Growing Pains For Supply Chain Finance?

Birds do it, bees do it, even educated fleas do it.- Cole Porter

Over on the cash management blog at CFO World, Peter Williams commented on a recent Demica survey which found that fewer bankers believe Supply Chain Finance will experience strong growth next year (75% see strong growth vs 90% in the previous survey). Mr. Williams noted that SCF makes a lot of sense and CFOs are jumping on board. SCF provides on-demand operating cash flow to suppliers in addition to reducing cost, capital and risk throughout the supply chain. As Mr. Winter points out, the advantages of SCF for all parties are clear and the potential benefits far outweigh the minimal set up costs. Supply chain efficiency and cash flow, two areas positively impacted by SCF, remain top corporate concerns. But the gap between “potential” and “reality” can be cavernous. Has this prevented SCF from “leaving the launch pad”?

Mr. Williams points to three SCF challenges. The first two are “getting the technology right” and “overcoming different legal systems”. Some providers of proprietary SCF technology may have technology challenges and most have challenges in one legal jurisdiction or another, however, SCF technology platforms have operated successfully for nearly a decade. At PrimeRevenue, we operate our open, bank independent SCF technology platform in over 30 countries and face competitors in most of them. Mr. Williams then points to perhaps the most important challenge CFOs are unwilling to commit– their limited financial headroom to these sorts of deals en masse. This issue of credit capacity is indeed significant. The concern is in large part driven by the credit crisis and the need to preserve liquidity and reduce bank dependency. It has lead large corporates to implement bank independent solutions that provide multiple accretive liquidity sources that do not impact a company’s credit capacity with its relationship banks. This is a natural response of SCF to the credit crisis as SCF evolves to open, bank independent technology and service platforms. But to get a sense of what’s happening on the ground, let’s look at what companies are actually doing. Just looking at publicly announced SCF initiatives we see leaders in such diverse industries as truck manufacturing (Volvo, Caterpillar, Scania, etc.), appliance manufacturing (Whirlpool, Electrolux) and retail (Wal-Mart, Kingfisher, Lowes, Sainsburys, Carrefour, etc) implementing SCF. These organizations have global supply chains and SCF wouldn’t be of much use to them if it was a purely domestic opportunity.

New technology and business process adoption takes time, especially in the Global 2000. Hurdles will always pop up. In response, SCF has evolved away from bank proprietary platforms to open, bank independent platforms to meet the challenges surrounding technology, legal jurisdictions, supplier adoption, benefit attainment and credit capacity.