For decades, businesses optimised supply chains at the expense of strengthening their ability to absorb disruption. The Covid-19 pandemic prompted a major re-think, forcing them to face existential questions typically side-lined before.
Nearly three quarters of businesses experienced supply-side disruptions due to the pandemic.1 Less than half had a contingency plan and struggled to ensure business continuity. While a pandemic might be relatively rare, major disruptors including trade wars, military conflicts, labour disputes and supplier bankruptcies can occur at any time. The impact of such events is huge because the world is interconnected.
“Supply chain disruptions can frustrate buyers and suppliers alike,” said Michael Sugirin, Global Head, Open Account Trade at Standard Chartered. “The inability to send or receive goods can impact the bottom line for both parties and damage business relationships. Logistically, buyers would need to scramble to find alternative suppliers amid disruption, while suppliers must weigh the repercussions of force majeure and extended business impact.”
Mother of reinvention
Fortunately, the crisis coincided with two emerging trends. Firstly, global trade tensions had already persuaded many companies around the world to begin diversifying supply chains. Secondly, technologies harnessing artificial intelligence (AI), the Internet of Things (IoT), 5G and blockchain were beginning to transform traditional linear supply-chain models into more flexible, nimble and transparent digital network.
These technologies enable businesses to accurately estimate inventory, optimise production, better assess final demand, manage known risks and prepare for unknown risks. Alibaba’s Xunxi Digital Factory, which opened in September 2020, provides a glimpse of this future. Production at the factory is driven by AI and IoT and steered by real-time insights gathered from the company’s e-commerce platforms, enabling it to quickly respond to changes in the commercial landscape and cut order lead times by 75 per cent.2
This move towards automated real-time order management and forecasting will define future supply-chain resilience.
Transforming supply-chain finance
While there has been rapid progress in the digitisation of physical supply-chain processes, supply-chain finance has lagged, leaving many businesses struggling to support their expansion or realignment. Manufacturers need financing solutions that integrate with their supply-chain platforms.
Banks and financial institutions play a strategic role in process integration. Nearly 80 per cent of banks in a recent survey listed digitalisation as a top priority for enhancing their trade finance models.3 As they overcome obstacles and employ digital technologies, businesses will benefit from greater platform integration.
“Banks bring a few things to the table regardless of whether it’s documentary trade, open account or something else,” said Samuel Mathew, Global Head of Documentary Trade at Standard Chartered. “We are the trusted intermediary that settles the trade (settlement). We are the party that mitigates the risk (capital), and we are the party that does the financing (liquidity) when it’s required. Even as trade finance becomes digital, the ability of connector banks like Standard Chartered to provide these elements at scale will remain a differentiating factor.”
Yet, change is challenging. On the supply chain finance front, banks cite the lack of a platform as the biggest hurdle when it comes to rolling out solutions.4 By contrast, agile fintechs can quickly develop platforms and other trade solutions but often lack the confidence that banks offer. That’s where collaboration comes in. Today, some of the more widely adopted digital finance solutions are rooted in bank-fintech partnerships.
“Financial institutions are building strong partnerships with fintechs, B2B and P2P platforms,” Sugirin said. “This has given rise to financing models where a wider variety of participants come together to deliver seamless client solutions. For instance, customers that use B2B platforms for procurement forecasts, sales orders, and inventory tracing may extend the experience to include financing and exchange of payments using the same infrastructure.”
While banks are both big innovators and buyers of enabling technologies, good relationships and an understanding of their clients’ businesses remain central to success: “Sometimes it’s not just about platforms and solutions, it’s about knowing your client’s business,” Mathew said. “That means understanding unique challenges as well as simple things like electronic signatures or e-mail with irrelevant requisite indemnities and figuring out the best way for clients to get their goods quickly and sort out their process inefficiencies such as dealing with physical documents.”
The biggest gamechangers
Blockchain and artificial intelligence are arguably the biggest gamechangers for supply chains across trade finance, logistics and more.
AI empowers financial institutions to better assess risk and profitability. Using inventory data and monitoring turnover, for instance, a lender can assess a company’s performance in real time and forecast growth. Distribution companies can use AI combine geo-location data from delivery personnel with order demands to optimize delivery routes. The result is lower risk and greater efficiency.
Technologies such as blockchain enhance trade through greater transparency and trust: “Previously, paper was the only medium of trust in global finance, added Mathew. “This process was slow, inefficient and prone to logistical disruptions in situations like Covid-19. With blockchain, it’s easy to achieve singularity of record and manage data without using any paper at all provided all parties are part of the consensus mechanism in an open or private permissioned blockchain network.”
Last year, Standard Chartered completed the first cross-bank Letter of Credit between Vietnam and Thailand conducted over blockchain for a USD50,000 shipment of plastics. Using the blockchain-based open industry platform Contour, the trade participants reduced processing time from as much as to five days to seven hours.5
While the benefits are clear, adoption of these technologies remains low. Only 10 per cent of supply chain professionals use blockchain, while 12 per cent use AI. Inadequate legislation and a lack of awareness are common challenges. That could change by 2025, with industry players tipping blockchain and AI usage of 56 and 60 per cent, respectively.6
“Local legal systems in many countries today do not recognise the legal enforceability of electronic title documents,” Mathew said. “Getting there comes down to the widespread adoption of existing international standards such as the model law of electronic transferable records drafted by the United Nations into local legislation and then relying on technologies such as blockchain or global titles registries to solve for singularity of goods title.”
Digitisation offers the opportunity not just to build resilience in complex global supply chains, but also extend the benefits of the system along every point in those chains.
“Standard Chartered works with clients to seamlessly integrate the financing transactions they do with us and the supply-chain platforms they deal with,” Mathew said. “More importantly, as supply chains re-configure and move across geographies, we are working with clients to make sure they have the financing and facilities they need to scale up.”
Produced by Bloomberg Media Studios in partnership with Standard Chartered.
This article is part of our ‘Digital Transformation’ series, exploring digitalisation trends to build resilience, efficiency and achieve transformative growth.