The blockchain technology has the potentials to reshape the economy and the way people work and live, and supply chain is most likely to be largely affected by this advanced technology.
The nature of blockchain technology lies on the grounds that it builds trust between trust-less counterparties. Since blockchain records information that is authentic and tamper-resistant, information becomes more transparent.
The conventional supply chain works well when suppliers obtain adequate financing promptly so that day to day operation and production are maintained in a good order. However the supply chain breaks if they don’t get enough financing, this happens a lot because suppliers are quite often the SMEs who aren’t favored clients in front of those financial intermediaries.
Therefore we believe that the best way to solve this problem is to isolate banks and other financial intermediaries from the supply chain, which will actually save quite a lot of money and time.
The best instrument is the debt note, the debt note circulates through core company all the way to its suppliers, investors, consumers and distributers as a medium of payment. The adoption of debt note experiences 3 phases: issuance, circulation and recycle.
Phase 1: Issuance
A core company is normally a manufacture giant such as Philips or Mercedes-Benz who is highly trusted by the partners in its ecosystem. Traditionally, the core company delays payment to its suppliers, so there is period of time normally months that suppliers need to be financed for its business. In this business scenario however that the core company issues debt note with the equivalent amount of value to what it procures from its suppliers, making a promise that it will repay its debt in the future.
Phase 2: Circulation
The core company will then give the issued debt note to its class 1 suppliers, with the debt note in hand, the class 1 supplier will have 3 options. First, it passes the debt note to its suppliers which are also the class 2 suppliers of the core company, the class 2 suppliers are willing to accept the debt note because it was issued by the core company and in return it gives the supplies to class 1 supplier. Second, the suppliers can also choose to pass the debt note to investors who are willing to hold the debt notes as an investment, in exchange of money. Third, suppliers pay debt note to its employees as salaries, who are also consumers in this context. The consumers purchase the products branded by the core company through its retailers and distributers.
Phase 3: Recycle
In the final phase, the debt note recycles back to the core company as it promises to payback. The investors and distributers will give back the debt notes to the core company and get paid in cash.
The adoption of debt note shows us that financial intermediary is no longer needed in the new supply chain model as opposed to the conventional one. This is phenomenal and significant because the profits that the banks are taken in the conventional model are now spreaded over to other roles along the supply chain. Notably, the suppliers will get very cheap funds for financing or financing is not needed any more.
The adoption of debt note removes banks from the supply chain as a trusted party, banks are expensive but inevitable, debt note is a great incentive for everyone to keep bank out of the game, as the market is profit-maximizing.
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Topic: The Application of Debt Note in Supply Chain Finance (Read 120 times)
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