Asking The Right Questions, Part I

Companies interested in implementing supply chain finance often ask what questions should be included in their supply chain finance RFPs.

I thought I’d start with a post about a couple of frequent RFP questions that aren’t as helpful as they appear. The least helpful questions revolve around a single theme – supply chain finance programs are very, very different from one another depending on the buyer’s supply chain demographics, locations, existing terms, negotiating culture, industry dynamics, etc. Trying to determine how any one program will develop based on what happens in the average program is not very helpful.

Each supply chain finance program requires a unique design based on the buyer’s circumstances to optimize results.

A couple of examples:

1. What percent of suppliers on your supply chain finance platform trade their receivables for early payment? This isn’t very helpful for a couple of reasons:

1. We’ve got some programs where the buyer wanted all of their suppliers on the program, have very short terms (eg 30 days), have dispersed spend and didn’t ask for any term extensions. Suppliers on those programs tend to trade less often, about 30% of dollar value is traded. There are more programs where the buyer has concentrated spend and long terms where suppliers trade nearly 100% of invoices by spend. The average is over 70% but the standard deviation is high so the averages aren’t very useful.
2. This really shouldn’t matter to most buyers anyway. Generally, their goal is for supply chain finance to support a term extension initiative, not to have a high number of suppliers trading receivables for early payment. Trading rates only come into play when the buyer self-funds but you wouldn’t want to compare trading rates in a bank funded program to a self-funded program. They dynamics are very, very different.

2. What percent of the suppliers you work with agreed to a term extension? Again, this seems like good information but not all term extensions or supply chains are created equal. We have some suppliers who are trying to extend terms from say 90 to 105 days and others moving from 45 to 120 days. Naturally, the success rate is different under those two scenarios, never mind that buyers have different levels of spend concentration, leverage supply chain demographics, etc. The average might seem to provide information, but the standard deviation is so large that it confuses more than it illuminates.