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Achieving Win-Win by Transforming Buyer-Supplier Relationships

by Chris Schmidt, Global Trade & Supply Chain Solutions Product Manager,
Bank of America Merrill Lynch

The development of supply chain finance solutions heralds a new era in international trade, and new collaborative technologies promote information sharing on a scale that was formerly impossible. Now buyers and sellers can share information and boost the efficiency of the whole supply chain while substantial amounts of cash can be released and put to better use.

Collaborative web technologies can provide a seamless flow of information between business partners.

Globalisation has produced many benefits for companies, which include new sources of customers, supply and capital. But all this comes at a price. Ownership of a complex global supply chain is costly and is usually not a core competence. Some companies have reacted by outsourcing the supply chain. In practice this usually means reallocating assets to focus on delivering value to customers while transferring ownership of the supply chain to trading partners. Companies have simultaneously reduced operating costs and addressed evolving market needs by building worldwide networks of suppliers. But outsourcing too has drawbacks.

In many cases, increased asset efficiency and cost reduction have been achieved at the expense of information transparency and control. Some companies have lost vital information that helped them anticipate market demand and allocate capital efficiently. When the supply chain is outsourced, companies depend on trading partners to provide this information. Moreover, trading partners must be relied on to be viable producers in the value chain. Here we explore the role of technology in clarifying the dynamics of the globalised supply chain. We also propose a methodology by which companies and their suppliers can collaborate, to their mutual benefit, to release significant amounts of cash that are currently locked in the supply chain.

Open technology increases transparency

Collaborative web technologies can provide a seamless flow of information between business partners. Uniform information creates an opportunity for companies to improve the speed of delivering value to customers. Furthermore, as just-in-time inventory management is introduced to the supply chain, costs can be reduced and profitability increased. However, success requires the right incentives. All parties in the supply chain must realise tangible benefits, thus cost reductions must be genuine and not merely shifted upstream to suppliers. Universally, companies need accurate, transparent information on all aspects of the financial supply chain and this must be readily available. However, there are other considerations too.

The shift from letters of credit to open account

Many buyers have recently changed their payment mechanisms from letters of credit (LC) to open account (OA).  Why? In most cases, it is to reduce credit line utilisation and finance costs. Using OA, a buyer can introduce a time buffer to inspect goods, reconcile accounts, and apply credit memos before making payment. But suppliers may lack visibility regarding the timing of payments: presentation of documents for a shipment does not automatically trigger the payment term. Payment timing often varies and this can complicate cash flow forecasting. In addition, the variability in payment timing can make it difficult for a supplier to access attractive financing.

Most companies acknowledge that such strains on suppliers are detrimental to all. If suppliers cannot forecast cash accurately, or raise cash efficiently, they will not be able to fulfill orders in a timely manner, and buyers lose out. Liquidity strains in the supply chain can severely limit a company’s ability to reach its full market potential. Banks offer supply chain finance (SCF) solutions that can help relieve such strains before they cause harm.

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