How To Sustain A Post-COVID Recovery? Support Supply Chain Cash-Flow

Nearly 70 years of post-war stability provided the foundation for the supply chains we know today. Like highly tuned race-cars, these complex ecosystems are optimized for performance in familiar and predictable conditions. Then COVID-19 hit and the impact on global supply chains was like trying to navigate a Force 10 storm in a speedboat.

Early on in the pandemic lack of visibility meant supply chain operators were hit by disruption in areas deep within their supply chains that they barely knew existed. The same lack of visibility also meant that when large buyers canceled orders and started to defer payments to their tier-one suppliers. they had very little awareness of how these acts of self-preservation would affect the millions of small, but vital, suppliers further down the supply chain.

Richer nations stepped in with a range of measures designed to protect suppliers from bankruptcy. Even so, many suppliers were forced to dig deep into their limited reserves of working capital to stay afloat.

Who should bear the cost of volatility?

More than a year since the first lockdowns, the recovery is gathering pace. But cracks are surfacing across supply chains still not fully recovered from a prolonged period of disruption.

Tradeshift's data suggests manufacturing order volumes increased 80% year on year in March compared with 21% for invoice volumes. This not only suggests that suppliers are struggling to keep up the pace fulfilling orders, but also implies that buyers are not releasing payments quickly enough for suppliers to build up the reserves of working capital they need to accelerate production.

The effects of this disconnect are well-publicized. In a recent interview, Jean-Marc Chéry, chief executive of STMicroelectronics, spoke of an "imbalance" in the relationship between suppliers and their customers: "If they expect the semiconductor [suppliers] to be the bank, to keep having a big working capital to support them, they can forget it."

The crux of the dispute comes down to a question over who should bear the cost of maintaining excess inventory to help manage spikes in demand. Mr. Chéry and his peers are more than capable of handling themselves in a negotiation with their buyers. But spare a thought for the millions of suppliers globally who don't have a place at the negotiating table. What leverage does a small business owner have when a large buyer decides to extend payment terms to 120 days in order to protect cash flow?

Tradeshift found that nearly a third of suppliers had seen their cash flow position deteriorate over the past six months. Nearly half said that they've seen an increase in the number of late customer payments since the beginning of the year. As a result, nearly one in five suppliers say they are struggling to cope with surging demand.

It need not be this way, however. There are huge pockets of floating capital that, if unlocked, would be sufficient to support suppliers through this critical stage in recovery. Take the $1.5 trillion pool that's doing nothing in unpaid invoices, for example. That's an enormous resource that if unlocked will go a long way to supporting suppliers through recovery and beyond.

Why aren't businesses tapping this pool of funds immediately? The simple answer is, they can't.

A system held together by paper

We tend to think of supply chains as these incredibly sophisticated machines, but underneath it all, they're currently held together by the exchange of paper-based documents. Invoicing is a good example. Despite all the recent advances in technology, around 50% of all invoices are still sent on paper.

The digital disconnect that exists between buyers and sellers makes most of what happens across the supply chain hazy at best. This lack of transparency leads to supplier onboarding hurdles, risk management challenges, and other complexities that limit a funders' appetite to finance anything beyond the transactions between the top few suppliers in the chain.

The latest Working Capital Survey from PwC finds that only 50% of these programs reach just 25 sellers on average. So while traditional Supply Chain Finance is a powerful solution for buyers and a fraction of their sellers, it stops well short of solving the entire problem, and it leaves most sellers without access to this low-cost form of funding.

Unlocking trapped capital

Using technology to digitally connect buyers and sellers can make supplier finance simple and readily available by overcoming many of the challenges that traditional supplier finance has today. That's because when buyers and sellers are connected digitally there is a vast amount of data that becomes accessible. And with this data, the supply chain and the relationships that bind it together become more transparent.

With a clearer view of risk, funders can inject liquidity into all supply chain transactions even before approval of an invoice, and at much lower rates. And they can do so without promissory notes, excess buyer liquidity, and all of the other slings and arrows of standard buyer facilitated early receivables payments programs.

As buyers focus on building resilience to future shocks, they must realize that it's in their own best interest to have a more equitable relationship with their suppliers. Technology is poised to help them bridge this gap by unlocking faster, more predictable cash flow, access to more vendors, and increased optionality in the event of disruption. The bottom line is that what's good for suppliers, is ultimately good for buyers.

(Christian Lanng is the founder and CEO of Tradeshift)