Supply Chain Finance on the Blockchain Enables Network Collaboration
What do Diageo and Tesco in the UK, Woolworth in Australia, and Carrefour in France have in common? Beverage giant Diageo recently decreed that it would require 90 days to pay its suppliers. Accusations of “shakedowns and “bullying” related to similar attempts to improve cash flow at the expense of their suppliers were also leveled at Tesco, Woolworth, and Carrefour. Facing public pushback, Diageo agreed to climb down to 60-day payments. Tesco had to accept changes to its supplier management practices. The Woolworth and Carrefour cases are ongoing.
Large buyers have long-wielded the big stick over (usually smaller) suppliers. This buyer-takes-all era of payables management, if not at an end, seems to be in remission. However, the acute pressure on every supply chain actor to optimize working capital, which led to the imbalance, remains. Apex stakeholders have led many a supply chain innovation for optimizing the flow of products. Product flow innovations have included analytic frameworks such as demand-driven supply chains (DDSN), practices such as vendor-managed inventory (VMI), and strategies such as incentive-matching contracts of dizzying sophistication. Optimizing the flow of money across the supply chain has been more challenging. Trade payables make up 20% of corporate liabilities. Thus the prevalence of inequitable “solutions” like the ones described above.
The post-Recession slowdown in lending and recent retrenchment of multinational banks pushes cash-constrained suppliers closer to factors and other similarly expensive financiers. SME suppliers often require capital injection from their better-established apex buyers. All of that increases the cost of goods for apex buyers, reinforcing a propensity to pressure suppliers. A perfect vicious circle!
Though we’re experiencing a time of flat demand, the pressure on costs hasn’t gone away. Indeed, it’s become more acute. Yet, it is no longer practical to pressure Tier 1 suppliers and expect them to pass on the big squeeze. Cost reductions have to come from across the supply chain, from each according to his ability, so to speak. In that effort, supplier finance can go from being heavy to being an enabler of a new – intrinsically collaborative – form of supply chain management.
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In mainstream supply chain management, collaboration typically refers to activities geared to improving efficiency by sharing demand patterns and synchronizing other business activities. However, if the motivations of interacting firms aren’t aligned, collaboration can actually exacerbate disruption. Unless care is taken to align and monitor incentives, collaborative activity – in design, planning, marketing, or inventory management – may yield small or negative benefits.
Western, largely American, initiatives such as VMI, Collaborative Forecasting, Planning and Replenishment (CPFR), and Continuous Replenishment have scored impressive benefits for apex buyers such as Walmart and leading suppliers such as Proctor and Gamble. Note that such collaborations are almost always monogamous: between one buyer and one supplier.