Supply pain? How invoice compensations might relieve the pain of the supply chain.

So far, “Byppay or not to pay” was a dilemma in clear favour of debt cancellation by means of invoice compensations with the help of byppay. In this publication, we aim to provide a comprehensive understanding of how the invoice compensations by Byppay pave the way for a more efficient supply chain.

Supply chains encompass all the stages involved in the production and distribution of goods, from raw materials to the final product. There are several general problems that can occur in supply chains:

1. Supply Chain Disruptions: Any unforeseen event like natural disasters, geopolitical tensions, or factory accidents can disrupt the supply chain. For example, a flood can affect the transportation of raw materials, delaying the entire production process. As an example, this has happened in the recent Covid19 pandemic and the Ukrainian war.

2. Demand Forecasting Errors: Incorrectly predicting the demand for a product can lead to overproduction or stockouts. This is especially problematic in industries with perishable goods like food.

3. Inventory Management Issues: Holding too much inventory incurs high costs, whereas holding too little can result in unfulfilled orders and lost sales.

4. Quality Control Problems: Inconsistent quality in raw materials or manufacturing processes can lead to inferior final products, affecting a company’s reputation and revenues.

5. Lack of Visibility and Transparency: In large and complex supply chains, it can be difficult to track and monitor the movement of goods. This lack of visibility can result in inefficiencies and increased risk.

6. Regulatory Compliance and Ethical Concerns: Different countries have different regulations and standards regarding product quality, safety, and labour practices. Navigating these requirements is often challenging.

7. Cost Fluctuations and Margin Pressures: Changes in the prices of raw materials, labour, or transportation can affect the costs involved in the supply chain, impacting the profitability.

8. Complexity in Global Supply Chains: Managing supply chains across different countries involves dealing with different cultures, languages, currencies, and legal systems, which increases complexity.

9. Environmental Concerns: As environmental sustainability becomes a growing concern, managing the environmental footprint of the supply chain is an increasing challenge.

10. Insurance services for all the former problems. Especially in international trade, with the inconveniences that clarify the responsibilities of the participants in the supply chain, and insurance services cover the risks.

11. Last, but not least, funding required to smooth payments along the supply chain. As one late payment can result in a chain of insolvencies that magnify the list of issues 1 to 10, then funding is required to feed the cashflow of the participants in the supply chain.

Example: Supply Chain in the Food Industry

Let’s consider a company that sources oranges from various orchards to produce orange juice. The supply chain involves orchards, transportation companies, juice production facilities, and retailers.

1. Perishability of Goods: Oranges are perishable. Any delays in transportation or production can lead to spoilage and waste. For instance, if a transport truck breaks down for a couple of days, the oranges may rot, affecting the entire production schedule.

2. Quality and Safety Regulations: The company has to ensure that the oranges are free of contaminants and the juice production adheres to food safety standards. A batch of oranges infected with pesticides can not only affect the production but also lead to regulatory penalties and brand damage.

3. Seasonal Variability in Supply and Demand: The supply of oranges is seasonal, while demand for orange juice might be more constant. Predicting these patterns and adjusting production schedules and inventory is challenging.

4. Cost Pressure: Fluctuations in the prices of oranges due to weather conditions or other factors can impact the cost of production. The company needs to manage these fluctuations without significantly affecting the retail price.

5. Environmental Sustainability: The company may face pressure to reduce its carbon footprint. This involves managing transportation efficiently and ensuring that the orchards follow sustainable farming practices.

6. Global Supply Chain Issues: If the company sources oranges from different countries, it has to manage the complexities of international trade, including tariffs, customs, and foreign exchange rates.

7. Cashflow issues: the supermarket pays late to the distributor who in its turn pays late to the farmers and they cannot pay their product or machinery suppliers. The weakest in the chain usually are the farmers, who take the most of the production risk, and despite having good clients, despite being viable, they often are excluded from banks funding so they struggle to pay their suppliers, and the problem goes downstream the supply chain.

Possible Solutions in the Food Industry Example:

1. Implementing Technology for Better Forecasting: Using data analytics and machine learning to better predict demand and optimize inventory levels.

2. Building a Responsive Supply Chain: Developing relationships with multiple suppliers and having contingency plans to manage supply chain disruptions.

