EXCLUSIVE: “Chain reaction” – Paul Christensen, Previse in ‘The Fintech Magazine’
Previse CEO, Paul Christensen considers how technology and collaboration can unlock liquidity and help supply chains establish their own new normal
COVID-19 has altered economic norms worldwide. However, one area yet to evolve with this changing landscape is the supply chain, which continues to be built upon models that risk becoming overwhelmed by the next shock to the system. Against a backdrop of rising prices and warnings of a ‘bottleneck recession’, I believe banks, corporates and fintechs can work together to help supply chains establish their own ‘new normal’ and build a more sustainable future for global trade.
Looking beyond Covid
It was unfortunate timing that the Suez blockage occurred in the midst of a pandemic that had already put unprecedented strain on supply chains. This pressure was reflected in first-quarter earnings calls in the US, with supplier testimonials painting a bleak picture. Paint maker PPG Industries, for instance, said it had been operating ‘hand to mouth’ during the crisis.
But the reality is that supply chains have been besieged with problems for years – now, with many suppliers pushed to breaking point, there has never been
a better time to take stock and reflect on the need for action. Among the plethora of problems noted by suppliers on the aforementioned US quarterly earnings calls, is issues with stock – or, more precisely, lack of it, hampering companies’ ability to accurately plan inventory and pushing up the cost of doing business. At the same time, there has been strong demand in the US, putting further pressure on suppliers.
When supply and demand are put out of kilter, it has a knock-on effect down the chain and suppliers feel this most acutely, largely because it often results in them having to wait longer to be paid – and the issue is not just the waiting, but also the chasing, uncertainty and stress involved. Buyers who are forced to push up the cost of business due to a lack of inventory foresight, tend to lengthen payment terms for suppliers in a bid to maintain cash
flow. No one can blame businesses for scrambling to maintain liquidity – the cash has to come from somewhere.
But US quarterly earnings calls showed that, despite the litany of woes recounted by suppliers, buyers have remained largely profitable; companies have been protecting their margins by sourcing from elsewhere. It should not be this way, nor does it have to be. With advances in technology, there is no reason why buyers should have to choose between their own liquidity preservation and prompt supplier payment, or switching their sourcing.
With artificial intelligence, it is possible to exercise foresight over one area of supply chains that could be the gateway to further progress – the probability of invoice payment. Machine learning can make a smart assessment of whether an invoice will be paid, based on past payment behaviour. Once it is determined that an invoice will be paid, the cash can be unlocked, instantly. The result is that every supplier can be given a ‘pay me now’ button. This technology can be embedded into accounting systems, offered by large corporates to their suppliers, or used by SMEs to secure larger loans, repayable as they make revenue.
Collaboration is key
This approach, however, requires a collaborative effort – from banks, fintechs and corporates. The good news is, there are benefits for each party. For banks, providing the capital to unlock immediate supplier payment can help them meet their environmental, social and governance (ESG) goals – an increasingly important consideration for investors. For corporates, unlocking their enterprise resource planning (ERP) data in a secure way can enable them to access swathes of small suppliers that would otherwise be precluded from offering their services – traditional supply chain finance options are prohibitively expensive, often outweighing the cost of participation.
And fintechs can provide value to the market in a burgeoning industry in dire need of change. With shortages expected to continue in 2022, the need to update the legacy processes that characterise global trade has never been more glaring. It is unrealistic to expect technology to transform supply chains in one big-bang moment, but the integration of innovative financial technology into legacy trade systems can help businesses of all sizes overcome the impact of shortages and bottlenecks.
The technology is ready and the world is watching. When the stakes are so high, it is crucial industry takes action: technology should play a key role in shaping the ‘new normal’ for the world’s supply chains.
This article was published in The Fintech Magazine #22, Page 87
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