Revolutionizing Supply Chain Finance

Introduction

For this research a study will be conducted to answer whether integrating Blockchain systems to Supply Chain Finance (SCF) with the use of the Internet of Things (IoT) benefit a business's supply chain along with their stakeholders. The focus is on improving SCF platforms with the latest technology. IoT devices have been around the market for some time but year by year it has been improving; however, both Blockchain systems and SCF platforms are new and are part of a niche market. Nevertheless, their potential is huge and disruptive. This chapter reviews from multiple literature sources about each component (supply chain finance, Block chain, Internet of Things) informing this research and how they can benefit from each other with their integration.

Supply Chain Finance

Templar et al. (2016) believes that to figure out the link between supply chain management and financial process, it is critical to first define supply chain management. Templar et al (2016) quotes the meaning of supply chain management from Mentzer et al (2001) as follows:

“The systematic, strategic coordination of the traditional business function and the tactics across these business functions within a particular company and across businesses within the supply chain for the purpose of improving the long-term performance of the individual companies and the supply chain as a whole.”

This explanation confirms the association between the management of an organization’s own supply chain operation and financial process. The definition also highlights the significance of interorganizational connections between supply chain members. This delivers individual organizations an opportunity to seize additional financial benefits such as reduced operating costs by applying vendor managed inventory (VMI) If they can organize initiatives across the business entities that forms the entire supply chain (Templar et al, 2016).

Supply Chain Finance is a method for two or more organizations in a supply chain, including external service providers, to equally create value through means of planning, navigating, and monitoring the flow of financial resources on an interorganizational level (Hoffman, 2005). It is also a set of products and services that a financial establishment offers to enable the management of the physical and information flows of a supply chain (Camerinelli, 2009). The platforms solution represents a blend of technology solutions and financial services that closely connect global value chain anchors, suppliers, financial organizations and very often technology service suppliers. They are meant to improve the effectiveness of financial supply chains by avoiding unfavorable cost shifting and by improving the visibility, availability, delivery, and cost for all global value chain participants (Lamoureux and Evans, 2011). It is the process of enhancing the financial structure and the cash flow within the supply chain (Gomm, 2010). SCF, is an inventive financial solution, it links the bank and capital constricted firms in the supply chain, diminishes the incompatibility risk of supply and demand in the financial flow, and creates value for supply chain with capital restraints (Chen and Hu, 2011). These are a few definitions to help understand SCF; however, the figure below gives a better understanding on the SCF platform mechanism.

The supplier (1) invoices the buyer (2) after ordering and fulfilling the order. The buyer goes ahead to approve the supplier’s invoice (3) and subsequently confirming financial institution of the payment once the invoice matures (6). The Financial institution can sell the invoices to the suppliers at a predetermined discount rate receiving the discounted finance provided immediately. As pointed by Randall and Farris (2009), SCF is based on the concept of lowering the financing cost while enhancing effectiveness and efficiency of financing. It facilitates better financing access by suppliers and, for buyers, longer payment terms. Nevertheless, despite posting several clear benefits for both buyers and suppliers, SCF has experienced a slow adoption. According to Wuttke et al. (2016), there is a time lag in introduction by buyers and adoption by potential suppliers.

The SCF adoption process takes two main perspectives: finance- and supply chain- oriented. The finance-oriented are short-term financial solutions to payables and receivables offered by financial institutions. Whereas, the ‘supply chain oriented’ focuses on working capital optimization of receivables, payables, fixed asset financing, and inventories (Gelsomino et al., 2016). Studies acknowledges the importance of optimization of resources through creation of efficiency in the supply system, but the focus has been on the products, services, and information. Little has been researched on the financial aspects supply chain (Caniato et al., 2016; Lamoureux, and Evans, 2011), but for businesses to maintain competitive advantage, it demands consideration of all aspects of supply chain. After the financial crush and depression of 2008 where financial institutions loan system failed, significance of aligning and streamlining financial flows encompassing better management and optimizing working capital became apparent (Gelsomino et al., 2016).

Integrating Blockchain systems into Supply Chain Finance

Blockchain increasingly used in the payments and by finance institutions due to its security, transparency, trust, and efficiency. As pointed by Guo & Liang (2016) and Nguyen (2016), immutability of the blockchain where no intermediaries can change or tamper with the information enhances security and entrenches trust. Efficient supply chain is a vital part of any business institution that can have a considerable impact on operations and the survival of the project. Organizations confronted with pressures to meet short-term cash needs are looking for a convenient way to manage their capital and supply chain (Pettersson, and Segerstedt, 2013; Lai et al., 2009). Therefore, the need for groundbreaking financial supply chain management solutions has been expanding and that is where FinTech firms have recently been initiating a transformation towards more efficiency and unified solutions (Kate, 2016).

