10 Tips Procurement Teams should consider when entering an SCF Programme
27 Mar 2017
We all know that the right recipe for a successful Supply Chain Finance (SCF) programme is to marry both the Treasurer/CFO and the Chief Procurement Officer (CPO). However, the question remains - how do you make sure the procurement team are aligned to the objectives and relay this initiative correctly to their suppliers?
First of all, we can identify some common interest of the treasury department and procurement to optimise payment terms, cash management and working capital. Procurement is in first line of negotiation with suppliers and this initiative must be well understood and simply presented. There is no better result than when the procurement team is involved and willing to “sell” their suppliers this new scheme. So what do they need to think about?
Let`s define 10 tips which will help you to better succeed with your initiative:
- Defining the term
Based on your region, culture and origin, the first step is to use the right and appropriate term to explain to your suppliers what you want to achieve: supply chain finance, reverse factoring, confirming, early payment finance etc. Using the right terminology and explanation will help your suppliers better understand your objectives.
- Get procurement to buy-in
Procurement is often at the leading edge of Supply Chain Finance. It is the primary connection with the suppliers, but that is a double-edged sword. Procurement may have divergent – even opposing – metrics from treasury. After all, you are getting your procurement team to ‘sell’ the concept of Supply Chain Finance and on board the suppliers, which is not always the easiest task. Incentives, make them part of the process and assist with the management of the project.
- Reduce your supply chain risk
Supply Chain Finance solutions help your suppliers produce the products you need by providing them with a flexible and cheaper alternative to traditional debt facilities. Having long term, stable, suppliers is highly valuable however, procurement teams also need to focus on diversification of their supply chain. Establishing a supply chain financing solution both for new and existing suppliers will enable you to build confidence in the ability of your supply chain to deliver your products in a timely fashion.
- On time delivery
By helping suppliers produce what you need when you need through the provision of financing, you will help them deliver your goods on time. Suppliers need to have visibility of your needs to purchase and produce on time. You may not have seasonality in your sales but they may. Giving them access to more cash to anticipate your needs is a must.
- Increase DPO while decrease supplier`s DSO
You and your suppliers have same objectives KPIs (Key Performance Indicators). DPO (Days Payables Outstanding) - DSO (Days Sales Outstanding) + DIO (Days Inventory outstanding) calculates the Cash Conversion Cycle, which is a key element for any company to plan their needs in treasury, Supply Chain Finance programmes can help both parties.
- Better oversight of your supplier chain risk
Monitoring vendor risk is a critical part to ensure the long partnership with your suppliers. There are tools, such as procurement software, which are used by some companies to follow and track supplier performance. This is a key element to make sure your suppliers are not at risk and will support your long-term initiative.
- Share the ‘love’
Be involved in this initiative. Nobody else knows your suppliers better than you. Share your negotiation culture, help with their difficulties, any insight you can provide them will be more than helpful!
- Engage your auditors
When presenting SCF to your suppliers, make sure you involve their finance department. If you are not careful, your supply chain financing endeavours can be misconstrued as on balance sheet financing. For example, your SCF risks can be re-categorised as debt. For some, the challenge is simply one of playing semantics with the auditors. “We changed the name of the programme to Accounts payable management services”. Some treasurers are finding similar issues with setting up POBO (payment on behalf of) structures where payables get reclassified as debt. Do not skip this stage as this might have long term consequences.
- Supply Chain Finance may not be for you after all
Make sure suppliers are eligible and will be ready to accept your offer. Think about where you sit in the supply chain and ask yourself ‘would I want to be in somebody else’s SCF programme?’ and if not, why not?” In a world where late payments are increasingly being frowned upon (the EU directive on late payments, the UK prompt payment code and Italy’s Codice Italiano Pagamenti Responsabili, are all cases in point), the concept of ethical SCF is going to gain more traction.
- Sell more, buy easier and pay smarter
SCF programmes are one of the new ‘key’ solutions to negotiate with suppliers. Once your SCF initiative is in place, and all your stakeholders involved, suppliers do not see this scheme as only a way to finance their working capital but a real win-win proposal helping both parties achieving similar goals.
Supply Chain Finance has been democratised for some years now and used by a number of corporates. At Demica, we have seen more and more corporates and SME`s around the world looking to implement such solution to solve various issues. After implementing a number of programmes, we clearly see the positive impact it has on companies profile's and their treasury achievements. Supply Chain Finance doesn’t mean only payment term extension but also price negotiation and cash flow improvement, which help companies in meeting treasury objectives.