Supply Chain Automation: A Quiet Revolution in Finance

Despite various initiatives, including Bank of England (BoE) deputy governor Paul Tucker’s recent proposal that negative interest rates should be considered as an incentive, UK banks are still reluctant to lend to small and medium-sized enterprises (SMEs). For them, the figures simply do not stack up. So, with suppliers being squeezed by extended payment terms and banks giving them the ‘waiter’s eye’, many businesses are faced with an increasingly difficult working capital crunch. In the past they would have been limited to traditional supply chain financing (SCF) arrangements such as factoring to take the pressure off and keep the wolves at bay. That is, if the banks involved were sure of a lucrative enough incentive for them in the deal, and if the business qualified in the first place.

Invoice financing has been a boom industry in the UK since 2008, but those organisations left with nowhere to go start to look around and the best of them start to get innovative. Often that’s where technology comes in, as with the growth of collaborative networks organisations have realised the power that lies within their supply chain. We live in a Facebook and Amazon world and it’s one where increasingly activities once regarded as the preserve of the banks, including lending and supplier validation, are now taking place peer-to-peer across their networks.

In other cases, organisations are looking to the technology which has sprung up in recent years in response to recognition of the value of these networks and also, since the start of the economic downturn, of a gap in the market for better access to finance. This combination, together with the growth and application of cloud technology, has come at a perfect time for vendors such as Ariba, Taulia and OB10 and others in their roll-out of solutions aimed at freeing up cash along the supply chain.

With the technology sitting in the cloud there’s also a level of visibility and accessibility that simply wasn’t available before, leading to tighter compliance and efficiency levels. If banks have been slow to respond to the challenges of the networked economy, to be fair to them they may well have had their eye on other things. There are now signs that some banks, for example Royal Bank of Scotland (RBS), are waking up to the opportunities which lie in front of them. That can only be good news for struggling businesses, many of which are faced with Hobson’s choice with the options of cutting relationships with important, but late-paying customers or accepting crushing terms of up to 200 days for payment.

Hold on to What You’ve Got

Despite this bleak choice the fall-back position of many chief financial officers (CFOs) is often to hang on to the cash that they have. At a time of economic crisis this might be regarded as an entirely logical approach, but the net result is often counter-productive. Putting a squeeze on suppliers in order to hold onto cash can have a disastrous effect on the relationship and cause inter-departmental strains between finance and procurement along the way. It might still be a price worth paying if a financial argument could be made but compared to some of the alternatives, for example dynamic discounting, such a protectionist strategy just doesn’t add up.

In fact, some observers point out that average payment terms haven’t changed much in the past 10 to 15 years. Which means that despite government-backed incentives to the contrary, such as the Prompt Payments Initiative, for those who work in finance and have responsibility for cash in the department the overriding instinct is apparently still to keep it there for as long as possible.

Dynamic Discounting

So what’s the answer? Like early settlement capture, dynamic discounting goes some way to providing one. It’s a solution which offers organisations the opportunity to capture discounts from their suppliers on a sliding scale, meaning that even when payment terms slip past the traditional timeframe, discounts – albeit at a lesser rate – can still be taken.

This enables organisations to regain integrity with their suppliers and have better visibility and control of their working capital.  Nevertheless, it’s not a practice which is welcomed by everybody. Small business support group the Forum of Private Business (FPB) has accused companies such as department store groups Selfridges and Debenhams of engaging in bullying tactics, to force their suppliers to accept a hit on their invoice values.

And yet, for the most part dynamic discounting has the capacity to be a far better solution for generating cash flow down the supply chain than factoring where finance may or may not be given, and where quite often the terms are punitive.  On top of that, if by engaging in and accepting dynamic discounting enables organisations to stay afloat and staff to get paid come the end of the month, then it’s something which is definitely worth having in the peer-to-peer (P2P) armoury.

Supplier Adoption

Where these types of solution have fallen down in the past has been in supplier adoption, particularly amongst smaller SMEs. However, the advance in cloud solutions means this is becoming less of an issue as suppliers are invited to opt in via automatic online enrolment campaigns for example. On top of that, with their extensive reporting capabilities organisations are able to stay in full control, putting the power back in the hands of the finance teams.

The Revolution has Begun

If you add to that the increase in the usage of vendor portals, which give suppliers instant access and visibility to their invoice processing, it’s easy to see that the world of accounts payable (AP) automation and workflow practice is starting to change. We are now at the beginning of a quiet revolution in finance and supply chain automation.

Indeed by taking control of P2P metrics analysis, finance directors (FDs) with a keen eye for new technology and its ability to help drive progress, gain newfound capacity to have a direct impact on both the profitability and, ultimately, the overall direction of their organisations. 


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