A Working Capital Solution

Why did you implement a Supply Chain Finance programme?

Supply Chain Finance (SCF) is a very exciting area and still one that not many people know very much about. It is often viewed as a credit arbitrage opportunity, but our main motivating factor in deciding to implement a Supply Chain Finance  programme was to improve our working capital – basically to release capital for the business.

This was of clear benefit for 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 in considering the Supply Chain Finance (a form of asset based lending and reverse factoring) programme.

What about Buyer / Supplier relationships?

Many industry commentators, as well as some of the Supply Chain Finance players, focus on improved buyer / supplier relationships as a benefit of implementing a Supply Chain Finance programme. Our implementation decision, however, was driven principally by financial considerations.

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 did consider the relationship we had with our suppliers, and we did not believe we could ask suppliers to further extend terms. We viewed the implementation of a Supply Chain Finance programme as a move to the next level and something that was necessary for our business.

Are there issues surrounding internal ownership of the supply chain finance project?

In the same way as commentators have been discussing the buyer / supplier relationship, they often also highlight the potential internal ownership issues at a buyer organisation. Does Finance (asset based lending) take the lead or is Supply Chain Finance a Procurement project? For us, the Supply Chain Finance programme was initiated by the Finance team, but ownership is now with Procurement. We see this as a 50/50 split – a true collaboration. Collaborations between different teams will always bring challenges, but in our case these were minor and so far certainly not insurmountable.

What motivates your suppliers to join the supply chain finance programme?

We have started talking to suppliers (regarding payables financing and supply chain financing) only relatively recently. To date, we have met with around 10 – 15 suppliers, all of whom are relatively small. These suppliers have found that financing is fairly expensive for them and often difficult to obtain. The advantage of a Supply Chain Finance programme for these small suppliers is greater than for larger companies because it gives them access to less expensive supplier finance / vendor finance than they could get on their own. Demica's supply chain financing solution is a solidly proven solution for payables financing and reverse factoring.

Suppliers’ motivations vary a lot between different types of suppliers. For the larger suppliers, it isn’t a question of cheaper finance. Larger suppliers see Supply Chain Finance (and asset based lending) more as a means to improving their financial flexibility, improving their balance sheet, and improving financial ratios, where needed.

How did you decide which suppliers to approach first?

We began by approaching fairly small supplier companies where we have a significant spend. As smaller companies, they had a lot more to gain from joining the Supply Chain Finance and supplier finance / vendor finance programme, and given the size of our spend, we were in a fairly good bargaining position.

We started by looking at each of our top 50 suppliers. We examined each of these in turn, scoring different criteria, and built a list of the ones we thought were best to approach first. We wanted to be able to talk to all the suppliers on this priority list within a three-week period.

There is a size below which it may not be feasible for a supplier to join a Supply Chain Finance programme, but the actual size is more of a question for the bank and the Supply Chain Finance platform provider than for us as the buyer.

How did you begin talking to your suppliers about supply chain financing?

We set up Supplier Days and invited the chosen suppliers to attend. At these Supplier Days, we outlined our supplier finance / vendor finance plan to implement the programme. The Supplier Days offered our suppliers the opportunity to ask questions and to discuss initial concerns with us and with other suppliers before we began to talk individually about supply chain finance and reverse factoring in more detail.

Following the Supplier Days, we sent each supplier a letter about the supplier finance / vendor finance SCF programme, and set up individual supplier meetings, at which we explained the concept in more detail and addressed individual supplier finance / vendor finance concerns.

It is still a little early for us to accurately say what concerns our suppliers most (if anything) about joining our Supply Chain Finance programme. Anecdotal evidence from other buyers suggests that around three-quarters of suppliers approached about joining a Supply Chain Finance programme will express some interest. To date, we have certainly received positive responses from all the suppliers we have approached.

Typically when we begin to speak to suppliers about the programme, we usually start by speaking to the President, CEO or owner. This is mainly because we are talking to smaller companies for whom Supply Chain Finance may be a new concept. For a small company, whether or not to join a Supply Chain Finance programme is also a very important, high level decision. If we were to talk to larger companies, it may well be that the initial contact would be elsewhere in their organisational structure.

Were there any surprises during implementation of  Supply Chain Financing?

It is still relatively early, but so far implementation of Supply Chain Financing has gone pretty much as we had expected with no surprises.

The most important consideration in ensuring a smooth implementation phase is the decision about which partner to choose – which Supply Chain Financing solution provider.