Sourcing and Procurement

Supply chain financing in post Covid-19 challenges

- Supply chain financing emerging as the go-to trend to maintain stability and resilience

- Technology adoption is paving a brighter future for supply chain management

- The new approach important in keeping pace with the need for sustainability

The sudden outbreak of COVID-19 was an eye-opener for organizations. It split open a can of vulnerabilities in their supply chains and highlighted the criticality of building an ecosystem with all stakeholders in tow. Offering financial access and back up to suppliers has thus emerged as one of the most effective ways to improve supply chain stability and resilience, strengthening it for future crises.

The crisis induced by the pandemic forced several companies to explore alternative and innovative ways to fund the supply base, in order to keep it stable in the face of a disruption. Of all, a tightened supply chain and extended payment terms emerged as the two major fallback options.

While companies looked at extending pay-terms to preserve cash, the strategy could have un-favourable long term implications and could be detrimental to suppliers. Supply chain financing, on the other hand, offers a more viable solution for faster payments and can be a value source for the organizations.

Regarded as one of the oldest commercial payment activities, supply chain financing is meant to ensure that businesses are always adequately equipped with the working capital necessary to keep the operations running. With cash becoming the king, especially in the pandemic times, supply chain financing is certain to gain even greater prominence in the near future.

Building an ecosystem

Typically, a company will benefit with a healthy cash flow if the focus is on improving the basics, such as improving liquidity, necessitating invoice approvals, and defining payment timings. But taking care of all these functions by one entity is practically impossible. As a result, companies have now started onboarding supply chain financing firms that in turn partner with large financial institutions to offset the risk and dependency on limited financers.

Also, with finance functions embracing new technologies, the mutations have further strengthened the virtue of supply chain financing. Let us look at some of the factors increasing the adoption and acceptance of supply chain financing in 2021:

Data analysis:

With improved access to data, banks and institutions can now understand the supplier credit worthiness at a much granular level. This access to in-depth knowledge via data can help financiers reduce risks and offer benefits of the program to a larger group of suppliers.

Optimizing working capital:

It is important to optimize working capital to ensure sufficient cash flow to meet short-term operating costs or debt payments. It is all about creating a balance between the assets and the liabilities. But due to the complexities associated with disposing of an asset, the process of optimization focuses more on cashable assets. More effective way to optimize the working capital rather involves working with the finance department and inventory management. While the former lever can help in fastening the receivable collections or extending the payments terms, the later can help in reducing inventory cycle to divert the cash flow.

Widening finance options:

Gone are the days when organizations and suppliers were dependent on a single source to ease the cash flow. With the intervention of technology, the reach has expanded, enabling multiple players to offer higher value and lucrative financing alternatives. The advancement has helped both the technology facilitators and the credit facilitators to collaborate. Digitization has also enabled easy communication, uninterrupted fund transfer, continuous tracking of funds by both buyer and supplier. Adoption of automation has also fastened the legal processes, thereby helping organizations reduce the working capital.

Gaining pace in blockchain:

In the past few years, the introduction of blockchain in supply chain financing has led to revolutionary instances. The technology is estimated to have the potential to help the food and beverage industry in saving $31 billion by 2024. Blockchain-based functions, such as cryptocurrencies, have not only enhanced transparency in the system, but also speed, accuracy, and security. Experts believe the advancement has enabled end-to-end sharing of data much more securely, compared with cloud computing. The year 2021 is expected to see a higher demand for platform-agnostic blockchain solutions.

Focusing on sustainable approach:

The COVID-19 outbreak categorically pushed up sustainability as the topmost priority for organizations. Interestingly, supply chain financing can play a critical role in the implementation of a sustainability strategy. By adopting technological advancements, for instance, the eco-hazard of using paper can be eliminated. According to reports, supply chain financing involves enormous amount of paper invoices and paper cheques. Technology can help companies reduce the overall carbon footprint by over 30%.

The intervention of trio:

Internet of Things (IoT), Machine Learning (ML) and Artificial Intelligence (AI), although at a nascent stage, are likely to witness greater role in supply chain financing in the coming years. IoT can be implemented at every stage of supply chain financing, thereby making the system more transparent, efficient, responsive, and reactive. Elements of IoT, such as data and analytics, can be used to conduct due diligence of the suppliers. Furthermore, supply chain financing can use AI to optimize working capital, as well as to maximize the access to the suppliers.

The above discussion clearly points to a greater prominence of supply chain financing in the coming years. With the collaboration of technologies and human capabilities, the industry is prepared to overcome any disruption that may occur in the future.

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