Supply chain finance as a strategic tool for managing working capital
The relationship between buyers and sellers often involves balancing different priorities. Buyers typically aim to delay payments to preserve cash, while suppliers, especially smaller entities, need to receive payments quickly to maintain operations. This dilemma has existed for as long as trade itself. However, Supply Chain Finance (SCF) has emerged as a critical solution by offering flexibility in payment terms.
According to a report from KPMG, companies are redefining their supply chain strategies to address the disruption and maintain resilience in an evolving global environment. The same report highlights significant investments in digital tools like advanced analytics, IoT, and blockchain to enhance visibility, predict disruptions, and improve decision-making.
At the EuroFinance International Treasury Management 2024 in Copenhagen , corporate treasurers shared their insights on how SCF is transforming their financial operations, ensuring supplier stability, and offering better cash flow management.
The foundation of SCF
Emma Hayward, group treasurer at Dowlais, a company operating in the automotive and powder metallurgy industries, shared how SCF has been important to the company’s working capital strategy. She explained that, while Dowlais wants to extend payment days to maximise cash flow for other purposes, the company also recognises the importance of supporting suppliers. “We have a partnership approach with our suppliers. We don’t want to push them too far in terms of payment terms,” she said.
Dowlais embarked on its SCF journey three years ago. According to Hayward, the process was not without its challenges. “It’s not something that happens overnight. It requires significant effort, senior buy-in, and collaboration across various departments,” she explained. SCF implementation, for Dowlais, required the active involvement of procurement, commercial teams, legal, finance, and treasury departments. Additionally, aligning multiple stakeholders, including various banks, across geographies was a critical part of the process.
“We now use supply chain finance in the US, Europe, and Asia,” Hayward continued. “It’s flexible, especially in terms of currency, and helps bring multiple banks into the platform, which is important to avoid reliance on any single banking institution.”
Overcoming challenges: technology and integration
The implementation of SCF isn’t without its hurdles. Mack Makode, VP and treasurer at Under Armour, a global athletic apparel, footwear, and Accessories Company, shared his experience during the COVID-19 pandemic when the company’s supply chain finance program faced significant challenges. Initially, Under Armour worked with a single bank to buy receivables from suppliers. However, the bank’s risk team pulled out of the program, leaving the company scrambling for alternative solutions. “We realised that the bank was acting as a chokehold, and if something happened, we were left without options,” said Makode.
His advice to others exploring SCF solutions was clear: avoid relying on a single bank. “Instead of going with a bank, working with a technology partner is better. They offer a platform where different banks and non-bank funders can plug in, giving you flexibility and a more robust solution,” he stressed. This “plug-and-play” model ensures that if one financial institution can no longer participate, another can step in without disrupting the program.
Makode further emphasised the importance of optionality, especially for large organisations with diverse supplier bases. “In our case, treasury plays a significant role in ensuring that our relationship banks participate on the platform,” he said. “At the same time, we have non-bank funders available in case we need them, which gives us the flexibility to meet the needs of all suppliers, regardless of their banking relationships.”
Navigating operational challenges
Despite the benefits, SCF programs come with their own set of operational challenges. Hayward pointed out that implementing SCF requires careful management of both the financial and technological aspects. For Dowlais, the integration of SCF with their existing ERP systems posed a significant challenge. “We had an older and complex network of systems, so integrating with the SCF platform required significant effort. We had to work closely with IT and legal teams to ensure smooth operations,” she explained.
Another challenge faced by Dowlais was ensuring that the banks providing funding received their repayments on time. “If you don’t pay the bank back, that becomes a much bigger issue than getting suppliers on the platform in the first place,” Hayward noted. Therefore, constant communication and monitoring are critical to maintaining a healthy SCF program.
Makode echoed similar sentiments, particularly the ongoing collaboration required between treasury, procurement, AP, legal, and IT teams. “Sometimes there’s a divergence between procurement and treasury teams—procurement views SCF as their suppliers’ project, while treasury sees it as a financing tool. Coordinating between these teams, along with AP, legal, and IT departments, ensures that the process runs smoothly,” he said.
Moreover, the sheer scale of the process—uploading thousands of invoices daily—necessitates automation. “Without automation, manually handling millions of dollars in thousands of invoices would be impossible,” Makode added. At Under Armour, the platform automatically uploads the invoices to the SCF platforms and generates the payment run based on invoice data, ensuring that payments to banks are processed accurately and on time.
Makode added that companies must ensure that all suppliers are treated equally in terms of payment. “You can’t have two payment terms—one for those using SCF and one for those not. That would create confusion and potential auditing issues,” he warned. By aligning payment terms for all suppliers, companies can ensure smoother financial operations and maintain transparent, consistent relationships across their supply chain.
What’s next?
Supply Chain Finance is rapidly evolving, providing businesses with the tools to optimise working capital, support supplier relationships, and navigate financial uncertainties. However, its successful implementation requires cross-functional collaboration, careful technology integration, and ongoing supplier engagement. As Hayward and Makode illustrated through their experiences, SCF is not a one-size-fits-all solution. Still, with the right partners and strategies, it can be a powerful tool to drive financial stability and growth.
The evolving landscape of SCF will likely continue to offer new opportunities for businesses to strengthen their supply chains, mitigate risks, and ultimately create more resilient operations. For companies considering SCF solutions, the key lies in understanding their business’s specific needs, selecting the right partners, and maintaining open communication across all departments. With these factors in place, companies can successfully navigate the complexities of SCF and reap the benefits of this innovative financial solution.