Decoding deep-tier supply chain financing

 The unsung heroes of the supply chain

Most supply chain networks include several small suppliers who don’t get an opportunity to access the lucrative financing options available in the market, unlike the big players or anchors of the supply chain. Either they need to wait for months as per the invoice terms or are forced to offer heavy discounts to their buyers for early payments. Typically, a supply chain involves multiple steps, including procurement of raw materials, processing, production, and delivery of the product offerings. This network consists of not just the major players but also the lesser-known suppliers who play an equally important role in creating an ecosystem of international or domestic trade. Lesser-known suppliers need funds to run their business more than the tier 1 suppliers. However, the visibility in a supply chain is mostly limited to tier 1 suppliers. Globally, around USD 500 Billion cash is trapped between corporates and their suppliers, and it peaked in 2020 as the Covid-19 crisis upended supply chains and stalled consumer demand worldwide. The evolution of the supply chain, referred to as SCF 4.0, leverages deep-tier or multi-tier finance to help the smaller suppliers, the unsung heroes of the supply chain, access the funds they require.

 

What is deep-tier supply chain financing?

Deep-tier or multi-tier financing can be easily explained through the illustration below:

                     Deep-tier financing illustration (tier-1 to tier-3)

 

How deep-tier supply chain financing helps the suppliers

The objective of the deep-tier financing model is to ensure that the smaller tier 2 and tier 3 suppliers have an equal opportunity to access funding. The model ensures that surplus funds lying unutilized in the global market can be leveraged by the suppliers who need them, and a healthy and mutually beneficial ecosystem is established.

 

How deep-tier supply chain financing helps banks and FIs

Banks and financial institutions which facilitate the funding get an opportunity to expand their reach and revenue by targeting a larger client base. Their fee income from new customers also increases correspondingly.

 

How deep-tier supply chain financing helps the buyers

The buyers or the anchors get complete visibility of all players across the supply chain ecosystem, which helps them understand the credibility of the suppliers and a general sense of the business operations. For example, if the packaging company goes bankrupt in a mobile assembling chain, it will affect the whole supply chain. But such disruption could have been avoided if the buyer could have extended the financing/early payment opportunity to the packaging company. Having a healthy ecosystem can strengthen the supply chain, taking into account the risk appetite and capability of all the members in the network. All the disparate parties in the chain can view and assess the risk component well in advance and act accordingly through improved visibility. They can also monitor the ESG (Environmental, Social, and Governance) factors.

 

What is hindering the increased adoption of deep-tier supply chain financing?

Though it seems like a win-win situation for all the parties involved, small suppliers are still underserved, which could be due to one or more of the following factors:

• A full drift is required to resolve the interoperability issue so that networks across geographies can be brought together under a common supply chain ecosystem. A network of networks is a possible resolution of this issue, but it requires significant investment in terms of time and money.
• There is a lack of a globally accepted, unified, and regulated approach for managing these networks.
• There is no standardization of electronic trade documents.
• Government initiatives should be made much more effective and lucrative for the exporters or suppliers.
• The ecosystem needs an affordable and scalable alternative to break the capex barrier and reach the underserved suppliers.

 

Deep-tier adoption models

Multilevel penetration approach by banks

Multilevel marketing is a well-known strategy used to onboard new customers through existing customers. Typically, in an automotive company, there are several suppliers of components such as chassis, engine, body, steering system, brakes, tyres, etc. Banks can penetrate this relationship further and onboard these component suppliers of the automotive company. This approach will eventually increase the banks’ revenue opportunity, and the suppliers can reap the benefit of lucrative financing options.

 

Platform-based approach

Once the new customers are onboarded, banks can navigate to a new model of an ethical, accessible, and scalable platform. The platform will allow all players in a supply chain to access favorable terms and several forms of funding and down payments quickly regardless of their business size, economic status, and financial position. This will resolve the issue of bringing all the players together and provide a level playing field to smaller suppliers.

 

Nowadays, all banks or financial institutions offer a user-friendly self-service front-end to serve their customer needs—from onboarding their trade parties to requesting financial assistance. These portals/platforms can be tweaked a little to replicate the deep-tier supply chain financing model to help the underserved entities. Ideated from the multilevel penetration approach,  the following three approaches can be employed towards this end where banks can move further towards building relationships with the subsequent automotive company suppliers.

 

Solution 1—Without child program

The platform will empower the suppliers of a supply chain financing program to onboard their subsequent suppliers and link them to the program. This will ensure visibility across the chain so that if a tier 3 supplier raises an invoice to its immediate buyer (Tier 2 supplier) and the immediate buyer accepts, the final buyer or anchor of the program can view the invoice details and extend financing or early payment options to the tier 3 supplier through the platform.

 

Solution 2—With child program

The suppliers in the platform can onboard their suppliers, create subsequent programs with them, and link the program with the parent one. This whole process of onboarding and creating the child program is managed from the web-based platform. The final buyer may opt for Early Payment Discounting (EPD) or financing based on capacity and appetite. Embedding a relationship tree structure and displaying it in the platform dashboard will improve transparency.

 

Solution 3—Invoice assignment approach

The initial steps in this approach are similar to that of solutions 1 and 2.  The only difference is the operating model, wherein the invoice amount raised by the tier 1 suppliers will be assigned proportionately among the related parties, and the final buyer will act based on this proportion. When a payment has been processed by the buyer based on the invoice raised by the tier-1 supplier, subsequent suppliers across the chain will also get paid proportionately

 

Conclusion

The eventual goal of deep-tier supply chain financing is to reach the bottom of the supply chain and serve those underserved. Banks’ alternative web-based model and multilevel penetration approach will enable the buyer/anchor, their tier 1 suppliers, and subsequent suppliers in a common framework at a lower cost.