a close or lead to tax overpayment.

Here are some tasks that can be dramatically improved with the adoption of an optimized intercompany solution:

• Minimizing trapped inventory. Much of what defines a cash flow-centered approach comes from spending less time aggregating and manipulating data, and instead, looking at ways to minimize trapped inventory. That includes being able to proactively identify constrained parts, understand the other parts on a bill of material, and proactively defer purchase orders on the non-constrained parts.

• Planning for variable customer behaviors. Predictive analytics can be used as a customer-facing solution to better understand when entities are going to be paying, improve forecasting, and make more strategic billing and collections decisions. 

• Segmenting supply chain. Not all products have the same value and different buyers have varying levels of value. It’s important to differentiate supply-chain decisions based on these values. Segmenting the supply chain in this way allows businesses to optimize their inventory and ensure that supplies are more readily available. 

• Digitizing the shop floor. Teams must use technology to manage information on a granular level, including in the warehouse and on the shop floor. For example, instead of using paper charts and Excel files to track inventory, manufacturing and distribution centers can use sensors, headsets, and tablets to collect data in real time for up-to-the minute analysis.

• Retaining top talent. Automating what used to be time-consuming, manual processes translates to a significant time savings for staff, making these roles more desirable for recruiting and holding on to the best talent. No longer struggling with every close, employees can focus on more strategic decision-making and allow technology to do the heavy lifting.

In the aforementioned Dimensional Research survey, intercompany stakeholders were asked which of their company’s goals would be more effective with improvements to intercompany. The choice that gained the biggest response (60%) was “supply chain resilience.”

To truly gain control over the intercompany supply chain and unlock working capital, multinationals must look at their systems holistically and transform operating models, because what impacts one function, also impacts Tax, Treasury, FP&A, shared services, and other functions.

By making these strategic changes, intercompany would see improved operational efficiency, gain global tax control, drive margin improvements, and achieve cash precision.

Learn more about BlackLine's Intercompany Financial Management, the first and only holistic solution to address the breadth of global intercompany operations.