AI: the Gateway to Supply Chain Reform?
Published: June 17, 2021
If ever there was an illustration of the need to reform supply chains, it was a container ship being stuck in the Suez Canal for six days, destabilising global trade, and holding up $9.6bn of trade for every day it was stranded. These costs will be felt for years to come. What role can artificial intelligence play in resolving supply chain challenges?
It was unfortunate timing that the Suez Canal blockage in March caused by the 200,000-tonne container ship Ever Given occurred in the midst of a pandemic that had already put unprecedented strain on supply chains. This pressure was reflected in first-quarter earnings calls in the US, with supplier testimonials painting a bleak picture. In May, for example, paint manufacturer PPG Industries admitted it had been operating ‘hand-to-mouth’.
This is a stark reminder of the reality that supply chains are fragile and have been subject to problems for years. Most of these issues pre-date Covid-19 and the subsequent disruption it is causing. The many counterparties that make up supply chains must navigate the unwieldy processes, which are often outdated, that characterise global trade.
A perfect storm of misery means many suppliers are being pushed to breaking point. There has never been a better time to take stock and reflect on the case for action.
Among the many problems noted by suppliers in the earnings call is that of stock – or lack thereof. Subsequently, companies’ abilities to accurately plan inventory has been hampered, pushing up the cost of doing business. At the same time, there has been strong demand in the US, putting further pressure on suppliers.
When supply versus demand is out of balance, it has a knock-on effect across the entire supply chain. More often than not, suppliers feel this most acutely, mainly due to having to wait longer for payment.
Suppliers can wait as long as three months in some cases – and the issue is not just the waiting, but also the chasing up of invoices, uncertainty, and the stress involved. For the buyers forced to push up the cost of business due to a lack of inventory foresight, these costs often result in the further lengthening of payment terms to suppliers in a bid to maintain cash flow.
No one can blame businesses for scrambling to maintain liquidity – the cash has to come from somewhere. This was proven again in the US quarterly earnings call, which showed that, despite the litany of woes as told by suppliers, businesses have remained profitable. In this case, companies have been protecting their margins by sourcing from elsewhere.
It should not be this way, nor does it have to be. With advances in technology being what they are, there is no reason that buyers should have to choose between their own liquidity preservation and prompt supplier payment, or switching sourcing.
An AI solution?
With artificial intelligence (AI) and machine learning (ML) it is possible to exercise foresight over one area of supply chains that could be the gateway to further progress. This is in the probability of invoice payment. ML can make a smart assessment, based on past payment behaviour, of whether an invoice will be paid. Once it is determined that an invoice will be paid, the cash can be unlocked instantly. Every supplier can be given a ‘pay me now’ button.
This approach requires a collaborative effort, from banks, fintechs, and corporates. And the good news is there are benefits to each party:
For banks (and corporates), providing the capital to unlock immediate supplier payment can help them meet environmental, social, and governance (ESG) goals – an increasingly important consideration for investors. Corporates can also unlock their enterprise resource planning (ERP) data in a secure way, enabling them to access numerous small suppliers that would otherwise be precluded from supply chain finance (SCF) programmes. After all, traditional SCF options are often prohibitively expensive. Meanwhile, fintechs can provide value to the market in a burgeoning industry that is in sore need of change.
With supply chains becoming ever more complex in an increasingly globalised world, it is unrealistic to expect new technologies to make sweeping changes in a ‘Big Bang’ moment. Fintech players that offer interoperable platforms, fit for purpose and ready to integrate with legacy systems, will arguably prove the most viable immediate option.
The technology is ready, the industry has spoken, and the world is watching. What’s next for global supply chains?