The Coronavirus disease (COVID-19) pandemic terribly impacted almost every single supply chain. Smaller suppliers, typically the weakest link, have been hit the hardest. In fact, during the first month of the pandemic alone, more than 100,000 U.S. small businesses were forced to close.
On the bright side, large corporations are starting to recognize the importance of supporting the smaller businesses that make up their supply chain. According to a recent survey by McKinsey and Company, 93% of procurement and supply chain leaders plan to invest in their supply chain resilience.
Missing the targets
Despite good intent, however, many global corporations are further extending their supplier payment terms, creating even greater pressure for their supply chains.
Most of the time, these payment term extensions are accompanied by a bank’s supply chain financing program that provides suppliers with low-cost financing to compensate for the longer time they now have to wait in order to be paid. In reality, however, although the vast majority of these financing programs look very good on paper, they ultimately do not serve their purpose.
In fact, even programs that are considered successful fail to reach more than 10-15% of the supplier base. Hundreds of millions of dollars have been invested by banks and software companies alike to try to solve the supplier adoption and utilization challenge. This may include automating and improving the supplier experience, or even drastically reducing prices to attract more suppliers. Nevertheless, the 10-15% adoption barrier seems to persist. This explains the steady, but not-at-all-explosive growth of the supply chain finance market.
What does it take to create exponential scale in supply chain finance, and in doing so, truly improve supply chain resilience?
The time is right
Every exponential breakthrough – whatever the industry – has been a combination of the right time, right solution and right execution. Just look at the explosive growth of cloud computing, corporate collaboration tools and even e-commerce at the onset of the current pandemic.
So, at a time when most supply chains (and especially the smaller suppliers within them) are in so much distress, why can’t supply chain finance programs follow a similar growth trajectory? Implementing better programs would not only mean better business for corporations, but is consistent with their values-based mission to invest capital in a socially responsible way -- growing the business ecosystem by helping small but vital businesses navigate tough times.
But, before we can achieve this goal, here are some of the challenges that must be solved:
- Design for entire supply chains, not just individual suppliers. Think about a retail brand that buys from a clothing manufacturer who in turn buys from a local importer, who in turn purchases the cotton directly from an exporter in Bangladesh. We need supply chain programs that can benefit all members.
- Capitalize on network effects. We need distribution and incentive structures that drive suppliers to not just participate in the programs, but incentivize their own downstream supply chains to participate as well.
- Play a higher order role. Corporates and banks must evolve from launching transactional financial models (term extensions coupled with supply chain finance) into designing true sustainability and resilience programs.
- Embrace exponential technologies. Asset tokenization using blockchain networks, for example, can be utilized to create programmable digital money that can flow seamlessly across all levels of the supply chain, substantiated by real, tangible trade assets.
Prepare for surprises
Partnering with IT solutions providers that have experience in this realm, enterprises and banks can put these principles into action to significantly amplify the reach of supply chain finance programs, optimize capital consumption and increase visibility into the entire supply chain.
As the world continues to surprise us, accelerating supply chain transformation will be crucial to deploying liquidity quickly and responsibly where it is most needed and creating the support system for tomorrow's global supply chains.