Supply chain finance: ‘Just-in-time inventory is going away,’ expert says

Wells Fargo Supply Chain Finance's John McQuiston joins Yahoo Finance Live to discuss the supply chain industry's outlook and difficulties encountered in boosting markets while restructuring the supply chain.

Video transcript

BRIAN SOZZI: One overlooked aspect to the supply chain bottlenecks gripping the world are those that help finance the purchases of the inventory stuck on those giant ships. Let's explore this more with John McQuiston, who is the head of structuring and program management in Wells Fargo's Trade Finance business. John, good to see you this morning. Thanks for hopping on here. From your vantage point, have we reached the peak in how bad these bottlenecks will be getting?

JOHN MCQUISTON: It's hard to give a definitive answer on that. I mean, eventually, things will recalibrate. You have a global logistics system that's calibrated for 5% up, 5% down growth. And what we've seen with this COVID-induced logistics crisis, when you drop the level of demand and turn the system off, and then you switch it back on again and grow 15%, 30%, the market, or the system, is not calibrated for those levels.

So it will take-- it'll take a little while for that to reset. Eventually, it will resolve itself because the economics incent everybody to do so. But it's just a question of how long that takes.

JULIE HYMAN: Hey, John, it's Julie here. To take a step back for a minute, you focus on supply chain finance, which I think got the wrong kind of attention earlier in the year from the blow up of Greensill, which was one of the biggest players in that space. What role is supply chain finance playing in the current situation as we're seeing it?

JOHN MCQUISTON: Right. Supply chain finance is a tool. And like all tools, it can be used for its intended purpose or it can be taken too far. And what supply chain finance effectively does is it allows a company to defer its bills. So if I could defer my mortgage and car payment and cable payment for six months and have it permanently deferred six months, that would be a huge source of cash.

And it's not holding more inventory, which is the ultimate effect of this crisis. Ultimately, just-in-time inventory is just going away. It's not working right now.

So holding the inventory is not the problem. You have to pay for the inventory. And by using a supply chain finance tool, you can extend how long you have to pay, which is the cushion a lot of companies need.

BRIAN CHEUNG: Hey, it's Brian Cheung here. Now, what's interesting is that we've seen some companies-- we were talking about this in an earlier blog-- kind of pull forward some of their fundraising to try to get more capital, perhaps, ahead of what could be more expensive borrowing costs next year if the Fed raises rates. Now, when it comes to issuing corporate debt, is that one way that you can get supply chain financing? What are the mechanisms by which you actually do this type of process, for those that are maybe not aware of this type of field?

JOHN MCQUISTON: It's an excellent question. The most important point in supply chain finance is that it is not debt. It is an accounts payable. And companies have limited capacity to put new debt on their balance sheet.

So if I had a choice between extending my working capital terms and being more efficient with my working capital cycle, which is very simply inventory accounts receivables minus payables, I want that number as small as possible or negative. So if I go out and raise corporate debt, I could borrow in the CP markets.

But what about if you're a mid-corporate player, or you're a company that already has a lot of debt on the balance sheet and the agencies are looking at giving you a downgrade in your debt ratings? Do I really want to add more debt? Well, no, I'd rather extend my payables further, because it's not debt. It's simply a form of extended payment for your payables. Does that make sense?

BRIAN SOZZI: That does make sense, John, even on a Monday morning when things are busy. I got that. But let me ask you this. Brian briefly touched upon the potential for higher interest rates. What would higher interest rates mean to your business? And then, by extension, what would that mean to consumers that are ultimately out there buying this inventory?

JOHN MCQUISTON: The higher interest rates effectively are not the factor that would drive down supply chain finance usage in the market by either large corporates or any other firms. It's a question of the differential between what a buyer pays and what a seller pays in terms of interest. So if you are a big investment-grade buyer and your interest rates go up 1%, but your suppliers, who are financing at much more expensive rates in the normal non-supply chain finance construct, their rates go up 4%, 5%, 6%, then the incremental value offered by these programs is even more significant.

So, I mean, ultimately, these costs may, in certain sectors-- depending on the dynamics of that sector-- roll into the cost of the product and end up with consumers. But most corporates and their suppliers try to minimize that as much as humanly possible. But, you know, just walk into any local supermarket, and you're gonna see the cost of a whole basket of goods being a lot more expensive than they were perhaps, I don't know, two years ago. So eventually, it does work its way in. But companies try to hold back on that.

BRIAN SOZZI: Yeah, my wallet, John, is really taking a beating this holiday season. We'll leave it there for now. Very interesting topic. John McQuiston, head of structuring and program management in Wells Fargo's Trade Finance Business. Good to see you. Have a good week.