7 Supply Chain Financing Trends to Watch in 2019

This is an excerpt of the original article. It was written for the March-April 2019 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2019

A few days ago, a colleague sent me “The Death of Supply Chain Management,” an article in the Harvard Business Review. If the title wasn’t enough to grab my attention, the last sentence in the first paragraph had me checking out job openings on LinkedIn: “Within five years to 10 years, the supply chain function may be obsolete, replaced by a smoothly running, selfregulating utility that ….. requires very little human attention.” Read more carefully, what the authors are really arguing is that as NextGen technologies find their place in our organizations, the role of the supply chain manager, including procurement managers, is going to…

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As the world's supply chains become more complex, the financial infrastructures that support them are evolving in new and interesting ways. Whether it's opening up the opportunities to a wider swath of companies, incorporating blockchain into the process, or helping supply chain managers become superheroes, supply chain financing is doing its part to support transactions around the globe.

The new definition

What once fell under the factoring umbrella, where a company sells its receivables to a third-party factor as a way of preserving cash, supply chain financing now involves large banks, financial technology companies (fin techs), specialized financial institutions and other entities that support suppliers that need working capital and liquidity.

“An executive at a major financial institution estimated that his firm performs $2.2 trillion per day in trade finance transactions, which typically includes loans to suppliers to buy raw materials, components and finished goods,” writes Dale S. Rogers, an ON Semiconductor professor of business at Arizona State University, in his new book, “Supply Chain Financing: Funding the Supply Chain and the Organization.”

“Given that the 2017 U.S. gross domestic product (GDP) was approximately $19 trillion,” he continues, “this is a substantial amount of activity designed primarily for supporting procurement operations around the world.”

A lot of the activity described by Rogers is being driven by suppliers that have tightened their supply chains and extended payment terms, two trends that have negatively affected their suppliers' financial positions. This, in turn, has pushed companies to find more creative ways to finance their diverse and underfunded supply bases. “I think Procter & Gamble was the leader in moving to 120-day payables,” said Rogers in a recent interview with SCMR. “That was unheard of six years or seven years ago, and now that whole consumer products sector has lengthened out its payables.”

Supply chain financing comes into the picture and helps to fill those gaps. Done right, the process helps both buyer and seller by improving liquidity, enforcing discipline in the approval of invoices and taking the variability out of the timing of payments. “The supply chain is a very important source of capital, and is about more than just make-source-deliver at this point,” Rogers continued, “it's also about funding, and freeing up capital for your organization.”

7 key trends

As supply chain financing continues to evolve, some key trends are emerging in the space. Following are seven to watch this year.

