Managing a supply chain is as much about ensuring a seamless flow of finances as it’s about tracking and ensuring the availability of raw material and finished products. To ensure an uninhibited stream of goods, it’s essential that payments processed across the board are executed on time, tracked accurately, and optimized to avoid extra costs to the organization.
As part of a typical supply chain, every organization manages payments with multiple suppliers, lenders, retailers, logistics providers, etc. The different components of the supply chain where payment transactions are required can be categorized as follows:
This involves the payments required to procure goods from suppliers and would mainly involve the payments made to suppliers. Depending on the situation, it can also involve the payments made to procurement officers to inspect and identify appropriate materials and place the required orders.
These are the payments made towards expenses to get goods from the supplier to the warehouse, or from the warehouse to the retailer.
These correspond to the warehousing costs necessary to maintain and track an optimal inventory of quality raw material and finished products. Examples of this could include rent for the warehouse and payments to be made to personnel for ensuring the security and quality of the inventory.
Sales & Distribution
These correspond to payments received on the sale of finished products to retailers or through other channels like e-commerce.
Challenges with Payment & Accounting
While procurement, transportation, and inventory payments are expenses that’ll be tracked as Accounts Payable (AP), the sale of goods is revenue to be tracked as Account Receivables (AR). Accuracy in recording these transactions ensures the reliability of the financial statements of an organization.
Traditionally, these transactions were paper based with one party issuing the documents – e.g., invoices – and the other party making cash or check payments. This required, manual intervention at every stage, along with tracking, recording, and reconciling these transactions, is prone to errors. With the evolving nature of global supply chains, the electronic transfer of documents and payments is a necessity. Even though the exchange of purchase orders and invoices with suppliers happens via email or through B2B supplier portals, manual intervention is required to cross-check an order against its invoice, make a journal entry to accounts, tender payment through a bank, and reconcile the payments report from the bank with the accounts.
Large corporates may have sophisticated ERP systems to simplify some of these processes by generating payment files and reconciling financial statements, but it’s unlikely that all the smaller players in a global supply chain will have similar technology available to receive those payments.
Small and medium enterprises (SMEs) can’t always invest in the resources required for end-to-end digitization. Cross-border payments and payments through third-party banks are also expensive due to bank fees and may not be preferred by all parties involved. This McKinsey report tells how SME’s are often underserved when it comes to cross-border payments – “Currently treated as either simple corporates or complex consumers, SMEs are often lost between correspondent banking and the premium affluent cross-border market”.
“A universally accepted and affordable standard for electronic B2B payments in supply chain may not have emerged yet, but there are affordable and convenient e-payment options available that can be implemented at different stages in the supply chain to simplify the payments process,” says David Smith, founder of The Smart Card Institute.
How Can Electronic Payment Improve the Supply Chain Process?
Let’s discuss some of the B2B e-payment options available to enterprises.
This requires organizations to have corporate banking accounts which can be used to make automated clearing house (ACH) or check payments to suppliers against invoices received. Payments may be made manually through the bank’s website or by sending a payment file to the bank. These are most suitable for local payments, because even though banks support cross-border and multi-currency payments through SWIFT, paying a local bank in another country and currency through a partnering bank involves multiple charges and losses due to exchange rates determined by the intermediary banks.
Also known as purchasing cards, organizations can issue these to procurement professionals for making purchases with greater cost efficiency, control, and convenience; they can be tied to a credit card or bank account. The bank issues the payments to suppliers against purchases and provides regular invoice documentation to the organization that issued the cards. This increases the efficiency of the purchase order process as fewer employee hours are required to review documentation and invoices, and issue checks.
Fleet cards can be issued by companies to cover transportation costs and can be provided to the personnel responsible for getting goods from one point to the other. They may be used for fuel as well as vehicle repairs and maintenance. Traditionally transportation employees were required to submit receipts of expenses incurred which were reviewed and reimbursed by administrators. Since fleet cards can automatically provide this oversight, they simplify the transportation accounting process. Contactless smart cards that use a chip based on RFID technology are found most suitable in the transportation sector.
Electronic Invoice Presentment & Payment
EIPP is any web-based B2B system that can issue invoices and receive payments against those invoices electronically. This usually requires that both parties involved in the transaction use the same EIPP system. EIPP solutions usually rely on a network of trading partners to offer a broad range of services to manage business transactions.
Blockchains allow for maintenance of distributed ledgers which can be used by all parties involved in the supply chain and provide an accurate record of transactions. They come with an inherent guarantee which allows for end-to-end automation for transaction management. This article from Forbes provides a detailed overview of how blockchains can improve industry payment transactions.
“Given the right payments experience tailored to their needs, corporates, especially SME’s, will certainly benefit from it making their day-to-day processes efficient and easier to manage while enhancing employee productivity,” adds Smith.
In conclusion, even though many businesses use electronic payment already, there are still much broader applications for advanced B2B e-payments that can make bottom line impacts for SMEs.