The use of supply chain finance (SCF) is growing. For companies, it offers an excellent negotiating tool when dealing with their suppliers and enables them to improve their working capital by extending payment terms. Simultaneously, it allows suppliers to finance their account receivables (A/R) at a rate that is more attractive than they would otherwise be able to achieve. SCF therefore delivers a win-win outcome for both buying companies and their suppliers.
While an extension of payment terms remains the primary driver for corporates to establish SCF programmes, it has also been adopted by companies seeking discounts from their suppliers. Some firms have used SCF to help them to achieve their corporate sustainability objectives, such as supporting small to medium-sized enterprises (SMEs) or minority-owned business. Others corporates have used it to support strategically important suppliers and safeguard their supply chain. There have even been government initiatives that use SCF to give SMEs access to financing at attractive rates, in order to kick-start economic growth.
As SCF has become more prevalent, companies have become increasingly ambitious in their goals. Just a few years ago programmes tended to focus on specific countries or regions. Given the increasingly global nature of both suppliers and financial targets such as working capital, many multinational corporations (MNCs) now seek to implement global SCF programmes with simultaneous rollouts across hundreds of legal entities.
Three Steps to Success
Regardless of the industry sector or ‘home’ country of a company establishing a SCF programme, to be successful it is essential for a corporate to do three straightforward, yet critical, things:
- Set a clear objective: Companies must have a clear objective when establishing a SCF programme. It is not enough just to aim to extend payment terms or improve working capital. Specific goals and rationales for the programme – coupled with clear targets and timetables – must be set out. These goals, objectives, targets and timeframes must be understood both by those who have to implement the programme and those who are responsible for delivering its objectives.
While there must be a broad understanding among all the relevant parts of the business of the reasons why SCF is being implemented by the company, there must also be ownership of the programme’s goals. Without ownership, the goals will not be achieved. Most frequently, ownership of goals in successful programmes sits within the sourcing organisation, which – in contrast to the treasury, which may be implementing the SCF programme – has direct knowledge of the most suitable suppliers to target for SCF. A company’s bank may be a useful source of information when determining which suppliers to select, as it could have insights into the financial positions of some.
- Ensure thorough training: Effective training, funded by adequate investment, is essential if SCF is to achieve its objectives. Individuals involved with the programme need to understand what it offers both the company and its suppliers. This can vary by supplier – some see SCF as an alternative source of liquidity, while for others it may be the only source of funding they can access. A deep understanding of suppliers’ motivations in signing up for a SCF programme is important if it is to be used as a negotiating tool.
Training must address exactly what message a company wants to convey to its suppliers when discussing SCF and what rationale should be given for the company wanting to establish a programme. Should suppliers be interested in accessing a programme or finding out more information, those individuals at the company in contact with suppliers must be able to confidently explain what next steps need to be taken. Some companies may require amendments to contracts, which should be prepared in advance, and the process for supplier onboarding must be transparent and robust. The individual working with suppliers should be able to anticipate the most common questions that suppliers have when being onboarded. Moreover there should be clear, and fully understood, guidelines about when a supplier should be referred to the bank administering the programme and when problems should be resolved in-house. It is for the corporate to drive the programme.
One example of best practice is the rollout of a global SCF programme by a consumer products company based in North America. The company began by establishing clear numerical targets, analysed its current situation and then set out clearly the path that would enable it to achieve its goals. All those affected by the SCF programme were given a full day of training. Different categories of buyers were tasked with setting targets for their categories. Crucially, this exercise is carried out annually to ensure that the company’s SCF programme continues to improve its effectiveness.
- Select the right partner: While it might seem obvious, it is critical for a company to select the most appropriate bank for its SCF programme. A bank should be able to support the specific needs of the company in terms of capital, credit and distribution capability – including the ability to get other financial institutions (FIs) to participate in funding SCF programmes; an increasingly frequent requirement given the scale of global SCF programmes. A company must be confident that the bank it chooses to work with has the financial strength and credibility to be able to meet these requirements for the foreseeable future.
While many banks claim to have SCF capabilities, few have dedicated on-boarding personnel or trade professionals who can explain the nuances of SCF in great detail. Moreover, few banks have the global network, or multi-lingual service capabilities, needed to operate a global SCF programme smoothly. Often banks have not invested sufficiently to facilitate global SCF implementation, while the right bank will have dedicated resources to streamlining SCF documentation to overcome the challenges of different currencies, time zones and accounts payable (A/P) systems. A company’s chosen partner should also be able to offer innovative SCF ideas that address specific spend categories, such as structured solutions for freight suppliers.
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