There are many benefits in applying a blockchain system into a supply chain finance platform; here are a couple of ways AXenS, a business that has a leading distributed supply chain finance platform, suggests blockchain can benefit SCF:

The ability to digitally track many components of the supply chain process, this acts as proof of shipment and collection of goods.

Payments can be simplified. All parties on the Blockchain have instant visibility to any part of the contract that has been executed. Payments can be distributed on a Blockchain and automated to create an efficient payment for upcoming transactions.

Resources are transferred from one party to another by digitally signed transactions displayed on the Blockchain. Each transaction can be verified by multiple partners on the network.

The network allows real time visibility of any action taken; this will give businesses faster approvals and payments because of the ability to automate contracts.

A decrease in fraud risk because every action or transaction is conducted by a one source at a time and distribute instantaneously (AXenS, 2018).

The diagram below shows the way AXenS operate their distributed supply chain finance platform between businesses.

Businesses can use supply chain financing to build stronger relationships with suppliers by providing short-term credit that enhances their capital for all parties, reduce currency risk and ultimately improve cash flow. Supply Chain Finance (SCF) companies are rapidly becoming the loaning solutions for the small and medium enterprises (SME). Due to the complexities and shortage of transparency of current supply chain systems adopted by SMEs are not as robust as it should be. However, with SCF solutions integrating emerging technologies like blockchain and IoT to tackle these defects the SCF is set for substantial growth. Applying blockchain can make every payment and every supply chain transaction more transparent, manageable, and easily verified creating end-to-end actual time visibility. IoT provides a unified network of devices, that connect and exchange data allowing for actual time tracking, cutting risk and enhancing finance productivity (Nesbitt, 2019).

The downsides of integrating blockchain into SCF

The potential of adopting a blockchain system is immensely beneficial and it is increasing in double digits over the past few years; however, there are some drawbacks to it. Templar et al (2016) listed the downside of a blockchain-driven SCF as follows:

The difficulty of exchanging crypto currencies to other conventional currencies.

Crypto currencies are referred to as a retreat for illegal actions and tax avoidances.

No clear governed law for smart contracts.

Unclear issues of blockchain scalability, latency and security in the future.

The trade-off between capacity and transaction volumes are not unraveled so far.

Blockchain is not appropriately examined so far.

Encourages fraud impostors to take advantage of the system.

Cost issues of operating a blockchain system are not figured out thus far.

Extensive work is needed to open the system for the complicated environment of organizational supply chains and their suppliers.

Chapter Summary

Even Though SCF is still a niche market, several technological developments are anticipated in the future. In addition to hesitation and resistance, adoption of SCF is faced by challenges ranging from lack of common vision among SC partners, lack of automation causing delays, and limited technological knowhow. Although collaborative approaches have been suggested aimed at reducing procurement cycle time, it is yet to full adopted. A Blockchain partnership with SCF is in its early stages and its potential is only developing, it holds out the possibility of fraud less and cheaper transactions liberating businesses and markets to grow in ways one cannot picture. Next chapter will cover research methods and all possible approaches to this research project.

Reference

Caniato, F., Gelsomino, L.M., Perego, A. and Ronchi, S., 2016. Does finance solve the supply chain financing problem?. Supply Chain Management: An International Journal, 21(5), pp.534-549.

Gelsomino, L.M., Mangiaracina, R., Perego, A. and Tumino, A., 2016. Supply chain finance: a literature review. International Journal of Physical Distribution & Logistics Management, 46(4), pp.348-366.

Guo, Y. and Liang, C., 2016. Blockchain application and outlook in the banking industry. Financial Innovation, 2(1), p.24.

Lai, G., Debo, L.G. and Sycara, K., 2009. Sharing inventory risk in supply chain: The implication of financial constraint. Omega, 37(4), pp.811-825.

Lamoureux, J.F. and Evans, T.A., 2011. Supply chain finance: a new means to support the competitiveness and resilience of global value chains. Available at SSRN 2179944.

Nguyen, Q.K., 2016, November. Blockchain-a financial technology for future sustainable development. In 2016 3rd International Conference on Green Technology and Sustainable Development (GTSD) (pp. 51-54). IEEE.

Pettersson, A.I. and Segerstedt, A., 2013. Measuring supply chain cost. International Journal of Production Economics, 143(2), pp.357-363.

Randall, W.S. and Farris, M.T., 2009. Supply chain financing: using cash‐to‐cash variables to strengthen the supply chain. International Journal of Physical Distribution & Logistics Management.

Wuttke, D.A., Blome, C., Heese, H.S. and Protopappa-Sieke, M., 2016. Supply chain finance: Optimal introduction and adoption decisions. International Journal of Production Economics, 178, pp.72-81.

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