Supply Chain Finance and Moving Beyond the Payment Terms Debate

Looking Back and Forging Ahead. A distinctive view on supply chain finance, payment terms, and the evolution of trade related financing which shaped this solution throughout history.

Agrarian Era

It was all so much simpler in the days of early Agrarian era markets. You yoked your oxen, or 1^st born, to the cart loaded with the bounty of your fields and made your way to the center of town. There you laid out your stall and proceeded to barter and exchange between trading partners. The market provided discernible pricing as exchanges of value occurred on the spot, visible to all and each participant adjusted their bid/ask position according to the immediacy of supply and demand. Most importantly you returned home with the proceeds from your day’s commerce, a testament to the immediacy of settlement.

Mercantilism Era

Population growth, global spice trade and the demand for more products and services ushered in the era of Mercantilism. In this era, specialized trading companies, the forerunners to commercial banks, provided trade liquidity, bills of exchange and early factoring models to provide some level of risk management for importers as well as exporters. This mix of elements led to massive plant construction, market growth and education of consumers to consume – commonly known as marketing in today’s world – all the while requiring providers of capital to underpin this activity with credit. Access to working capital and cash flow were the key drivers for the global trade.

Industrial Military Complex

The rise of the Industrial Military Complex and its fostering of large-scale manufacturing across multiple locations had a significant impact on what we now call the supply chain. This era drove economies of scale to what we later coined as Just in Time, 24-hour replenishment and cost-to-serve modeling, but also drove the de-coupling of the consumer-supplier direct negotiation. The advent of marketing and advertising completed this separation and created what could be termed the era of designing the consumer experience. The consumer intimacy with the end-supplier was no longer as relevant. All goods were neatly packaged along with messaging as to why you needed this brand in preference to others. Companies relied on their distribution channel and the marketers to influence the consumer behavior.

Post-War Era

The Post-War era recognized that large-scale production capability to achieve and maintain a competitive offering was required, alongside significant capital outlay that banks were only too happy to provide. With low-cost sourcing, the rise of more educated consumers globally, and sophisticated financing options, this era became known as the era of global trade finance. DSO (Day Sales Outstanding) and DPO (Days Payable Outstanding) became part of the daily jargon and CFOs faced increased pressure to match or improve upon accepted industry standards.  As a response, the era of squeezing the supply chain, especially so on payment terms began in earnest.

The informed consumer and the end of the traditional receivable

The rise of the internet, real-time big data availability, price comparison and multiple distribution channels put the consumer in charge of and having influence over many aspects of the buying experience and the supply chain. Consumer demands are changing the nature of consumption reflecting a consumer in charge of the process and consequently acting as a direct participant in today’s global supply chain; similar in some respect to the market experiences our agrarian forebears experienced. In terms of financial markets we are familiar with highly sophisticated systems matching buyers and suppliers with immediate settlement terms globally across an array of commodities.

Coming back to the title of this article, how then is this related to Supply Chain Finance and the debate on payment terms?

In today’s market the informed consumer is firmly in charge and the individualization of the buying experience has markedly increased the velocity on the consumer side of the transaction and the settlement of that value exchange. This is also true where value exchange and settlement activities such as $100M of oil contracts for delivery settle at the speed of light. Isn’t it therefore somewhat archaic for the supply chain to wait for 30-60-90 or even more days for payment of goods and services already delivered?

When looking at a company’s position with respect to the buyer’s DPO and supplier’s DSO, the conversation is still stuck in the old arm wrestle of “my payment” terms versus “your payment” terms. The view is that one way or another one side invariably loses or at best comes off in reasonable shape and that one party’s working capital will be adversely affected.

Supply Chain Finance

Supply chain finance has become a key solution for leading organization allowing them to shorten their payment and settlement time in order to remain competitive. Gone are the days where an organization could just look at its own DSO and DPO to improve its working capital without considering the other constituents in its supply chain. Today’s new supply chain finance models provide a holistic approach allowing both side of the trading equation to improve their financial strength and remain competitive.

Highly efficient processing platforms offer suppliers payment on an earlier date rather than the maturity date and on the other side, the buyer has the opportunity to improve its working capital by optimizing its payment terms. The difference of time between collection date by the supplier and repayment by the buyer is bridged by a third-party funder providing financing based on the buyer’s credit rating. This creates a win-win solution with the ability for the buyer to standardize payable terms, while giving the option to the suppliers to get paid in just a few days instead of 60 or 90 days.

Looking Back and Forging Ahead

Every business model during the different eras has either reshaped itself to exploit or withstand prevailing conditions, or has been reshaped by those prevailing conditions. Companies who accept that the only protection against oblivion is a constant willingness to innovate and move away from processes that no longer serve them or their suppliers’ best interests will grow and profit from that change.

Throughout history one constant has remained and will continue to be front and center: access to efficient working capital, favorable payment terms, and cash is a fundamental component in the ability of buyers and suppliers to cooperate and exploit the market conditions in front of them.