"By taking orders of $2 million, I have to prepare cash flow requirements for $6 million."

This is the common dilemma of many small- and medium-sized businesses (SMB) in the supply-chain world today. They are facing pressure from each tier in the supply chain:

1. The amount of inventory is increasing
2. Cash is required to purchase goods from suppliers
3. Billing/AR is delayed when selling goods to customers

The accounts receivable (AR) terms have become constraints on SMB owners. For example, it is common to experience AR terms for global SMBs of approximately 66 days, 51 days in the U.S., and 53 days in the U.K. To ensure their business, SMBs will often make concessions on the terms; but, if the payment terms exceed an acceptable limit, the constraints will eventually become existential to many SMBs.

A Competitive Lever

Financial terms are becoming a game between the strengths and weaknesses in supply chain, and there’s often a question of whether to prioritize core companies and help them grow bigger, or boost smaller businesses that may be struggling to survive.

Emerging next-gen technologies are becoming an efficient solution, perhaps even an equalizer. But to effectively solve the dilemma of supply-chain financing, in addition to new technologies, it’s also necessary to apply new industry rules to leverage new financial ecosystem thinking and strategies.

The world is ushering in a new era of growth and innovation. New Business 4.0 technologies such as mobile, internet of things (IoT), blockchain, cloud computing and satellite remote sensing are empowering the traditional financial industry. 

Blockchain technology can be used to optimize the supply-chain financial ecosystem, revitalize the accounts receivable of SMBs, enable fast financing, and reduce the account payment period. In essence, supply-chain finance is emerging as a strategic supply-chain management tool. 

By applying blockchain technology to supply-chain financing, accounts receivable can be split and transferred. This can result in the financing time for SMBs to be shortened from months to seconds, which would greatly improve financing efficiency. 

The traditional paper bills that could not be split in the past, now can be converted into an electronic creditor's rights certificate via blockchain technology. The split flow is traceable, all changes are immutable, so that data cannot be manipulated. 

For example, after the first-tier supplier receives the 1 million electronic credit certificates paid by the core company, it can split 700,000 and pay the second-tier supplier; the second-tier supplier can split the 400,000 to separate out and pay to the third-tier suppliers, and so on. As long as this electronic voucher obtains the right to confirm the core company, SMBs in the entire chain can use the voucher to obtain loans from financial institutions and enjoy the same financing costs and efficiency as the core company. 

Blockchain Application

With the advances in blockchain technology, the central bank and the clearing house can integrate the e-ticket system with the supply-chain financial platform to generate supply-chain bills. Supply-chain bills issued by core companies can be split into bills with a minimum face value of $1, so that accounts payable can be split and flowed step by step. Bills of similar nature, such as maturities, can also be aggregated to form a basic asset pool and circulate in the bond market after being packaged, linking the bill market and the bond market, and opening up new financing channels for SMBs. 

Blockchain technology can quickly decompose the credit transmission of core enterprises to upstream and downstream SMBs, which is equivalent to bulk loans. 

How will we prevent fraud on duplicate pledges by warehouse receipts? The blockchain application can be combined with IoT to provide efficient solutions and build a trusted warehouse receipt system. The following is a scenario simulation: 

• Circumstance: 
  • Cloud-based video monitors the live movement of vehicles entering and leaving the warehouse, and electronic fences are installed around the mortgage. 
• Trigger event: 
  • When the mortgage is moved, the system will alert personnel immediately. 
  • This step essentially replaces the monitoring from the bank personnel.
• Action: 
  • All warehouse data will be updated and cross-validated in blockchain in real time and cannot be tampered with. 
• Business benefit: 
  • Before: It would take a week to review the pledge of warehouse receipts. 
  • After: With the help of the blockchain ecosystem, the loan can be released in real time.

Supply-chain finance will enter a new ecosystem stage: the full data model of core enterprises plus upstream and downstream enterprises. The data of order processing, freight tenders and loads, financing, warehousing, and other operational transactions of both core companies and upstream and downstream SMBs are fully transparent in the system. Meanwhile, information for all involved parties, such as logistics and other third-party participants, are integrated to support services for enterprises. In this new ecosystem, core companies play a role in enhancing various credit making transactions data more credible. 

Just as 25 years ago, internet applications began to spread worldwide, till today, our work and lifestyle have experienced transformational change. With the maturity of blockchain technology, it will bring an even more exciting transformation to the world.

Zoe Zou is an engagement manager in the global supply-chain consulting practice at Tata Consulting Service.