Three ways trade credit helps spot supply chain disruptions from miles ahead

Mayank Jain   /    Head - Marketing and Content    /    

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    Remember why no one could tell how the spread of a lung-affecting virus led to a toilet paper shortage in 2020?  Just like not many could see the coming of a pricier Christmas in 2021, or why the U.S. Federal Reserve just dropped ‘transitory’ from its inflation talk.

    The answer: A globally constricted supply chain seemed someone else’s problem until it became everyone’s problem. Now close to two years into the pandemic, the economic fallout can be mapped to global trade disruptions, shutdowns in third-world manufacturing hubs or the rising credit risk in an uncertain world like this. 

    We’re looking at inventory issues precipitated by supply-chain challenges, higher cost of sourcing raw materials, packaging and shipping. And thus the world enters into a once-in-two-decades inflationary environment, where even the well-cushioned FMCG companies such as Unilever, Nestle and Procter & Gamble have raised prices by as much as 9% owing to elevated commodity and freight costs.

    The impact becomes evident in Gartner’s monthly COVID concerns tracker, where consumers pegged ‘Product Availability in Stores’ as the fourth highest concern and ‘Prices Going up due to High Demand’ leapfrogged past ‘Spread of Contagious Variants’.

    Clearly, there is another contagion underway and it’s inflation. This time though, it is triggered by inventory mismanagement and at the root lies the opacity and fragility of modern supply chains.

    The way to avoid fire-fighting inflation is to see the smoke rising. If suppliers have enough foresight into trends and deviations to see a marked disruption coming, they can put in place contingency plans and contain the damage. One such metric could be trade credit that can help stakeholders in the value chain enough leg up to avoid a global meltdown.  

    Here are three ways suppliers could use trade credit to crystal-ball gaze.

    Three ways to arrest the butterfly effect in supply chains

    Trade credit - essentially buy-now-pay-later for retailers offered by suppliers - is a reliable benchmark to help offset geo-political, financial or operational risks that could potentially derail long, far-spread supply chains. 

    Here’s how:

    1. Consumption-led yardstick into future-predicted demand.

    A retailer’s ability to offload inventory is a good marker for demand. If a retailer places frequent high value or high volume orders, the supplier agrees to offer trade credit at  robust repayment terms that help the retailer grow at scale. This demand for trade credit is a healthy benchmark to predict demand spikes and factor them into inventory planning and supply chain management.  

    2. More visibility into tier-n suppliers to avoid an adverse domino effect.

    Supply chains are now more complex and intricately woven than ever before. They consist of several suppliers sourcing everything from raw materials to finished goods - forming a horizontal chain where each supplier’s business is dependent on the financial resilience of the one succeeding it. 

    (Sourced from elementum.com)

    Trade credit defaults can be the first warning signals of an impending disruption, arising out of factors that could be operational or market-linked. For example, if a tier-1 supplier defaults on the trade credit provided by the tier-2 supplier, the effects could run upstream and ultimately leave the OEM vulnerable to unforeseen shocks that will create cost pressures. McKinsey finds this visibility down the supply chain to be remarkably low for most companies.

    3. Investment-grade suppliers build in supply chain robustness

    Once companies establish deep visibility into their supplier networks, well beyond the supplier they interface with, it can help them assess the creditworthiness of suppliers in the chain. The investment grade suppliers will tend to keep operations on track, whereas subpar suppliers could come up as weak links - vulnerable to shocks in the region as well as globally. Creditworthiness based on trade credit becomes a safety valve that can help stakeholders in a supply chain contain risks and manage them effectively with a workaround that warrants minimal disruption.

    Trade credit for the next billion

    India’s $500 billion retail grocery market is the largest beneficiary of the trade credit model. In fact, enterprising mom-and-pop stores are leagues ahead of the online grocery stores that amount to 2-3% of the total grocery sales in India. Needless to say, trade credit has been financing India’s small kirana stores, which typically fail to qualify for institutional credit.

    FinBox embedded credit infrastructure can help suppliers identify and manage inventory in real time with our sophisticated AI/ML engines that make account monitoring, underwriting and forward planning a breeze. This will help them ensure inventory reaches where the demand is, and forsee a disruption when a default occurs or when a supplier's creditworthiness gets impacted.

    For a leading B2B online platform, FinBox embedded credit infrastructure streamlined BNPL for small retailers of consumer electronics. Our technology suite helped the platform predict time-sensitive demand spikes in specific regions, increasing average order value by 50%. With the ability to correctly underwrite retailers and offer customized repayment terms, the platform boosted its wallet share of credit as percentage of gross merchandise value to a whopping 250%. By consistently deliveing on retailer needs, the platform gained traction and brought its customer acquisition costs down by 38% year-on-year.  

    To know how we can help you succeed, hit us up here.

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