Regulatory reform – and in particular the effect of Basel III on banks – has put pressure on corporates to take on more of the risks in their supply chains.
Companies have been looking to supply chain finance (SCF) to improve their working capital and manage risks across complex markets.
From corporate buyer-managed, single and multi-bank programmes (many of which are run by more bank-agnostic third-party providers) through to ones that involve dynamic discounting and alternative financing sources, the range of SCF programmes in use can be confusing and challenging to compare.
Geographical location and industry may make the biggest differences to what should be international best practice. Again the regulators may serve to mix up the pudding. Indeed, accounting out to be more important to you than the purchasing or sales functions. In an ideal world, you’ll balance all three out, but this is no ideal world.
Treasurers wanting to find a ‘plug and play’ for SCF will be disappointed, but it pays to take the initiative to make implementation easier. The keys are education, communication and incentivisation. Over-promising and under delivering is a problem that looms large for SCF and a cold analysis of the costs, beneﬁts (and hidden costs and unexpected beneﬁts) in multiple jurisdictions is very important.
Unilever has a procurement-led supply chain finance programme. “Implementation is not easily replicable in different markets but what is replicable is that you can learn from your mistakes,” says Pascal Germain, director corporate finance & treasury EMEA at Unilever.
Here are five key pointers to get you on track
1. Define your terms
Industry players tend to agree that SCF is a misnomer. For one thing, SCF is not simply about financing suppliers through reverse factoring (which is also known as ‘confirming’ even though Santander admits to rueing the day it slapped copyright on the term years back). Reverse factoring means getting paid earlier on an invoice (for a fee) and can be attractive for suppliers – extending their accounts payable and beneﬁting from the stronger credit’s rating.
So, inevitably, discussions on SCF tend to get bogged down in the definition. It’s taken the Euro Banking Association and the ICC to put down a marker for standardising definitions. “SCF is financing supply chain processes,” says Enrico Camerinelli, senior analyst EMEA at Aite Group. “It’s a broad umbrella, but it’s not rocket science.”
Is the lack of a comprehensive definition a roadblock? Possibly, but as long as all players have the same one, there shouldn’t be a problem.
Effective SCF means articulating complex concepts and then communicating them throughout multiple business lines. In order to get a successful programme in place you need to get all the preconditions right, to identify key players in the process and discuss what is possible. Some players call this an opportunistic coalition. But having a ‘process owner’ sitting in finance/treasury can be one successful way of engaging that coalition.
If you want to hear more about Supply Chain and other issues currently facing treasurers, I recommend our Effective Supply Chain Finance event which will be held in Amsterdam on 3 June 2015. Download the brochure here
2. Procure procurement’s buy-in
Procurement is often at the leading edge of SCF. It is the interface 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 SCF to get suppliers on board, which is not always the easiest task.
“Procurement has traditionally been focused only on the cost of goods,” says Unilever’s Germain. “The ‘win’ of SCF to the corporate is not obvious if key performance indicators (KPIs) are not measured and discussed.” He adds: “You need to embed what the benefits are, and that means education.”
Sourcing or operating in a low cost environment (for that read most MNCs and growing medium-sized companies) has been the driving force for growth. But often a lot of working capital is locked in supply chains across the world, and that can act as a drag. SCF programmes can both protect the supply chain globally and also release working capital that’s tied up in it.
Martin Schlageter, head of treasury operations at Roche, says that setting effective KPIs was the start of a three-year journey to implementing the company’s SCF programme. Metrics have been a big part of Roche’s working capital improvements. “The best way to succeed was to embed KPIs into bonuses,” he says.
Buy-in is also necessary for logistics and IT. The same message applies: measurement, communication and appropriate incentives.
3. Share the supplier love
Know Your Vendor should be as important a success factor as Know Your Customer is to a bank, some treasurers say. This is a key part of risk analysis along the supply chain. Your suppliers’ loyalty is important. You may not be your suppliers’ only client, or, indeed, your suppliers’ biggest client. They may supply your competition. “The lessons are, treat them well and loyalty will be its own reward,” says Schlageter. Getting suppliers to sign up to the programme (inelegantly called ‘onboarding’) is one of the most difficult aspects of SCF. Schlageter points out that even if suppliers don’t come on board, you can learn a lot more about them just by asking. “It’s a good way of finding out about their financial stability and standardising payment terms. One client said they weren’t interested in SCF because they already have too much cash – so we considered extending payment terms further from 60 to 90 days.”
4. Engage your auditors
Or maybe this should be the first point. If you are not careful, your supply chain financing endeavours can be misconstrued on the balance sheet after the fact. Your SCF risks being re-categorised as a lump of 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’, says one treasurer at a European food retailer. “And that seemed to work.” Some treasurers are finding similar issues with setting up POBO structures (payment on behalf of) where payables get reclassified as debt. Check it works for you – you are taking risk away from the banks along your supply chain, make sure you are being effectively rewarded for it. You may only want to extend your balance sheet to key suppliers and you may, as some companies do, want to extend ‘headroom’ on your balance sheet in case the programme abruptly ends.
Changing bank ‘horses’ midrace is a risk too – a factor which makes some corporates look for a bank-agnostic programme. Others have had to deal with their own credit ratings being under threat for different reasons, which can impact a programme. Again, measurement and communication of risk is important.
5. Last, but not least. SCF may not be for you after all
Q: Why don’t you see many Nordic companies engaging in SCF programmes?
A: Because they simply pay faster anyway.
That may sound like the beginning of a bad joke, but the reality is that this was an exchange with a Nordic corporate treasurer and explains the corollary, why supplier finance (at the very least) gets better traction in countries where there is a tradition of late payments.
There are other reasons why SCF may not work for your company. As one treasurer of a European food group says, “Think about where you sit in the supply chain ‘food chain’ and ask yourself ‘would I want to be in somebody else’s SCF programme?’ and if not, why not?”
But 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 CPR (Codice Italiano Pagamenti Responsabili), are both cases in point), the concept of ethical SCF is going to gain in favour, according to Aite’s Camerinelli.
“You may find yourself assessed and ranked on your payment behaviour and how proactive you are in providing support in financing supply chain processes,” says Camerinelli.
If you are responsible for your company’s financial supply chain and want to understand how to enhance working capital, increase liquidity and mitigate risks, this essential event is for you - only €300 for corporate treasury professionals.
EuroFinance's 2nd annual
Effective Supply Chain Finance
3 June 2015, Amsterdam, The Netherlands
This 1-day knowledge-sharing event will showcase a range of corporate case studies to help you understand how every line item in your balance sheet can be a precious resource to enhance working capital, increase liquidity and mitigate risks. Everybody you meet will be someone you can learn from.
What's new for 2015?
- Get insights on regulation to highlight the real risks for late payers
- Find out how procurement and treasury can work best together to create successful programmes
- Learn how to make SCF a part of an adaptable working capital toolset
- Find out how SCF can be used not just for operational capital but for long term capital projects
- Learn how to get the ‘long tail’ of smaller companies engaged in SCF programmes
- Decide what works best and find out how suppliers can have more choice of when to pay
- Understand how SCF technologies will evolve in the future
Who should attend?
- Treasurers who are responsible for their financial supply chain and who want to understand how to enhance working capital, increase liquidity and mitigate risks
- Procurement professionals working with treasurers
- Banks, technology and platform providers who want to meet with procurement and treasury professionals to understand the challenges they face
“A lively and interesting presentation with a good balance of banking and corporate viewpoints.”
“A very useful conference with great insight into SCF problems and opportunities.”
“A focus on Supply Chain Finance for a conference was a great idea! Please set up a follow-up conference!”