SCF Retail Development: A Model for Other Industries

Consistent and reliable supply is the lifeblood of any
retailer. In recovering economic conditions with continued pressure on margins
and input costs, it is important that suppliers are able to respond to demand.
However, the availability of working capital is a common challenge.

Supply chain finance (SCF) has undergone rapid growth in recent years, helping
to cascade funding through the retail supply chain to the benefit of retailers
as well as the suppliers themselves, with both sides becoming more closely
aligned as a result.

A decade ago supermarket buyers kept their
supplier relationships close to their chests. Contacts were protected even from
their own treasury departments. This is because buyers were judged primarily on
margin, so focused on price and quality. The alignment and appropriateness of
suppliers for specific product sets across the business and even in buyers’ own
categories was less important, provided of course that the numbers stacked up.

Cost of funds was low, and cash flow was strong, so engagement with
other departments was not a top priority. This naturally led to payment
agreements being inconsistent, based on separate negotiations with different
suppliers across categories and products.

In SCF programmes,
companies use uncommitted banking facilities to advance up to the total value of
approved invoices to suppliers. Ten years ago the method was experimental and
difficult to implement given the disconnect between retailers’ own business
functions.

Today the economic and socio-political landscape is very
different. The cost of borrowing for supermarkets has increased, and there is a
huge imperative for retailers to better know their suppliers and the source of
products following various food scandals.

Meanwhile, the pressure on
suppliers is even greater today. Poor cash flow is stretching their ability to
meet orders, with input costs and competition increasing. Some retailers are
also rationalising and looking to consolidate their supplier bases.

Working in Unison

This alignment of priorities has led many
retailers and their suppliers to explore using SCF for the first time, with
noticeable uptake of the product emerging around three years ago. Now all of the
UK’s largest supermarkets have some form of SCF in place. This allows their
suppliers to access funds via automated bank systems, enabling them to invest to
meet demand and provide better assurances to retailers around delivery.

Retailers have been able to do this because their treasury and buying
departments are working more closely together as the cost of funds has grown and
working capital is more strictly controlled. IT is also linking-in during
supplier discussions as this department’s role in fulfilment is critical.
Larger, more professional accounting teams and systems have the capabilities to
approve invoices quickly in order for banks to advance this funding.

Food retailers are also increasingly consolidating their suppliers to realise
efficiencies. With SCF, these suppliers can draw down cash for multiple orders
under their own individual programmes. Hence, for many suppliers, using SCF can
provide a significant competitive advantage in securing new contracts and this
is expected to drive further growth for the product in the years ahead.

The success of SCF in retail and a growing appetite for it in other supply
chain-reliant sectors, such as manufacturing, has led to considerable recent
developments across associated products. These advancements are also being
driven by a notable shift in attitudes towards working capital.

During the downturn companies would battle hard to fight inefficiencies and
scramble to realise every penny of their working capital for short-term gain.
The subsequent economic recovery has seen treasurers more carefully scrutinise
working capital to unearth enhancements for long-term competitiveness and,
importantly, sustainable growth. Firms are doing this by looking more closely at
evolving solutions such as SCF, and analysing the many and varied facets of
working capital management.

New Options

On the product
front, businesses across differing size segments have always had the choice of
considering supplier-driven commercial solutions such as factoring or invoice
discounting. Each company will have its own requirements, but the growth of
retailer (buyer)-driven SCF solutions makes it more likely that a supplier will
be better off using the SCF tool. Nine times out of 10, SCF will be cheaper for
the supplier, who will have much reduced, or virtually no administration from
their perspective. Finally they will be totally integrated in the way they do
business with their major retail customers. 

The development of
‘eBay-inspired’ services such as Receivables Exchange and MarketInvoice, which
essentially allow companies to create their own working capital solutions by
selling off their outstanding invoices to investors in online auctions, is also
helping improve working capital for small and medium-sized enterprises (SMEs)
but at a greater cost than major retailer-driven SCF programmes.

Pressure on key suppliers to the public sector is also expected to drive the
uptake of SCF amongst large corporates. They can use the product to illustrate
support for their own wider supply chain and allay fears of delay in the
delivery of important government contracts. In tendering for new opportunities,
providing these assurances is increasingly important.

Despite its
underlying benefits and the favourable economic drivers, there are still hurdles
for SCF to overcome to achieve greater adoption. A programme between a single
corporate business buyer and all their suppliers can take up to six months to
implement. Banks need to work with all parties from an early stage and
understand everyone’s processes intimately to ensure the scheme is fit for
purpose.

Meanwhile, cultural barriers also remain. Suppliers need to
overcome financial and technological mistrust when embarking on SCF, as many
believe they will lose out or are unwilling to alter their processes. The
cultural upheaval is unquestionably a challenge, but one which can realise
important benefits in the medium to long-term. However the ever growing number
of SCF programmes in the UK has already touched many SMEs and once they have
experienced the benefits by signing up to their first programme, they will be
eager to sign up to any others that are available from their major customers –
this is a product where take-up will snowball.

You only need to pick
up a newspaper to be reminded of the financial pressures companies, particularly
retailers, are still under, despite the improving economic outlook. Some
inevitably feel that in challenging times uncommitted capital should be used to
provide for their own expansion, rather than support suppliers.

It
is probable that continued uptake and development can allay many of these
concerns and lead to further expansion for the product across sectors, with SCF
users becoming strong advocates of the product. Major retailers stand as shining
examples of how SCF can be highly effective in improving working capital and
improving reliability, even where there has been a period of development and
cultural adjustment. Their example, coupled with renewed focus on working
capital enhancement to deliver sustainable expansion during the economic
recovery, will further accelerate the development of SCF.

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