If I had asked people what they wanted, they would have said faster horses- Henry Ford
No, that’s not the latest text message shorthand or “txtspk”. The Bank of England (BOE) commissioned the Association of Corporate Treasurers (ACT) to chair a Supply Chain Finance Working Group (SCFWG) to review the Supply Chain Finance market. The review was released this week and it provides much more than an alphabet soup of acronyms. The report refers to what I would call Supply Chain Finance as Buyer Driven Receivables Programs (BDRP). The report is at times inconsistent in their SCF definitions but for now we’ll leave the definition debate to my first post on Supply Chain Finance. The working group concluded that SCF has an important role to play in providing business credit in today’s credit constrained environment, “In conclusion, SCF can help ease lending constraints for small to mid tier companies or those with a weaker credit standing in market conditions where lenders are concerned with credit quality we do believe that buyer driven programmes can and will help ease funding conditions…it is working and fulfilling a valuable role in the provision of working capital to a diverse range of companies.” I found it interesting that the working group decided to call out the role of bank independent technology platforms vs proprietary bank owned platforms. Platforms that are bank/investor independent are helpful to broader market availability but need to be more open to alternative funding sources. The last part of that statement is a bit of a head scratcher since, by definition, open, bank independent platforms are more open to alternative funding sources. It was nice to see the working group point out the important role of “integrators”. According to the report “The role of the integrator is to provide advice and assistance to organisations who are embarking on the deployment of a SCF solution.” The integrator should provide expert input in the selection of the appropriate solution, the accounting structures and tax implications, the selection of funding source (internal / external) and the “on boarding” (recruiting) of “suppliers”. Interestingly this role today is usually performed by the SCF technology/services provider or banks rather than traditional systems integrators such as consulting firms. Among the reports other conclusions
- Selection of the best Supply Chain Finance solution depends on the requirements of the buyer and their unique suppliers
- Supply Chain Finance (Buyer Driven Receivables Programs) are growing fast and there is no lack of funding constraining the growth of SCF.
- Procurement should play a vital role in SCF solution selection and deployment.
- Adverse market conditions have lead many organizations to extend supplier payment terms which has forced suppliers to look for alternative financing solutions.
- Accounting considerations are important for the buying organization.
One area of the report which is a bit lacking is the discussion of buyer objectives in Appendix 2. All of the objectives focus on features of an SCF solution. There is no mention of supplier relationship management objectives such as improving the financial health of the supply chain, payment term extensions, reduced pricing, etc. All in all, from my perspective as someone who has implemented many Supply Chain Finance programs, I think the white paper provides a useful description of SCF despite the omission of some critical tactical considerations as well as some definitional inconsistencies.
Published September 7, 2010