TCO Analysis as an Emerging Instrument of Supply Chain Finance

There is a significant move within the corporate world towards business-to-business (B2B) finance. In view of intensified collaboration between corporates and their suppliers, banks are becoming increasingly challenged by the fact that the powerful business partners within supply chain finance (SCF) are corporates’ suppliers. Suppliers have a much clearer picture than most banks of the procurement situation, process flows and cost of their main corporate partners.

Corporates involve their suppliers for cost minimisation programmes, with special emphasis on total cost of ownership (TCO) analysis. Operating and maintenance costs easily exceed purchasing costs; for example engines and vehicles cost 80% in terms of operating and maintenance compared with 20% purchase cost. Suppliers have more knowledge and competencies to reduce costs in the long run. It is revealing that on the procurement side operating and maintenance costs are often the most critical criteria for choosing new products and suppliers.

Due to this optimised integration of suppliers and clients, the dependency between corporates and banks is becoming more fragmented. There is a clear move by corporates away from those banks that do not have the capacity to understand corporates’ products, processes and structures.

Figure 1: SCF Model


Source: Franzjosef Willisch

Building a Close Relationship

B2B finance of supply chains has the advantage to intensify relationships with suppliers and clients. These partners have a closer relationship and a deeper insight into business models and supply chain processes than providers and banks do, which is why the latter have difficulties in realising increased efficiency and minimising costs in comparison.

Suppliers support an increasing collaboration and dependency in a positive way. Long-lasting contracts and confidence, as well a better understanding of business partners’ needs, feed into this collaboration trend. Local and global suppliers focus on customer services and products, and take part in cost reduction discussions with procurement, production and maintenance.

The main drivers for corporates to participate in a SCF programme are:

  • Total cost reduction with process improvements.
  • High supplier performance regarding quality, on time delivery and acting as a strategic partner to reduce TCO.
  • Ability to make fast decisions in response to market changes and demanding customers.
  • Offer and demand dynamic supply chains.

Working capital optimisation, supplier risk management and impacts from procurement department on financial statements are three considerations to look at when trying to build an integrated SCF solution. Risk analysis, for example, can be assigned to several suppliers in terms of hedging the risk involved in case of an important supplier exiting the market. The importance of supplier management will increase over the next few years, as suppliers need to be integrated in a SCF solution.

Overall, TCO analysis should be aimed at optimising a corporate´s working capital. Corporates will choose trading partners for the future to improve their total cost management, which is just one part of their procurement and sales concept.

Alternative Bank Strategies

Modern financing options, such as reverse factoring, often disintermediate banks and this has resulted in their absence in this market to date. For reverse factoring, the most powerful business partner bears the risk of the financial supply chain (FSC). In order to gain access to this market, banks must be able to show that they are best able to bear risk and effectively help corporate treasurers.

In addition, banks need to develop and improve their oversight of their customer´s supply chains. Corporate finance in not just a part of analysing the financing need, but should also consider the local requirements and characteristics, such as supplier dependencies. International banks are over-emphasising the corporate’s high-level financial demand, instead of going into a more detailed analysis of market demand.

To improve FSC products and services for corporates, here are five potential starting points:

  1. Select strategic initiatives with corporates’ trends: define a frame for sales, cost efficiency, rules and guidance.
  2. Analyse existing business models and their strategies: show details of financial products, processes and technology platforms; analyse the intersection between physical and financial supply chains.
  3. Establish different strategies and define specific prospective strategies: select strategic focus regarding customers´ supply chains, particularly procurement, production and sales; focus on TCO and business volume; and define collaboration structure with customers and suppliers.
  4. Define target business model: identify different specifications regarding the future business model; clarify adjustments regarding physical and financial supply chains; and define and determine the offering products, trade processes and technology platforms
  5. Implement a new business model: focus on a delivery strategy and plan to realise new structures, processes and products; include potential technology providers, suppliers and customers; and implement controlling instruments to develop a new business model.




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