Just-in-time production is an increasingly common way of working for manufacturers, retailers and service providers around the world. It involves a business holding on-site the minimum amount of parts, materials and stock needed to create a product or deliver a service, while relying on frequent, small-batch deliveries to ensure it can continue working at all times.
When done well, it leads to remarkable efficiencies. Honda U.K. only keeps one hours’ worth of parts on its production line, with two million new components arriving at the plant every day. At German supermarket Aldi, deliveries of new produce are sent straight to the shop floor, often using the boxes or pallets they arrive in as the in-store display unit.
Just-in-time is good for growth
For large manufacturers and retailers, just-in-time production means they need a lot less expensive floor space for storing parts and stock. But it’s also essential for startups and small-to-medium enterprises (SMEs) looking to compete in a global economy, especially those based in the E.U. Europe’s many frictionless borders allow a business to source supplies from a wide range of countries and have receive them within 5-24 hours.
When your SME doesn’t have to tie up a large chunk of its working capital in supplies and stock, you can use that money to hire staff, develop more efficient processes and foster future innovation. In the growth stage of a business, your order book isn’t always consistent, so the ability to react to increased demand as new orders come in, is an especially useful feature of just-in-time production.
Despite these growth-enhancing benefits, SMEs still face a surprising problem. Paying for a just-in-time service in another country can often take longer than it does for the goods to arrive. Cross-border payments within the EU sometimes happen quickly but can also take up to 24 hours if the payment was initiated outside regular bank opening hours or if it’s going through a country with slower processes like Spain.
Why slower payments hit SMEs harder
A delay in receiving just-in-time materials or stock has more-or-less the same impact on a large established company as it will for an SME. Both will not be able to fulfill a customer order in the usual timeframe. The delay that occurs because of a slow cross-border payment hits SMEs much harder.
Established companies have a well-earned reputation and name recognition that assures suppliers of their creditworthiness. When Honda U.K. orders from an Italian company, that firm will usually be happy to send the materials right away, confident that payment will follow. SMEs often don’t have this luxury. Payment needs to be received before goods are dispatched, affecting their ability to move quickly.
This highlights the importance of trust in business, but as Jiri Kobelka—CEO of Tatum Blockchain API—explains, “You can only enjoy trust if you have a long-term relationship with someone. If you are a new company, it’s very difficult to have this trust from the start. This is a barrier to innovation for anyone trying to build a startup that can compete on a global scale.”
Kobelka also notes that many of Europe’s cheapest suppliers, who can help SMEs be competitive at a smaller scale, lie outside the E.U. in former Eastern Bloc countries like Russia, Ukraine and Serbia. While it’s not surprising that transporting goods takes longer when you add the need for customs checks, it’s remarkable that paying these suppliers is an expensive process that takes anywhere between three and five days.
Faster payments will help solve Europe’s innovation issue
For all the benefits of the free movement of goods, capital and people across its continent-wide open borders, Europe still has an innovation problem. The E.U. stands well behind the U.S. and China on most meaningful measures of entrepreneurship. Only 26 of today’s unicorn companies were formed in E.U. countries, versus 106 in the US and 59 in China, while rates of venture capital investment in the US are five times that of Europe.
Financial service providers can play a key role in solving Europe’s issue with innovation by reducing the friction that slows down payments across the E.U. and Eastern Europe. Blockchain technology and digital assets have already proved that cross-border payments can be instant and affordable, which can have a huge impact, according to Jiri Kobelka:
“I believe that if more European banks use blockchain for cross-border payments and allow their SME clients to benefit from faster, cheaper remittances, it will shift Europe’s economy to the next level and open the market for opportunities in the international trade.”
The time is right for Europe’s banks and payment services to adopt a just-in-time payments process that will be as transformative as just-in-time production. Those that do will become the preferred providers of the EU’s growing number of SMEs with plans to have an impact at a global scale.
For more information about how Ripple and RippleNet can offer faster, cheaper and more transparent global payments, please visit us here.