Bearing the burden of supply chain finance

As many of you no doubt know, for the past 12 years I have been doing a lot of research into the retail supply chain in developing countries. The poorest three billion to four billion people in the world get their groceries thanks to around 50 million families, each running a ‘nanostore’. This channel is extremely fascinating from a logistics perspective. In Latin America, for example, the Mexican bakery company Bimbo directly supplies more than five million stores. A Bimbo representative visits each nanostore – often several times a week – to deliver bread, tacos, cookies and other goods.

The delivery frequency is so high because a lower frequency directly results in lower sales; many of the nanostore owners have such a limited cash flow that they simply cannot finance much inventory. Moreover, because stores go out of business rather regularly, suppliers demand immediate payment on delivery. In effect, suppliers and retailers keep each other in a stranglehold that isn’t beneficial for either side.

Running the risk

It seems obvious, then, that a retailer would order more if the supplier would defer payment for a while. However, the question is how much more would be ordered, and would the sales increase be high enough to make it worth running the risk of non-payment? We recently investigated this systematically in a project we ran in Peru. A distributor of hygiene paper products gave a small number of its customers a one-week credit period for the maximum of one order: receive today, pay next week… But if you don’t pay next week, you have to pay immediately again from then on. Advanced econometric analysis revealed that sales increased by a factor of 2.5 – in other words, just a one-week credit period was enough to generate 150% more sales. Surely, if you were a supplier, that could tempt you to run the risk of the customer going bankrupt!

Simple interventions

In our projects in developing countries, it is fascinating to see how relatively simple interventions can achieve major commercial and operational benefits. This is being further accelerated by digitalized payments and credit. It is interesting to think about what we could learn from this in the European environment. There are certainly some parallels in the area of chain finance. Many European retailers – think of those in the hospitality industry, for example – are also small-scale and underfunded, struggling to obtain formal loans. The same is true for many small suppliers in the manufacturing industry. And today’s high interest rates make it even more difficult and costly to depend on the banking sector. However, due to how the operational and commercial advantages are shared out in many supply chains, the best-funded partner should shoulder more of the responsibility – and not only morally, but also in a purely business sense.

Strongest shoulders

Just as in Peru, the most rational and optimal approach here in Europe would be for the strongest shoulders in the supply chain to bear the heaviest burden. That would make those strong shoulders even more muscular.

Jan Fransoo is Professor Operations and Logistics Management at the Tilburg School of Economics and Management