24 Feb 2012 Supply chain democracy relies on your vote
Today, we’re delighted to welcome a guest post from Lars Rolf Jacobsen – Financial Solutions Manager at Tradeshift.
Size matters. Throughout history, it has always been the case that the bigger company in a relationship has all the power. And financial transactions are no exception to this rule.
But the rise of the internet has leveled the playing field in some aspects of business. Now, any small company can use Skype to communicate for free with suppliers and buyers across the world. Whole workforces can be recruited and managed through the web, meaning that talent is cheaper and easier to control. And with e-commerce, any company can market and sell a product to a global audience.
Business processes are changing too. Applications like Salesforce, Google Docs and Dropbox allow virtual workplaces to become a reality. Smaller businesses are leading the way here with their ability to be flexible and nimble. They don’t have to worry about tossing out old legacy IT systems as a larger company would.
But one area that has escaped this transformation trend is business finance and, in particular, Supply Chain Finance (SCF). It’s no coincidence that this is an area where nimble small businesses are forced to communicate with less-flexible large enterprises and so it is where a lot of innovation just goes out the window.
It’s time for a SCF revolution
SCF is broken. Why? Mainly because there are conflicting interests at work and because providers have not been able to take advantage of cloud-based technologies.
This is a major problem as powerful buyers are pushing for extended payment terms to reduce working capital investments. And, at the same time, banks are being forced to reduce balance sheets.
The result is that small businesses are left between a rock and a hard place. And it makes no sense.
Existing SCF solutions fail to achieve critical mass and catch the long tail of smaller suppliers. That’s because SCF implementation is time consuming and cumbersome and so, consequently, enterprises tend to focus on large suppliers because that’s where the most obvious volume is.
That might seem logical. But, in most cases, these large companies already have funding alternatives at low interest rates and so SCF becomes less relevant.
It’s actually the smaller guys that have the most need for SCF. But, for a large company, that means working with an unwieldy mass of thousands or maybe even tens of thousands of small businesses. They see it as a logistical nightmare.
Supplier adoption is key
But, if you subscribe to the argument that the focus needs to be on smaller businesses, then you’ll also agree that a successful SCF scheme therefore depends on getting high adoption rates amongst smaller businesses.
Making ‘supplier entry barriers’ as low as possible is clearly crucial. And here an integrated SCF and e-invoicing platform provides a solution.
Here are four reasons why integrating e-invoicing and SCF makes sense:
Increase supplier adoption – a free, easy-to-use e-invoicing platform will encourage on-boarding amongst small suppliers and provide a platform for SCF.
A base for offering other products – once an e-invoicing platform has significant suppliers using it, the potential for offering these suppliers other products such as SCF and dynamic discounting becomes clear.
Flexible financing options – currently most proprietary platforms only include a single product. Banks have SCF platforms and other providers have tried to build platforms for products such as dynamic discounting. This is because a product like dynamic discounting is not a profitable business for the banks as it is funded via the buyers’ excess cash position. Current platforms cannot support multiple products from a technical point of view. But, by launching SCF via an e-invoicing platform, more options become available, such as combining SCF and dynamic discounting to create more value for the supplier.
Work-flow integration – a key benefit of e-invoicing is the possibility to integrate into existing internal work-flow systems. This will also be the case when including SCF. An example is the approval flow of invoices. The most advanced e-invoicing platforms are built to create real-time communication between buyers and suppliers via invoice status updates and real-time messaging. This means the invoice approval flow is already implemented via the e-invoicing solution – and this is one of the key elements in a SCF program.
So while this might initially seem like a radical new approach to what are generally accepted processes, there is no doubt that many businesses are currently failing to make the most of SCF.
And, as we’ve seen, smaller businesses are using the technological revolution. They are the ones that stand to gain from this (as well as the buyer of course) and they are also the ones most likely to adopt. So it’s a perfect situation.
So let’s usher in the supply chain finance revolution!