Using Carrots and Sticks to Sustain Supply Chain Finance
Orbian Chairman Tom Dunn talks about the FinTech’s evolution after years of revolution.
Eighteen years after its inception, too many people still think of Supply Chain Finance (SCF) in terms of facile slogans like ‘Win-Win’ and ‘Credit Arbitrage,’ says Orbian Chairman Thomas Dunn. But that’s a false narrative. “The narrative is actually one of sophistication,” he says.
Dunn wants the industry to know that SCF is a very flexible and adaptable tool that is constantly evolving in order to ever better support the complex negotiations and long-term relationships between procurement and sales.
“Four years ago, we said that it was time for SCF to ‘go to college,’” says Dunn. “As SCF moved into its later teenage years, it needed to abandon adolescence and take down the posters of Che Guevara on the wall.”
Thus in 2013, Orbian enlisted researchers and academics at Germany’s prestigious European Business School to analyze data points parsed from hundreds of millions of real transactions in order to map out a more sophisticated view of the supply chain landscape.
“It gives us a topography for creating what we’re going to call ‘sustainable’ supply chain finance programs,” explains Dunn. That means incorporating triggers based on the data gleaned from the behavioral performance of the supplier in order to induce better terms and offerings from the buyer.
On one level, if a supplier reduces the price of goods, the discount rate on the SCF program comes down, too. At another level, if a supplier moves from 95% reliability of delivery to say 98%, again, they get a reduction in price and a more favorable rate in the supply chain program. Dunn says that by moving to carbon neutrality or closing a factory using child labor, for example, those social and environmental considerations can be brought into the equation.
“Sticks and carrots are being used to reward good behavior,” he adds.
How sustainable SCF works
First, a successful SCF launch must focus on harmonization of payment terms across suppliers — not picking off weak links in the supply chain. “It’s all about creating a level playing field to kick off individual negotiations, which can take place elsewhere in the buyer-supplier relationship,” explains Dunn.
Second, give suppliers the flexibility to get discounts whenever they want one. Sometimes there’s a need for cash, sometimes it’s to accelerate receivables, other times it’s neither. But price it accordingly, he says. It’s an important mechanism to persuade otherwise reluctant suppliers to participate in SCF programs.
Third, and this is where Dunn says the research and analysis has really paid dividends, is to offer suppliers a fixed-rate discount option on the term of their contract with customers, so they know that they are no longer exposed to LIBOR variations.
Investing in the future of SCF and beyond
As the field competing for these deals becomes more crowded, Dunn doesn’t view it so much as a threat as a massive opportunity. “When I see the emerging technologies, particularly on the analytical side, it’s going to enable us to broaden the product offerings up and down the timeline,” he says.
Going forward, Orbian is focused on what he calls approved endorsed financing. “There are exciting developments in the FinTech world around the period of pre-approval that will bring an interesting set of options,” he says.
Also, allying with big invoicing companies, like ob10 and Tungsten, will ensure that SCF will always be an at-the-ready, treasury management product to be deployed at the touch of a button in sales negotiations.
With its robust R&D budget, Orbian is at the forefront in the development of fixed-rate alternatives, sustainable SCF programs, and the technicality of SCF. “We’re consistently creating the most innovative finance solutions,” says Dunn. “At the end of the day we’re offering a tool, but it’s a tool enabled by the world-class quality of Orbian’s professional staff and services.”
The original article can be found here.