In most cases, supply chain financing is achieved through traditional payment methods. Blockchain applications facilitate faster payment flows and can incorporate upstream suppliers into supply chain finance (SCF). The benefits of the technology were discussed by seven international experts at the 3rd Supply Chain Finance Hub hosted by the Technical University of Munich (TUM) at the Heilbronn Campus.

Supply chain financing stabilizes the cooperation between trading partners.  With more than 360 registrations across 37 countries, TUM hosted one of the world’s largest digital events dedicated to supply chain finance (SCF) at the Heilbronn Campus. The topic of what has now become the 3rd Supply Chain Finance Hub, headed by Prof. Dr. David Wuttke, Professor of Supply Chain Management at the Center for Digital Transformation, was “Blockchain Supported Supply Chain Finance: Tapping into Uncharted Territory.”

Faster flows of payments

The blockchain opens up the possibility of exchanging delivery and payment transactions between trading partners in a verified, secure and real-time manner. The elements that are associated with cumbersome paper processes in traditional supply chain finance mechanisms can be reliably digitized in the blockchain by means of smart contracts. The flow of information, goods and money in supply relationships becomes transparent through blockchains, as does the origin of materials.

The use of blockchains for supply chain finance accelerates cash flow – for all parties involved. As a result, blockchain has what it takes to fundamentally change the way supply chains are financed.

Incentivizing subcontractors

The financing of suppliers deeper in the supply chain in particular is being made possible by blockchain applications: if an upstream supplier can demonstrate to the financing bank via blockchain that it is also part of the supply chain of an OEM (original equipment manufacturer), the upstream supplier can benefit from the OEM’s credit rating and interest rate advantages in the same way as the direct supply partner. “The blockchain opens up the information content of supply chains all the way to the deepest levels. This and its smart contract function make it a highly interesting option for supply chain financing,” explains Prof. Dr. David Wuttke.

Transparency creates resilience

Financing supply partners conveniently, cost-effectively and quickly is an aspiration of blockchain SCF applications. At times when liquidity is becoming more and more important for companies, fast payment flows offer that competitive edge – also when dealing with reliable supply partners. The so-called deep-tier financing via blockchains is becoming an attractive option for supply relationships between industrialized and emerging countries: “If companies are also able to offer upstream suppliers favorable financing costs, this reduces the costs across the entire supply chain,” explains Rebecca Liao, co-founder and former COO of the US provider Skuchain, one of the world’s first companies to rely consistently on blockchain technology to offer financing across the supply chain. While at the same time, supply chain financing via blockchain boosts transparency, making supply relationships more resilient: “As a buyer, blockchain gives me information about my supply chain that I wouldn’t get without the technology,” explains Rebecca Liao.

Siemens: open to the new technology

Corporations such as Siemens have been paying their suppliers early for decades without cutting their own payment terms. Supply chain finance providers take over the interim financing. Douglas J. Schoch, Vice President Siemens Financial Services, advocates the possibilities of the new technology during the interactive expert panel. Blockchain has the potential to not only influence payment processes and the supported supply chain, but also to fundamentally change the nature of the supply chain: “Blockchain can be used to transfer digital assets along the supply chain very effectively, whereby the creditworthiness and risk are defined by the OEM,” he says, explaining the advantage for purchasing companies.

Fast, affordable, reliable

Melanie Neumann, Head of Central Sales Trade Finance at Bank UniCredit, is in favor of a combination of traditional and blockchain-based supply chain finance services. “We are trying to introduce our customers to the modern alternatives,” she explains. The benefit of blockchain solutions is in the standardization of payment terms, the low costs and the speed: “It takes much less time from instruction through to payment than with traditional forms of payment,” she emphasizes.

The benefits lie in real-time application: “Blockchain solutions minimize the risk of payment defaults and have a very positive effect on liquidity,” adds Mark Cudden, CTO of we.trade, a blockchain joint venture among European banks. Cudden believes that digital blockchain trading platforms therefore also drive growth for small and medium-sized enterprises.

Trust in the accuracy of the transaction is generated by the counterfeit-proof blockchain code. Despite this, the modern single source of truth still does not seem to have the full confidence of users and there is still some skepticism about the technology in management. Furthermore, the legal framework conditions, such as the intellectual property (IP) of the data, the transfer of ownership as well as the trigger for the payment in the blockchain, have to be stored in a legally secure manner.

Application must fit

In any case, blockchain is not the solution to all problems, but rather a tool that must fit the application: “First of all, define your problem and then consider whether blockchain is the solution for this,” recommends Mathias Hummel, Senior Consultant at Horn & Company.  The fact that not all suppliers benefit from a financing package is shown by current research results. “While blockchain enabled multi-tier supply chain financing can be advantageous for supply chains, others might be better off with traditional supply chain financing arrangements,” warns supply chain researcher Yoko Shibuya from Stanford University in the US.

Monitoring and financing

The blockchain becomes an effective instrument for supply chain management thanks to the option of being able to track supply risks and sustainability data. Prof. Dr. David Wuttke clearly sees this as an opportunity for supply chain financing: “Companies can set up blockchains initially as payment platforms and then use them for their supply chain monitoring as well, or they already have a blockchain for the flow of goods and information and then use it for supply chain financing as well.” Wuttke sees the potential of blockchain in SCF not only for incremental improvements (faster, cost-effective financing of supply partners) but also for comprehensive business cases within modern supply chain management (deep-tier management and financing).

More information can be found at www.wi.tum.de/hub.