Thought Leadership
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July 15, 2020
Building Resilience into Tomorrow’s Supply Chain
Andres Ricaurte - SVP and Global Head of Payments, Mphasis
Tags: leadership

The COVID-19 pandemic has caused unprecedented disruption to every industry around the world. The supply chains for critical products such as personal protective equipment (PPE), medical devices, cleaning agents, and even food, have been at times unable to cope with the unexpected surge in demand. Other industries, such as travel and entertainment, have become idle almost overnight. As a result, a major liquidity crisis has distressed supply chains across the globe. Leading automakers such as General Motors and Ford, hold limited cash reserves that would last a few weeks, leading to potential bankruptcy if the shutdown continues. While several governments have initiated relief programs to help bridge the liquidity gap, many businesses are unable to access these benefits. Whether working overtime to catch up with demand, or struggling to keep the lights on, every enterprise has realized that 'supply chain resilience' is vital in the post-pandemic world.

Banks will invariably play a crucial role in the recovery of the global economy as a primary source of financing for many businesses. However, traditional offerings, tools, and models are facing challenges in dealing with the new normal. One, where demand for financing is dramatically exceeding the available supply, and where banks are finding it increasingly difficult to predict, quantify and plan for new types of risk.

To support a meaningful and sustainable re-activation of global supply chains, we need to re-think about traditional approaches. We must embrace more flexible, efficient, and resilient models that enable a higher level of visibility and collaboration between banks, buyers, and suppliers. Here, technology plays a vital role.


Good but not enough

In traditional supply chain finance arrangements, banks leverage the creditworthiness of large corporate clients to offer their suppliers competitive financing. While this is a great concept, even today's most advanced programs are constrained by manual processes and unable to scale beyond a small population of suppliers. Typically, the suppliers that end up benefitting from these programs are the largest ones, for who the banks can afford to invest in lengthy sales and implementation processes. This has two significant effects.

First, it alienates a 'long tail' of thousands of small and mid-sized suppliers—the weakest links in most supply chains. In fact, more than 100,000 small businesses in the US have permanently closed since the pandemic escalated in March, according to a recent study from Harvard Business School, the University of Illinois and the University of Chicago.

Second, it creates under-utilized bank credit lines that consume capital, which could be deployed elsewhere. In addition, the lack of digital technology makes it nearly impossible to obtain data on program performance or gain visibility into the health of the supply chain. Greensill Capital, a SoftBank-backed supply chain finance (SCF) firm, witnessed this first-hand when the pandemic caused two of their clients to turn insolvent and another to fall apart without any warning.


Financing supply chains at scale

Unlocking value for entire supply chains requires a network-based model that can connect banks, buyers, and suppliers digitally and at scale. Blockchain networks such as Contour[1] and Marco Polo[2] are demonstrating that banks (such as HSBC, Standard Chartered, and BNP) can connect to a common ledger to share information seamlessly and instantly. These networks are helping to simplify traditionally lengthy processes such as validating invoices, approving trade documents, and on-boarding new suppliers. It is not surprising that blockchain investments in the banking, financial services and insurance (BFSI) sector are estimated to reach US$22.46 billion by 2026.

The truly exponential impact comes when we connect these new information flows with digital payments and financing networks. In this area, asset tokenization[3] is proving to be a powerful catalyst for a new generation of supply chain ecosystems. Consider a manufacturer of medical equipment that needs to quickly scale production by placing many orders with its global supplier base. Rather than leveraging the traditional linear process (issuing a purchase order, receiving goods, approving an invoice, and eventually paying that invoice), the manufacturer can issue smart purchase orders in the form of tokenized assets (tokens), embedded with different financing options. The tokens allow suppliers to access the working capital needed to fulfill orders at the click of a button. Through smart blockchain contracts, payments can be released in tranches as and when suppliers demonstrate progress in production–seamlessly connecting the physical and financial supply chains in a single, intelligent transaction. Given that most suppliers are dependent on other suppliers, they can also use digital tokens to enable digital financing for their downstream supplier network. The digital, borderless nature of these tokens allows for value to flow seamlessly from one supplier to another, across geographies and currencies, creating a more connected, transparent and resilient supply chain.

Banks that embrace the network paradigm and successfully capitalize on disruptive and exponential technologies, can significantly amplify the reach of their programs, optimize capital consumption and increase visibility into the entire supply chain. As the world continues to surprise us, these capabilities will be crucial to deploy liquidity quickly and responsibly where it is most needed, and will become an invaluable support system for tomorrow's global supply chains.


The article was originally published on Andres Ricaurte’s LinkedIn Pulse. Click here to read and connect.

References:

[1] https://www.contour.network/

[2] https://www.marcopolo.finance/

[3] https://www.coinspeaker.com/guides/all-you-should-know-about-asset-tokenization-in-2020/


  i. https://www.bloomberg.com/news/articles/2020-04-07/worst-isn-t-over-for-general-motors-deutsche-bank-says-in-cut

  ii. https://www.nber.org/papers/w26989.pdf

  iii. https://www.pymnts.com/news/b2b-payments/2020/greensill-faces-swath-supply-chain-finance-defaults/

  iv. https://www.forbes.com/sites/michaeldelcastillo/2020/02/19/blockchain-50/#ee1db407553d

  v. https://www.prnewswire.com/news-releases/blockchain-in-bfsi-market-to-reach-22-46-bn-globally-by-2026-at-73-8-cagr-allied-market-research-300923160.html

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