3. Adopting Sustainable Practices: Incorporating sustainable farming practices, optimizing transportation to reduce carbon emissions, and utilizing renewable energy in production facilities.

4. Enhancing Visibility through Traceability Systems: Employing systems like blockchain for better traceability of products from farm to consumer. This can also help in quickly pinpointing and addressing quality issues.

5. Engaging in Strategic Partnerships: Forming partnerships or alliances with other companies or suppliers to share resources and expertise can help in mitigating some of the supply chain challenges.

6. Engage in creative agreements for enhancing their liquidity: Forming agreements with their clients and suppliers for invoice compensations, for example.

By addressing these issues and employing strategic solutions, companies in the food industry can create more resilient, efficient, and sustainable supply chains.

Let’s focus on the financial issues in the supply chain. When a supply chain involves several companies, each issuing invoices to the next in line for the products or services they provide, this creates a cascade or circuit of invoices. This structure is common, yet comes with several problems:

1. Delayed Payments: If a company at the beginning of the supply chain has payment terms of 30 days, and subsequent companies have similar terms, it can take a long time for payment to reach the end of the chain. This can create cash flow issues for companies further down the line. Let imagine someone adding unilaterally further delays of 60 or 90 days…

2. Dependence on Predecessors: Each company in the chain is reliant on the company before it to make a payment. If any company fails to pay on time, it can cause a domino effect, with each subsequent company also being unable to pay its invoices on time.

3. Increased Costs and Reduced Profitability: The cost of capital for financing outstanding invoices can accumulate across the supply chain. Each company may have to bear the costs of borrowing or face opportunity costs due to tied up capital. This reduces the profitability for all parties involved.

4. Complexity and Administrative Overhead: Managing and tracking multiple invoices throughout the supply chain can be complex and time-consuming. This administrative burden can also lead to errors.

5. Risk of Bad Debts: If a company within the chain becomes insolvent and is unable to pay its invoices, it can lead to bad debts for its suppliers, which can have knock-on effects throughout the supply chain.

Solutions so far have been Banking Solutions:

1. Supply Chain Financing (or Reverse Factoring): Financial institutions can offer supply chain financing, where they pay the supplier’s invoices on behalf of the buyer, who then repays the financial institution at a later date. This can help to alleviate cash flow issues for suppliers and ensure that payments are made promptly.

2. Factoring: Companies can sell their accounts receivables to a third party (a bank or financial institution) at a discount. This allows them to receive immediate cash, while the factoring company takes on the responsibility of collecting the payments.

3. Letters of Credit: A letter of credit from a bank guarantees that a buyer’s payment to a seller will be received on time and for the correct amount. This can provide security and assurance for transactions within the supply chain.

4. Trade Credit Insurance: Companies can take insurance on their receivables. This can protect them in case a buyer fails to pay, thus reducing the risk of bad debts.

And about Non-banking Solutions…

And as you might have anticipated, I advocate for the need on much more efficient and flexible non-Banking Solutions, by means of new agreements among clients and providers:

1. Invoice Compensation or Netting: As we have explained in former Medium publications, this involves offsetting the amounts owed between companies in the supply chain. For example, if Company A owes Company B €100, and Company B owes Company A €80, then through netting, Company A will just pay Company B €20. This reduces the number of transactions and administrative load.

2. Byppay or other Blockchain-based Solutions: Byppay and similar blockchain-based platforms as an evolution of invoice compensations or netting allow for secure and instantaneous invoice payment agreements along the supply chain, so that one single payment triggers the compensation of many invoices. By tokenizing invoices and using smart contracts for the invoice compensation agreements, these platforms can automate and expedite payments bypassing companies in the supply chain, so that clients pay directly to the suppliers of their providers, ensuring that companies quickly receive solid payment promises and reducing the risk of payment defaults.

3. Dynamic Discounting: Companies can offer early payment discounts. This provides an incentive for buyers to pay earlier, which can help improve the cash flow of the suppliers.

4. Establishing Clear Payment Terms and Policies: Companies can collaborate to set clear payment terms and policies that work for all parties. This can include shorter payment terms, penalties for late payments, and incentives for early payments.

By adopting a combination of these banking and non-banking solutions, companies in the supply chain can mitigate the problems associated with a cascade of invoices and create a more efficient and financially stable operation.

Keep tuned to see how byppay speeds ups the payments in the supply chain.