Supply Chain Specialist

For the supplier, Xelix’s dynamic discounting solution is a source of flexibility and control.

How dynamic discounting cuts risk from the supply chain

For finance directors, avoiding disruption in the supply chain is a crucial strategic objective at both an operational and fiduciary level. Buyers are hubs in increasingly complex networks of firms at various stages of development. This portfolio of suppliers can be extremely diverse in terms of their size, scope of activity, access to funds, and therefore vulnerability. It’s the FD’s job to manage the risk and ensure operational continuity.

Targeting supply chain insolvency risk

Xelix’s dynamic discounting solution can act on risk in the supply chain and remove many of the fragilities inherent in such a complex network. It allows you to target suppliers who may be vulnerable and, by improving their funding position, reduce supply chain insolvency risk.

To be competitive in a globalized economy inevitably requires a varied and often widely distributed supply chain. The need for both low-cost and unique goods or services forces buyers to work with suppliers who may be innovative but lack scale or they may be located in emerging market economies where labour or raw material costs are lower.

In both cases, the company may come to rely on suppliers whose access to capital markets is compromised in some way, either because of the suppliers’ credit quality or the higher interest rates and more restrictive credit conditions of their local capital markets. Simply put, banks may not lend to them, or if they do the interest rates might be unaffordable.

Dynamic discounting arbitrages interest rate differences

Dynamic discounting allows the buyer to arbitrage interest rates and produce a solution that is preferable to themselves and their suppliers without relying on the banks or other financial intermediaries.

Cash in the bank in a major economy may earn the buyer less than 0.5%, while a loan to an emerging market small to medium-sized enterprise (SME), assuming it is available at all, might carry a very high interest rate. Dynamic discounting allows a buyer to close that gap to mutual advantage with no risk to either buyer or supplier.

By paying early for a discount on the invoice, essential funds are redistributed across the supply chain network creating a more stable structure with no complicated legal arrangements required. The buyer has to pay the invoice in any event. At the same time, the supplier receives a highly competitive and possibly essential method of boosting their working capital, insulating them to some extent from the vagaries of a banking relationship which can change quickly if local economic conditions dictate a tightening of credit terms.

Insulating suppliers from market, economic and political risk

It’s not then difficult to see how dynamic discounting can act as a buffer against all sorts of other risks that make the supply chain and its component companies fragile. Being able to directly inject working capital up the chain can offset the impact on suppliers of currency and commodity price volatility, regulatory or tariff changes, increased political risk and routine fluctuations in the economic cycle. It can also help mitigate the ‘bullwhip effect’ where demand can expand or contract up the supply chain with an amplified impact, causing distress for suppliers as they struggle to accommodate rapidly changing order books.

Bolstering reporting metrics

So, when auditing supply chain fragilities and identifying those suppliers whose failure or disruption could cause the most downstream damage, dynamic discounting can be used as a strategic weapon in the risk-management arsenal.

When it comes to reporting, investors will be reassured the finance director has not only identified and analysed where the risks of disruption may come from but has taken innovative steps to remove them. By improving their payment performance and supporting suppliers, dynamic discounting also bolsters the buyer’s corporate social responsibility metrics.

For the supplier, Xelix’s dynamic discounting solution is a source of flexibility and control which doesn’t require an investment in technology or increase their exposure to bank lending or other financial intermediaries. And so in periods of economic or financial volatility, whether they need extra working capital to cover shortfall or to fund expansion, they will come to view the buyer who has provided this flexibility and control as a strategic partner.

For the buyer’s financial director, dynamic discounting dramatically reduces risk in the supply chain, binds in strategic suppliers while also providing much improved return on cash balances, with risk-free APRs of over 10% achievable.

If you want to find out how Xelix can help reduce your supply chain risk, get in touch below.

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