1. Companies are using their supply chains to keep tighter controls on working capital. Made up of receivables, payables, inventory, cash and other assets, working capital has become a focal point for a lot of companies. “They're using their supply chains to manage that capital a lot tighter,” Rogers contends. For example, they're moving assets off their balance sheets and onto their income statements—a shift that helps organizations “unburden themselves of assets and improve their financial positions.” To manage these shifts, Rogers believes supply chain professionals should focus on capital and cost flows within their own supply chains. That means asking yourself questions like: How are my suppliers managing their capital? What does our own working capital look like? And, how can we change the way we're paying our suppliers?
2. A larger pool of providers is offering a wider array of financing options. Supply chain financing used to be the domain of factoring companies that would buy companies' receivables at a discounted rate in order to free up working capital for them. That has changed significantly over the last few years. “One of the biggest changes that has happened is that there are now more players offering a wider selection of alternatives in the market,” says James Gellert, chairman and CEO at Rapid Ratings International. For example, credit providers have taken an interest in providing capital while technology providers are enabling that transfer of funds and/or other mechanics associated with the evaluation of both customer and supplier. “This mirrors trends in digitalization and data management with small- to midsized enterprise funding,” Gellert points out, “and the overall expansion of technology and data usage.”
3. The definition of “fundable transaction” continues to expand. As the number of funding sources expands, those sources are essentially “broadening the spectrum” of entities they're willing to fund. According to Gellert, this has created opportunities for more supply chain partners to effectively manage their own working capital and operate in a healthier, more financially-sound manner. “As long as the ‘customer' is of a strong enough quality, and as long as the supplier actually delivers on whatever product or service is being commissioned,” says Gellert, “those arrangements can be deemed pretty good risks. These types of trends are pushing more providers to open up the definition of what they consider to be a ‘fundable transaction.'”
4. Supply chain managers are becoming financial superheroes. Today's supply chains are about more than just make-source-deliver, which means that the people who run them need to be able to speak and understand the language of finance. “That's the lingua franca of organizations right now,” says James B. Rice, Jr., deputy director at the MIT Center for Transportation and Logistics. “It's not necessarily the language of supply chain, but knowing the language of finance will help the practitioners communicate not only what the costs are, but also where the opportunities are.” After all, supply chains are franchise builders and growth engines, Rice says, even if all practitioners don't see it that way. “Get your elevator speech ready. When you see your CFO tell him or her: ‘here's how our supply chain is affecting revenue, profitability and working capital,'” Rice suggests. “If you can do that, you'll be a superhero.”
5. Blockchain gains momentum in supply chain finance. Two years ago, FnConn, a subsidiary of FoxConn, partnered with online lender Dianrong to launch Chained Finance, a blockchain-based supply chain finance platform. “By using the Chained Finance platform, every payment and every supply chain transaction can be more transparent, manageable, and easily authenticated,” FnConn's CEO said in news interviews at the time, noting that the platform supports suppliers of all sizes while “ensuring the timely delivery of products to end customers and improved efficiencies across the entire supply chain.” Fast-forward to 2019 and Joe Vernon, practice leader, supply chain analytics, at Capgemini is seeing more companies incorporating blockchain technology into their supply chain financing efforts. “Foxconn basically had a lot of vendors in China that needed credit, so it turned itself into a bank,” says Vernon, who is currently working with two customers on related pilot projects, “and then used blockchain to create a trusted network of vendors to subsidize. It's genius.”
6. IoT, machine learning and artificial intelligence are facilitating supply chain finance relationships. Blockchain isn't the only new kid on the block in supply chain financing right now. According to Antonella Moretto, assistant professor at Politecnico di Milano's school of management, IoT, machine learning (ML) and artificial intelligence (AI) are all making an impact on the sector right now. And while these technologies are still maturing, Moretto says AI is of particular interest to companies that are doing supply chain financing deals. “It's very useful with credit scoring,” she explains, “with some technology platforms doing the legwork on the scoring, and then presenting companies with the best financial proposal for each supplier.” Based on their success so far, Moretto sees more AI, ML and other advanced technologies making their way into the supply financing sector in the near future. “The more data that can be evaluated, the more precise decisions can be made on it,” Gellert adds, noting that AI, neural networks, and/or human evaluation all continue to modernize the supply chain financing industry. “This industry is relatively old and hasn't had a lot of huge advances,” says Gellert. “But I think we're at the stage now where some really significant and interesting advances are taking place.”
7. Demand for supply chain financing is going to continue. As he looks around at the major trends taking shape right now in the global economy, Politecnico di Milano Professor Federico Caniato expects demand for supply chain financing to rise significantly over the next few years. “With interest rates rising, new trade barriers being enacted, and other issues affecting the working capital of companies,” says Caniato, “no one can take available liquidity for granted.” That rule applies both in and out of the company's four walls and across the entire supply chain. “Companies can't just look at their own working capital without concern about the impact that it has on the rest of the supply chain,” says Caniato, who points to the global financial crisis of the 2000s as one example of why expanding payment terms to suppliers is not necessarily the smartest move. He adds: “A lot of suppliers suffered and then that backfired to their customers. Using supply chain financing can fill those gaps and help even the smallest of suppliers stay financially healthy and operational.”

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