How a Global Pandemic Led to Supply Chain Finance Adoption in Healthcare – And Why It is Here to Stay

When COVID-19 struck, glaring vulnerabilities were exposed in the healthcare supply chain. Amid this disruption, supply chain finance programs – long utilized in consumer sectors like retail to help suppliers get paid more quickly and allow buyers to extend payment terms – emerged as a working capital tool for more hospital systems.

Historically, hospitals have primarily reinvested revenue back into their operations. As such, institutions did not have much working capital on hand to deploy at a moment’s notice.

The pandemic very quickly highlighted vulnerabilities in the healthcare supply chain, particularly an overreliance on global logistics.

For healthcare providers, the shortage of masks, gloves, and other personal protective equipment created tremendous pressure. At the same time, hospitals had to figure out how to be more efficient as revenues crumbled.

Another concern that became much more pressing in the pandemic was supplier resiliency. Hospitals asked: Are my suppliers doing well enough to deliver consistently over the long-term? If you’re in the business of saving lives, that certainty of supply and the ability to deliver when it’s needed is mission-critical.

In a difficult market, buyers are keen to extend payments for as long as possible. Conversely, suppliers need their invoices to be settled faster. Healthcare executives discovered that supply chain finance helps both sides manage risk and optimize their working capital. Buyers settle their invoices on payment terms that their institution could manage. Suppliers, meanwhile, don’t have to wait for this settlement and are paid more quickly.

Hospital executives also realized that they could put their institution’s strong credit ratings to work, further spurring the growth of supply chain finance in the healthcare space. Supply chain finance programs are set up through the buyer and the rate paid by suppliers to get paid early is based on the buyer’s ratings. Because the buyer often has better ratings than the smaller supplier, the supplier gets access to less expensive funds than they would through their regular borrowing.

2024 and beyond

After the pandemic, the deployment of supply chain finance in healthcare has continued to grow as hospital systems have seen how it can strengthen supplier resiliency. For similar reasons as hospital systems, it has also being adopted in other non-profit sectors. For example, supply chain financing is increasingly being utilized by universities, which often also have hospitals associated with their schools.

Retailers, the first adopters of supply chain finance, are also doubling down on this solution.

Several years ago, they might have only partnered with the large suppliers that are equipped to sell 100 million items annually, versus 100,000. These large suppliers represent only about 20% of the industry but about 80% of buyer’s strategic spending.

However, more innovative supply chain finance platforms have made it easier for retailers to more efficiently purchase from small-to-mid sized suppliers. This obviously has benefited smaller suppliers. With the supply chain finance market evolving quickly, supply chain products that might once have been available only to corporations with high-grade credit ratings are now offered more widely.

The continued fast evolution of supply chain finance solutions offers a new way forward for CFOs in many industries to take direct charge of improving supplier-buyer arrangements, much like we have seen in healthcare in recent years. This can also act as a catalyst to ensure the broader finance and procurement functions work together in a symbiotic relationship. In an increasingly uncertain economy with geopolitical tensions growing, we expect the focus on supply chain optimization to continue.

Michael Stitt is a Senior Vice President at U.S. Bank. A 25-year banking industry veteran, he leads efforts to deliver trade and working capital finance solutions to the bank’s clients across the United States.