EuroFinance

As countries around the world adopt increasingly drastic measures in an effort to slow the Covid-19 pandemic, individuals and businesses are being severely tested. For treasurers, current challenges range from the rapid adoption of working from home models to stresses in the corporate bond market. Another major threat lies in disruption to essential supply chains: if key suppliers are unable to provide goods on time, companies will struggle to meet customer orders.

One solution that may be able to support companies facing the latter situation is supply chain finance – a topic that was explored in detail at EuroFinance’s one-day conference on working capital and supply chain finance on 26th February. At that point, the coronavirus crisis had yet to be confirmed as a pandemic by the World Health Organisation, but the impact was already evident, with some speakers appearing via video link due to local travel restrictions.

While the situation has moved on considerably since then, the messages arising from the conference are just as significant now as they were then – not least because of the supply chain implications of the developing crisis, and the role supply chain finance can play in helping to mitigate these.

What is supply chain finance?

Supply chain finance is a solution that allows highly rated corporations to support their suppliers by offering them early payment at a cost of funding which is based on the corporation’s credit rating rather than the suppliers’. The corporation then repays the funding provider on the invoice due date. Once seen as a niche solution, supply chain finance gained traction in the wake of the 2008 financial crisis, with companies acting to support their suppliers, and thereby prevent disruption to their own businesses.

In the current market, supply chain finance could once again have an important role to play. Indeed, the covid-19 pandemic is already affecting customer behaviour in many sectors. As Martin Brudermüller, Chairman and Chief Technology Officer at chemical company BASF, said in a recent earnings call: “…what we can see overall is a very, very cautious ordering behaviour…. it is a little bit more living from hand to mouth.”

Smaller suppliers may find such a shift in customer behaviour particularly difficult to accommodate. “If cash dries up across the supply chain, we could see a lot of smaller businesses start to fold,” commented Christian Lanng, CEO of Tradeshift, in a recent press release that also found global B2B transactions dropped by 62% in the week of 8th March.

In light of these challenges, some industry experts predict a surge in demand as finance becomes more expensive – or even difficult to obtain – for smaller suppliers. By allowing suppliers to access payment within days instead of weeks or months, supply chain finance can give suppliers access to the working capital they need to stay in business in a highly challenging market.

Maximising the benefits

For companies that do take advantage of supply chain finance during this difficult period – either by expanding an existing programme or by putting a programme in place – there are certain pitfalls to avoid if the programme is to be a success.

As Martin Schlageter, Roche’s Head of Treasury Operations pointed out at the recent conference, a mismatch between the goals of treasury and procurement is a common stumbling block where working capital initiatives are concerned: procurement may be focused on achieving cost savings, while treasury’s main focus is likely to be on improving cash flow. As such, collaboration between treasury and procurement is key.

“You need a mindset change and you need harmonised incentives,” Schlageter said, adding that once this is achieved, an effective programme can deliver so much value “that you are immediately able to enter into qualitative discussions with the supplier.”

Having the right processes in place is another essential factor, Schlageter explained – particularly for a company like Roche, which has 15 different ERP systems around the world. By introducing a payment factory structure, the company was able to streamline its payment process globally, thereby making it easier to embed supply chain finance into the process.

Another consideration highlighted during Roche’s presentation by Stephan Wilckens, Head of Global Procurement Productivity & Performance, is the importance of engaging closely with suppliers when implementing a supply chain finance programme. As such, Wilckens believes Roche’s bank-provided solution is a better fit for the company’s needs than a third-party solution, which might offer less control over the programme’s execution and benefits.

Consider the move to extend supplier payment terms, a crucial but sensitive aspect of supply chain finance “Do you want a third party to send letters to your key suppliers, or do you want to engage them in a discussion?” he says, adding that companies should expect to get “a lot of pushback” from suppliers if they opt for the former approach.

Safety first

While the advice given by Roche predates the more recent escalation of the coronavirus crisis, these are nevertheless important messages to bear in mind when operating a supply chain finance programme – and in times of stress, it’s particularly essential for companies to maximise the benefits of any measures they may adopt to boost the resilience of the supply chain. For example, participants at the Madrid conference highlighted the importance of bank relationships in underpinning supply chain finance programmes.

At this stage, however, it’s also important to note that many companies will be concerned with more immediate crisis management activities. “We’re focusing on our people’s health and safety first, then reviewing our cash forecasts,” says Anthony Buchanan, Treasurer at Asahi European Breweries, UK and winner of EuroFinance’s 2019 Award for Innovation in Risk & Financing. “Within this part of work, we will review our customers’ and suppliers’ needs – but it’s too early to discuss next steps.”