Stabilise Your Supplier Base with Deep Tier Financing
If your lower-tier suppliers are in financial trouble, the ripples can turn to waves as they travel upstream! But help is at hand to keep your supply base stable during volatile times
Many global buyers are now having to step deep into their supply chain and make sure smaller suppliers are financially secure.
Disruptions during Covid-19 revealed the instability of the supply chain due to a lack of transparency into deep-tier suppliers. During the shutdowns, many small- and medium-size enterprises (SMEs) could not keep their doors open, endangering supply chains that relied on these businesses. There’s about $500 billion in the payments system between corporations and suppliers.
There are countless stories of brands being damaged by intricate, multi-tier supplier structures that have contributed to the fragility of the global supply chain over the past several years. Supply chain resiliency is a high priority, as just-in-time shipping turned to just-in-case during the most disruptive periods.
Deep tier suppliers — those several steps away from the ultimate vendor of the product — are often small- to medium-size enterprises that may be located far away from the final point of use. Think of fasteners manufacturers that go into seats that go into autos. The typical supply chain includes many smaller suppliers, from materials to finished products and final delivery. These smaller businesses are often at the whim of their customers, waiting months for payments regardless of invoice terms or coerced into discounts for faster payments.
Democratising Global Finance
Historically, these deep-tier suppliers have had less access to credit as they are typically small to medium enterprises. Financing options for SMEs have been limited or may come at a higher cost. Supply chain financing positions SMEs to take advantage of favourable credit terms of their corporate customers so the buyers can build continuity in their procurement flow with a stable supplier base.
To build supply chain diversity, many global buyers are engaging smaller suppliers in supply chain financing by giving access to credit using the more favorable terms of their large customers. Some systems use blockchain technology for smart contracts that reduce risks and transaction costs for all parties. Buyers can offer financing to stabilise critical deep-tier suppliers with improved cash flow. Organisations can tap into existing banking relationships or use new vendors.
Finance giants like Citi are pairing with online platforms to make it easier for smaller companies to participate in financing. Stenn’s online platform provides SMEs with financing opportunities to help support their international trade. The offering will cover onboarding, compliance, risk management, and potential financing for a large universe of deep-tier suppliers.
The finance program reaches out to the suppliers of the supplier. Access to funding will encourage the growth of these smaller companies, boosting local economies as well.
Electronics manufacturers such as Samsung and Fox have funded efforts for their Tier 1 suppliers to provide financing to smaller upstream suppliers.
The objective of the deep-tier financing model is to ensure that the smaller tier 2 and tier 3 suppliers are able to sustain their business model. The buying organisation has a more stable supply chain and deeper visibility into the companies in their ecosystem. Helping suppliers will lessen disruptions in the supply chain. Your company may be able to help a critical supplier avoid shutdowns due to low cash flow. It’s a win-win situation to decrease supply chain risk while deepening supplier relationships.
Suppliers have improved cash flow to pay workers, purchase materials, and invest in the business for the future. They are better insulated from disruptions that could be fatal to a small business without access to affordable credit.
Financial institutions can expand their customer base to smaller clients, backed by the stability of the buying organisation. One Asian bank digitised its onboarding process for new borrowers and reduced administrative time by about 75 percent while approving loans to SMEs worth about $3 billion.
Building on the Blockchain
Buyers and sellers can engage with smart contracts on the blockchain that track and trace the movement of goods and payments. With less administrative overhead, transaction costs can drop by up to 80%. Digitising all the information involved – such as invoices, approvals, and payments – into cloud-based systems ensures that all parties have accurate, secure information. A smart contract on the blockchain ensures that all parties will be treated fairly, and payments will happen when they should. Deeper visibility into the financial position of their deep-tier suppliers enables manufacturers to reduce supply chain.
Supported by confidence of the information held in the blockchain, SMEs speed up cash flow with faster payments. The same pool of operating capital supports more frequent transactions. Because blockchain data is anonymous, companies don’t have to worry about sharing competitive information about suppliers and customers.
The ecosystem benefits from Increased transparency with better ability to track goods throughout the supply chain, which reduces the threat of fraud or non-performance.
Some financing platforms, built with the blockchain, can track and trace product origin to certify practices that meet ESG standards. Suppliers have much-needed working capital support, while buyers can track the source of goods and have verifiable use of responsible production methods. This level of security can facilitate complex cross-border trade and payments.
For example, Trusple, a blockchain platform, partnered with banks and merchants to facilitate payments for trade between Spain, Mexico, and China. The system uses smart contracts that automatically execute transactions when the milestones established in the contract by the importer and exporter are reached.
Ultimately, the goal of deep-tier financing is unlocking the value of business relationships to offer access to finance for every supplier. Buyers can strengthen relationships with suppliers and help to improve the resilience of their supply chains by working to provide access to financing. More suppliers with access to affordable funding mean buyers can build more resilient supply chains, which is critical in these uncertain times.