Supply chain finance yields $5 billion for P&G
The US consumer goods giant has provided tangible evidence of the benefits for multinationals. Nicholas Dunbar reports.
Consumer goods giant Procter & Gamble has quantified the benefits it gets from its five-year-old supply chain financing programme. The programme allowed the Cincinnati-based company to extend payment times to suppliers in return for offering them discounted up-front cash payments with the help of partner banks.
Speaking to investors on a 1 August earnings call, P&G chief executive David Taylor said, “An important cash productivity project has been supply chain financing, which we continue to expand. This program, which is a win for suppliers and for P&G, has yielded nearly $5 billion in cash in the five years we’ve been driving it. We improved payables by five full days last year on a constant currency basis”.
Supply chain finance generates cash for P&G because the extended payment period allows it increase accounts payable in its cash flow statement. That reduces working capital and frees up cash flow. For example, in its annual report for the fiscal year ending on 30 June, P&G said it generated $1.4 billion of cash, partly due to this effect. Days payable outstanding were 108 days, compared to just 75 days when the SCF programme began in 2013.
Such extension of payment terms has attracted critics, concerned about the impact on small to medium size enterprises (SMEs). Some argue that high days payable outstanding should be considered a black mark under corporate and social responsibility (CSR) guidelines. SCF is one way of mitigating these criticisms.
On its website, P&G has a series of documents and testimonials that explain the benefits for suppliers. The principle works on the basis that the supplier has a lower credit rating than AA-rated P&G. On this basis it would cost the supplier more to fund an unpaid receivable for 75 days rather than receive cash from a bank after 15 days, discounted to pay the bank the interest cost of lending to investment grade P&G for a further 60 days or more.
One P&G supplier that provides a testimonial is Brazilian forestry company Fibria Celulose, which has a credit rating of BBB-, just below investment grade. According to Fibria’s chief commercial officer Henri-Philippe van Keer, “We joined the SCF programme at the pilot stage as our company identified it as an opportunity to improve free cash flow and lower working capital at competitive cost”.
P&G’s website identifies Citi, Deutsche Bank and JP Morgan as its three partner SCF banks. By using SCF, P&G has in effect transformed its $10.3 billion payables into short-term bank financing, supplementing the $10.4 billion of existing short-term debt on its balance sheet. Better still, the financing is free of charge because suppliers absorb the interest cost in their discounted cash payments.
Other consumer goods giants including Mondelez, Kraft Heinz, Kellogg and Anheuser Busch Inbev have also introduced SCF programmes as part of payment term extensions, albeit with less transparency than P&G. Suppliers that want to work with these companies appear to have little choice but to accept the credit on offer, paying for the privilege of accepting it.
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