Supply Chain Financing on a Budget Explained
As consumers, we don’t always know how a product gets on the shelf. The entire process of researching, developing, testing, manufacturing, distributing, and marketing is almost invisible to end-users except for those involved.
In recent years, consumers started to feel the squeeze when their favourite brands became unavailable in the market and when it became difficult to meet their daily needs. Consumers don't need to know how supply chain financing and management works. It is normal. But INFT, as one of the leading neo-banks in the region, we have our eye on the ball.
When something major happens, then it hits everyone. When the supply chain is ill-equipped to deal with emergencies, we are all in the same boat.
With the right supply chain financing, it lowers costs and improves efficiency. And even when emergencies occur, manufacturers, wholesalers, distributors, and retailers will have enough working capital in the supply chain to keep things moving to minimise the effect on end-consumers.
So, if you’re not familiar with how the supply chain works, let’s take a quick look at how your favourite products reach the shelves.
1 - Mobilising Money at Different States of the Supply Chain
The supply chain moves to the drumbeat of an optimised system that moves raw materials up the supply chain. Although each element of the supply chain involves a series of steps, the common players in the supply chain are the producers or manufacturers, vendors, warehouses, transporters, distributors, and retailers.
Each step of the way, financing needs to be pumped into product development, operations, distribution networks, customer service, and marketing. Financing a whole supply chain starts with understanding customer demands and funding each function along the way to make that happen.
The way each player in the supply chain is funded depends on the types of business financing it needs. The most popular of which is funding the business with working capital, offering each component with supplier financing or reverse factoring and, down the line, we could also offer Buy Now Pay Later or other forms of dynamic discount.
The popular types of supply chain funding are small business loans, Purchase Order Financing, and Invoice Factoring.
2 - What Does Supply Chain Financing Solve?
Sometimes, supply chain financing involves a single agreement between all parties involved with one financier. Other supply chain financing programs are offered to individual companies under a single platform.
The different funding programs aim at solving the problems faced by wholesalers, distributors, retailers, manufacturers, and consumers. It’s a big bag of complex problems to solve.
An example will be the kind of financing that solves the high cost of maintaining an inventory, which means ensuring the distributor in the chain can manage its inventory efficiently. The distributor, after all, plays a crucial role in having an on-point system of managing in-going and out-going stocks, and ensuring adequate supply.
Traditionally, the tallying-up of stocks in the inventory is a manual task. But with the advent of the modern software and dealer distribution management systems, the workflow has become far more structured and productive. They’re powerful and ensures optimized supervision of resources at hand. On the downside, it can also be both costly and cost-effective in the long run.
This is, perhaps, when a wholesaler or distributor needs supply chain financing the most.
All around the world, various industries have begun investing money into the latest technology, training, and upgrades to their workflows to meet new trends and standards. Customers now demand faster, better, more efficient, and the almost instant meeting of their demands.
3 - The Benefits of Supply Chain Financing
As mentioned, every industry is different. For example, in the case of a clothing manufacturer, it needs funds to procure raw materials which obviously involves bulk purchases of fabric, buttons, zippers, threads and many other components.
The manufacturer incurs a lot of cost to purchase raw materials, machinery and its maintenance, hire labourers, maintain quality control, just to name a few.
The supply chain financing will obviously bring about better cash flow, intelligent distribution of resources, and sensible deployment of manpower. It stabilises the supply chain at the lowest cost possible and while funds is directed to where it is needed most.
Distributors can optimise their working capital by getting paid faster (or almost immediately, depending on the kind of supply chain financing it goes with) resulting in improved working capital statuses. With enough funding at this stage, distributors can also better forecast accuracy in incoming payments and adequate stock.
For all buyers, having the right supply chain financing reduces the disruption to the supply chain movements and strengthens the relationships.
The most important part of supply chain financing is that sellers along the system will get paid faster or are given extended payment terms, freeing up cash flow and leaving their working capital untouched. Supply chain financing also gives all involved more flexibility.
In recent years, the biggest benefactors of such flexible financing are small and medium suppliers who are exposed to unforeseen circumstances that threaten their ability to meet demands and receive payments, as seen during the COVID-19 pandemic.
It forced companies to go into cash preservation mode, lower their financial risks, and rethink their supply chain structure. With a low-cost, flexible supply chain financing programme, everyone will benefit from it.
4 - How Supply Chains Work
Before deciding on a single supply chain financing program, most financial institutions consider the supply chain model and its overall strategy. Based on its evaluations and findings, it will then offer a scheme to improve cash flow, promote efficiency, lower risks, and enhance workflow.
An example would be the continuous flow model which involves companies that manufacture, distribute, and sell only a few products that do not change over time. Classic examples would be foodstuff, commodities, daily essentials with short shelf lives, and more. The products are also almost always identical, in high demand, and require little redesign over time. Raw materials are replenished quickly and continuously to reduce bottlenecks which can disrupt the chain of events that follow.
The fast chain model is commonly used by companies producing and distributing products based on trends; the demand for these products fluctuate over time. The production, design, and R&D team are always moving at a blinding speed to catch up to and meet market demands. Good examples would be electronics, fast fashion, and eCommerce.
The flexible supply chain model involves companies that face high surges (often predictable) in demand at certain times of the year and then experience a dip after that. It can happen once a year or a few times.
An example would be seasonal merchandise, smart devices, and household appliances. These companies must quickly adjust before the approaching uptrend, and then shut it down as soon as the demand tapers off. Their forecasting, management of inventory, and incurrence of labour costs must be highly diligent and accurate.
Singapore imports approximately 55 million SGD in goods from all around the world, mostly from Malaysia, Taiwan, China, and the United States. Companies who rely on international trade should consider alternatives to global payment solutions to streamline their invoicing and payment workflow because it can be a very manual and time-intensive process.
5 - The Key Factors in the Supply Chain
Starting with predicting the demand, the company will start strategizing its inventory and manufacturing process to ensure that supply meets demand. Once that is in place, the company will then begin to source raw materials that can go into production and streamline workflow to help them be ready for the market.
During the stage of assembling, the company would also be running tests to ensure the products or services meet industry standards. The later stages of the supply chain management process involve the packaging and shipment of finished products to the distributor, retailer, or consumers.
Let’s not forget that also in this supply chain, customer service and warehousing are, once again, involved because there almost always is a case of returned items. Not having a plan for this could damage long-term relationships.
Supply Chain Management Financing Bolsters Financial Crunches
SMEs in Singapore was deeply affected during the global pandemic and highlighted the need for financial safety nets and flexible financing. INFT offers just the right kind of financial solutions that can be customised to meet the needs of the industry at various stages of the supply chain.