Maybe necessity can make a good bargain after all.

A company engaged in the supply of steel products to various industries, from construction companies to utilities and energy firms, recently expressed its faith in its suppliers. They have had long relationships with most of them. However it has become clear that in a business landscape that has become more challenging recently (mainly caused by high inflation) being able to cash in on bargains would enhance the firm’s competitive advantage. In practice this means being able to buy products offered by suppliers outside the group’s existing relationships at short notice without hesitation. Without any security arrangement in place this would expose the buyer to a fraudulent or incompetent seller, as most sellers will ask for a payment upfront, only to deliver later. So, how to overcome this ‘conundrum’? How to skip a time-consuming due diligence process that makes it impossible to cash in on unexpected offers from unknown suppliers without jeopardising security?

The company has given the occasional unknown supplier the chance to do business by demanding a delivery on their doorstep so the cargo could be inspected. Only then, after having vetted the quality of the delivery, the invoice would be settled. However, not all sellers are pliable enough to comply with this rather uneven demand. In addition, one could have one’s doubts about a supplier that is still keen to deliver on these terms. Any ‘established’ firm would have enough opportunities to do business on better terms. In a case that involved a very competitive offer from an unknown company to supply the firm with steel tubes, the cargo arrived much later than was agreed. In fact, so much so that the buyer was no longer convinced delivery was going to take place at all. This confirms the suspicion that accepting bargain basement proposals together with very favourable terms of trade (on the doorstep without any advance payment) is not a reliable way of sourcing product. Any gains made on price are lost in an effort to solve supply chain problems.  

To be able to deal with (potentially more reliable) unknown suppliers, which tend to be more demanding and usually require some kind of financial commitment from the buyer, we need a different set-up altogether. What if the buyer were to make an advance payment to a strong and reputable third party under a strict contractual framework dictating that this payment would be paid-on to the seller upon delivery as agreed? This would then allow the parties to settle their obligations simultaneously. The buyer would not have to worry about a corrupt seller and the seller would not have to bend over backwards to make a sale as he could ask for a ‘deposit’ to be held for his benefit. And what if all of this were to take place digitally? Meaning the entire settlement process would be executed over an easy to access (on-line) platform backed by a third party ‘settlement-agent’ of superior credit quality and high repute? Then both parties would not have to know each other to be able to feel secure when they decide to do business, having had no time to carry out any due diligence.

The platform capable of offering the solution, i.e. solid security and efficiency at the same time does in fact exist. It is offered by Mercurion Trade Services (www.mercuriontrade.com) in cooperation with the Baltic Exchange. The platform itself only serves to make everything transparent and efficient. Neither buyer, nor seller will be financially exposed to Mercurion’s offering, as the payments will be held by the Baltic Exchange, an institution that has been around for the best part of 300 years. It has been engaged in this specific kind of settlement service for third parties for some time now (called ‘Escrow’). Taken together the risks for both parties are substantially reduced by using this ‘digital Escrow service’. The coming together of more assertive buyers and ambitious sellers could help to expand the marketplace and further reduce procurement costs.