Why finance teams are at the coalface of supply chain resilience

Russia’s aggression in Ukraine marks another dark turn in a series of events that have shattered the relative stability businesses have enjoyed over the past 30 years. The enormity of these events can feel overwhelming. But how organisations react to a crisis has a very real impact on whether they will be successful in weathering and recovering from such external pressures.

If the past two years have taught us nothing else, it is that buyers and suppliers should be working together to plan for and address such challenging conditions. Instead, a strong and understandable instinct for self-preservation has seen most large organisations focus on building up their own cash reserves while leaving suppliers further down the chain to deal with the consequences.

In business, as in many aspects of life, cash remains king. So, when volatility emerges the first reaction among many large buyers is to keep hold of it for as long as possible. According to research from Hackett Group, large companies took an average of 58 days to pay suppliers in their first fiscal quarters of 2021, up from 55 days the previous year. Our own data shows late payments to suppliers are double the level they were at in the six months before the pandemic.

A blind spot on supplier health

Finance and accounts payable teams are by no means ignorant of the careful balancing act required to manage their own cash flow needs and the health of their suppliers’. What they often lack however are the insights, time, and options they require to ensure that acts of self-preservation do not morph into acts of self-harm when suppliers begin to struggle.

Even today, the relationship between buyers and suppliers is largely governed by the exchange of paper-based documents. Accounts payable teams spend the bulk of their time on low-value tasks, and almost no time on understanding the financial health of their supply chains.

The lack of shareable real-time data also means that finance and procurement departments are often forced to operate in siloes. So, when CFOs are tasked with looking at options to increase cash flow, they are often forced to base decisions on fragmented information.

The digital disconnect between buyers and suppliers also means that when a buyer decides to delay or extend payments, options to mitigate the impact on suppliers are severely limited. Lack of data means traditional supply chain finance options are largely off the table for anything other than a minute percentage of suppliers who have the credit history and paperwork to whet funders’ appetite.

It’s also worth mentioning how regulators are trending in the direction of treating this style of finance as debt to a buyer. This could well cause large organisations to think twice about adopting this model in the future.

Measuring the health of the ecosystem

Resilient organisations recognise that their own health goes hand in hand with the health of the entire ecosystem of suppliers upon whom they rely. Using technology to digitally connect buyers and sellers can drive this equilibrium in many tangible and highly measurable ways.

Buyers that want to get payments flowing faster to suppliers are often hamstrung by cumbersome processes. Digitalisation gives them options. For example, research by Ardent Partners found it takes an average of eight days to process a paper invoice. Automating parts of the AP process through digitalisation enables organisations to reduce invoice cycle times to as little as three days. Automation can also lower the average cost to process an invoice by 80% and in some cases, we’ve seen AI reduce manual interventions by as much as 99.5%.

With automation taking the lion’s share of low-value and laborious processing tasks, teams finally have time to nurture the all-important human side of the relationship with suppliers, something which has long been overlooked as the volume of business relationships has swelled.

By establishing a digital thread spanning the entire supply chain ecosystems, teams also open the door to a far more holistic view of trading relationships that mirrors the highly complex and interconnected nature of modern supply chains. This transparency enables decision-makers across finance, procurement, and treasury to identify single points of failure and make informed choices quickly about how to manage them in real-time.

Unlocking liquidity

Finally, and perhaps most importantly, digitalisation opens the door to a range of innovative financing methods that help buyers preserve cash without damaging the health of their suppliers. Instruments such as supply chain finance have largely failed to support suppliers because many of them appear too risky for financial institutions to extend a line of credit.

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 than ever before. And they can do so without promissory notes, excess buyer liquidity, and all the other slings and arrows of standard, buyer-facilitated early receivables payments programs.

It can seem rather crass to talk about business opportunities in the face of pandemics and wars. At the same time, people are often at their best in the face of adversity, coming together to solve common problems with innovative solutions. The crises of the last few years have been a wake-up call to industries across the world, impelling them to ditch the old, inflexible systems and processes that simply exacerbated their exposure to a febrile, fast-changing world.

Digitalisation plays an essential role, but human relationships are an equally important part of the solution to today’s supply chain crisis. Finance teams are the engine room of B2B interactions; give them the right tools, and you’ll soon see those crucial relationships bloom – whatever the world throws at you.

Contributed by Don Frazier, VP, Tradeshift

Don is a leading expert in supplier financing, working with businesses of all sizes to help them optimise their cash flow and working capital using innovative data-driven financing solutions.

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