Supply Chain Finance Case Study
A Working Capital Solution
Why did you implement a Supply Chain Finance programme?
Supply Chain Finance (SCF) is an exciting area for us to be involved in. SCF is often viewed as a credit arbitrage opportunity, but our main motivating factor in deciding to implement our SCF programme was to improve our working capital – to release capital for the business. This was clearly of benefit to the owners of the company, but at the same time we believed that the asset based lending programme would have no significant impact on our customers – which was also an important factor when we were considering implementing the SCF programme. We had been working for some time to improve working capital and had already extended terms with our suppliers from around 35 - 37 days to close to 60 days, but we needed to make further progress. We considered the relationship that we had with our suppliers and we did not believe we could ask suppliers to extend terms any further. We viewed the implementation of a SCF programme as a move to the next level and something that was necessary for our business.
What about Buyer / Supplier relationships?
Our implementation decision was driven principally by financial considerations, but many industry commentators also highlight improved buyer / supplier relationships as a benefit of implementing a SCF programme.
Are there issues surrounding internal ownership of the SCF project?
In the same way that commentators have been discussing the buyer / supplier relationship, they also often highlight the potential internal ownership issues at a buyer organisation. Does Finance take the lead or is SCF a Procurement project? For us, the SCF programme was initiated by the Finance team, but ownership is now with Procurement. We see this as a 50/50 split – a true collaboration.
What motivates your suppliers to join the SCF programme?
Suppliers’ motivations can vary as much as the different types of supplier can vary. Larger suppliers see SCF more as a means to improving their financial flexibility, their balance sheet and their financial ratios. Smaller suppliers often find that financing is fairly expensive for them and difficult to obtain. The advantage of a SCF programme is often greater for them than for larger companies because it gives them access to less expensive supplier finance / vendor finance than they could obtain on their own.
How did you decide which suppliers to approach first?
We began by approaching fairly small supplier companies where we have a significant spend. Smaller companies have a lot more to gain from joining the SCF programme, and given the size of our spend, we were in a good bargaining position. We started by looking at each of our top 50 suppliers. We examined each in turn, scoring different criteria and built a list of those we thought were best to approach first.
How did you begin talking to your suppliers about SCF?
We invited the chosen suppliers to a Supplier Day where we outlined our programme. The Supplier Day offered our suppliers the opportunity to ask questions and to discuss initial concerns with us and with other suppliers. We then set up individual meetings where we talked about SCF and reverse factoring in more detail and addressed individual concerns. We received very positive responses from all the suppliers that we approached. Typically when we approach suppliers about the programme, we usually start by speaking to the President, CEO or owner. For a small company, whether or not to join a SCF programme is an important high level decision. The initial contact at larger suppliers was generally at a less senior level.
Were there any surprises during implementation of the SCF programme?
The implementation of SCF programme has gone pretty much as we had expected with no surprises. The most important consideration in ensuring a smooth implementation phase and subsequent ongoing service is the decision about which SCF solution provider to choose. We have found that Demica's SCF solution is flexible and effective..