Supply Chain Finance – Exploiting the delta

It doesn’t matter what the difference is – you can exploit it. If you have a gradient in the road, you can roll a truck down it. If you have a difference in temperature, that can be used. You can generate electricity from a temperature gradient. Financiers take advantage of movements in exchange rates – the more volatile the changes the better.

This is the principle that makes supply chain finance valuable. An invoice for $1million dollars payable tomorrow has a different value to an invoice that is due in 3 months time. That difference – that gradient – can be exploited. The question is, who owns the gradient?

There’s a very intelligent and well thought out debate that Taulia have initiated that asks this question. It’s aimed fairly and squarely at the banks and financial institutions that sit between buyers and suppliers – or to put it another way, payables and receivables. Take a look here.

To most people who are not accountants, this can seems complex so it good to be able to distill it down into simple terms. In essence, a supplier can “sell” their receivables. They can get value from the fact that they have money due and get the money today. Similarly, buyers pay early in return for a cheaper price. They’re exploiting the delta – the difference in value between payment now and payment in the future.

A third way is to let a middleman – a bank normally – exploit the delta. They can take a cut of the mutual benefit. And if the buyer and supplier haven’t got the facility to exploit the delta between them, this is fair. As long as everyone is open about it of course.

The point is that the value gradient between a buyers payables and their customers receivables is owned by them – the buyer and the seller – and it is for them to “take control”, as Taulia put it. In a very amusing video, Taulia make the comparison of your house sitter renting out your stuff while you’re away. A trusted third party taking advantage of a situation they find themselves in despite purporting to be offering you a service.

I don’t wish to demonise banks or other financial institutions that take more than their fair share of the payables gradient – exploiting the supplier’s need for early payment. In the past, there wasn’t a great deal that the supplier could do about it. The banks genuinely added value by offering supply chain finance or factoring arrangements that worked – but this is the 21st century. Buyers and suppliers can collaborate directly and take control themselves to exploit the value they have in their – and it is theirs – no one else’s – supply chain.