From computers to sofas to coffee beans to aircraft – nearly everything that is worn, eaten, or in any way used today has been produced, processed, and packaged in a culmination of a complex supply chain. As a result, the efficiency of procurement processes, demand management, and logistics systems throughout the global supply chain has become ever more sophisticated and optimized for success over the decades. Why, then, it has to be asked, has the financial fluidity that enables these processes to operate within the supply chain remained as sluggish, unpredictable, and expensive throughout this time of global market evolution?
The management and movement of money among suppliers, for the most part, has remained as static in terms of operational progress as it was decades ago. That being said, there is finally momentum gathering that is seeking to apply the same level of innovation that has created such great efficiency in production and movement of goods across the supply chain to the financial processes that ultimately fund it. With the physical operations of the supply chain now having reached a high level of electronic efficiency, the same can still not be said about the associated financial supply chain. It is shocking to see that the vast majority of companies – even the largest ones – are so occupied managing the complexities of daily cash flows manually – Microsoft Excel being a dominant method – that they do not have the capacity to get to other important aspects of managing cash, such as maximizing supplier discounts and related. Data archival is still being processed manually, as is documentation such as invoices and paper-based payment methods, and credit availability and cash flow issues are still not fully optimized to make the meaningful difference to financial operations efficiency that is now long over due.
Put simply, this needs to change, and, very slowly, it is. There are some promising trends emerging in B2B supply chain finance as we move towards 2015, and so let’s take a look at what they are and how they impact the industry, its players, and B2B payments’ effectiveness going forward.
Track and Trace Trends
Supply chain finance (SCF) enables buyers to ease payment terms while also ensuring the cash flow of their suppliers is improved, thereby reducing instability within the supply chain. This is indeed proving to be one of the most attractive elements of the initiative that is driving adoption of B2B ePayments solutions of many organizations around the globe. The enabling of transparency across the supply chain means that suppliers always know precisely when they will be paid and can plan their finances accordingly. Predictability is often more important than speed when it comes to payments.
On-time payment is essentially what corporations would like, even if prompt payment cannot always be managed. SCF management solutions allow companies to optimize their working capital effectively, a fact that 90% of banks acknowledge. What is more, since banks are increasingly finding their own customers engaged in trade with one another, and corporations are similarly involved with several banks to finance their activities, there is emerging a sense of increased competition for any one of these banks to stand out as providing the best and most valuable means of SCF. More than 75% of banks view SCF as a value-add product for their corporate clients – the trend then is set for rife competition amongst them to soon start appearing in more aggressive terms than we have seen so far.
The IFC and the GTSF
The International Finance Corporation (IFC), which is the private sector arm of the World Bank group, are becoming increasingly involved in implementing SCF programs to encourage private sector development in emerging markets. For example, the Spend Matters’ Network reports of Levi Strauss & Co. who work with apparel manufacturers in Bangladesh, Sri Lanka, and other countries. Some of these large manufacturers are seeking to use Levi receivables to raise cash.
Through their Global Trade Supplier Finance (GTSF) program, the IFC is providing suppliers in emerging economies with access to competitively priced financing. It works by the suppliers being able to sell their invoices to the IFC – and thus, receiving early payment – at rates based on the buyer’s credit rating. So, in the Levi Strauss & Co. case, the Bangladesh suppliers have been able to access financing at rates 320 basis points above the London Interbank Offered Rate (LIBOR)
The IFC now works in over 100 developing countries, providing SCF and other solutions around the world.
The Mimicry of Consumer Technology
The most successful B2B ePayments solutions are beginning to mimic the B2C consumer technology that has been steadily evolving to make payments easy, immediate, customizable, and with all the complexity involved, masked behind easy-to-use website user interfaces.
B2C e-commerce has had a fifteen-year track record of increasing success, and has become a truly accepted part of our everyday lives. The same people who are working day in day out in the B2B world of business are also, inevitably, engaging and fully versed in the world of B2C e-commerce, albeit most likely as consumers. There is therefore a readiness and even an expectancy now for suppliers and buyers involved in B2B to conduct business in a similar way.
Last month, I reported on this trend, quoting Forrester Research which stated that B2B e-commerce to have been worth almost $559 billion in 2013. However, with B2B offline commerce reaching the $300 trillion mark, the potential for the e-commerce market to grow is exceptional, and indeed all the trends indicate that it will, and SCF will be at the core of this technology’s continued growth.
Faster, Safer, Smarter IT Systems Pushing Data Visibility
The new era of visible data, as made available by current technology, is predicted to put the natural tensions between logistics and finance to an end, as financial operations are finally being integrated into the supply chain. Take Intel for example. Armin Sarstedt, the vice-president of manufacturing and technology, said that only through high-speed access to vast amounts of data could Intel keep up with the rapidly changing dynamics of the computer and smartphone markets, and thusly overhaul their supply chains to cope.
“We operate in a market that changes very quickly, that has very fast product cycles, but also huge volumes with great demand volatility, and to respond to this we have to [be] able to make strong commitments – under-commitment is no option. If a customer needs one million pieces, that is what he needs – and we need high agility and agile responsiveness, because just having large inventory levels doesn’t mitigate the fast product cycles.” (Armin Sarstedt)
Supply chain teams have needed to organize themselves to keep up with the speed of demand, and that has required access to whole new sets of data, and indeed that data to be available across a whole supply chain. What is happening now, though, is that SCF teams are utilizing the same data as well.
Greg Johnsen of GT Nexus told The Loadstar how the trend has unfolded:
“The first set of technology was about automating transportation data – this was warehouse management systems and load planning systems; a second wave centered on supply chains, and was about providing global transparency; the third wave, which we are seeing now, is large organizations automating the money flow.
“It is about knowing for certain that something has occurred – in the physical supply chain this is normally exception reporting; in the financial supply chain it is about knowing that a payment has been approved, for example, and one of the big developments in supply chains today is getting the financial and physical supply chains to talk to each other, because then you can do some very interesting things.”
All of the trends emerging should speed the process of SCF becoming easier to understand and to use for corporations across the globe. At the moment, only a tenth of cross-border SCF is conducted out of what is potentially possible, according to European banks. The complexity of SCF indeed plays a large part in the stalling, but innovations in both emerging and developing economies are producing trends that promise to hike up adoption significantly in the coming years. It’s exciting to watch, but even better to be a part of.