Commerce is global. As economies have evolved, so have the options to source materials and services to support the operations of an effective supply chain. Manufacturers have capitalized on their expanded avenues to procure goods at the lowest cost or with the fastest delivery, depending on their needs. This which often entails engaging with vendors in multiple locations, and often in different countries.
This expansion of choice has had a positive impact on manufacturing, and ultimately on customers that purchase products at a lower cost and higher quality. However, suppliers and manufacturers face financial supply chain management challenges due to nuances in transactions such as cross border payments, tax implications, and speed of settlement. Luckily, there have been improvements in technologies that enable monitoring and automation of invoicing and international payments which accelerate transactions and ensure smooth operations.
The process of buying or “procuring” an item to the final invoice payment is called procure to pay1 and it has multiple, required steps. While in consumer purchasing scenarios there has been rapid adoption of electronic payments methods, B2B purchasers have been slower to embrace the trend and instead rely on paper checks and manual processes.2 However, this slow adoption means that critical working capital is often tied up in inventory and represents a significant opportunity to improve the B2B payment process. Here are four options businesses can consider when evaluating ways to support seamless, secure B2B payments in their supply chain management strategy.
Global Trade Management Solutions
Invoicing and payments cannot exist by themselves in a supply chain, but are part of a larger series of interrelated and interdependent operations, called global trade management (GTM), that requests, orders, transports and settles all of the goods and materials within a supply chain.3 Before making a payment, organizations must ensure the goods and services they purchased are worth the money spent.
There are multiple vendors that develop software that integrates with existing technology infrastructure to manage these transactions with the intention of giving greater visibility into materials transportation and compliance risks. The software can also screen customers, countries and carriers identifying the best options for each. This software takes out the manual processes of calculating shipping costs, taxes, and risk analysis in a global supply chain which results in a better understanding of current financial health and supports more accurate and timely B2B payments processing.
Once an organization is satisfied with the goods or services from a vendor, there are multiple options for payment. As stated earlier, invoices can be issued and a manual payment via check can be made, or organizations can leverage the SWIFT system (Society for Worldwide Interbank Financial Telecommunications) that transfers money between financial institutions using a vast messaging network. The network securely transmits information and instructions between institutions by identifying accounts by the institution code, the country code, the location or city code, and the individual branch code.4
The system identifies accounts from an originating branch to a receiving branch using a recipients account number. The originating bank will send a payment transfer message over the SWIFT network about the transmitting payment, and once it clears the money will be credited to the receivers account as part of the supply chain invoicing process. While this method is secure and fast, the drawbacks are that the system is only a messaging system telling the banks to transfer funds but it does manage money and transfers can take between one and three days.5
An emerging technology that supply chain decision makers can evaluate to transfer funds between financial institutions is Blockchain, the foundational technology of Bitcoin. This technology will allow companies to make and confirm instantaneous transactions across a dispersed network without a central node such as SWIFT. This distributed model is still in its infancy, however several top financial institutions are experimenting with Blockchain and it is heralded as a secure and transparent way to track assets and confirm transfer of ownership, in this case B2B funds in an international supply chain. This method could provide a seamless and secure transfer of money between suppliers and vendors, however, as an unproven technology, it will need additional evaluation and vetting before widespread adoption.6
Supply Chain Financing
The final option to enable faster B2B payments in a global supply chain doesn’t actually transfer money immediately, but instead supports effective distribution of funds for both supplier and vendor. Supply chain financing, also known as supplier finance or reverse factoring,7 allows businesses to lengthen their payment terms to suppliers by using a bank as an intermediary. The supplier sells its invoices to a financial institution instead of invoicing the manufacturer directly. The manufacturer then has the option for longer payment terms with the financial institution and the supplier has faster access to funds to continue producing goods and services. This benefits both supplier and manufacturer as it frees up capital that was earmarked for payments, and enables corporations to put that capital to work in other areas of their business.
Each of these four solutions enables more visibility and communication of financial transactions between suppliers, manufacturers and financial institutions, ultimately enabling faster and more secure B2B payments in a supply chain. As decision makers evaluate and implement solutions, traditional invoicing and check payments will continue to be be replaced with technologies that facilitate greater speed and flexibility in processing supply chain finance and help streamline the supply chain management process.