Horses for Courses, Part I

Supply Chain Finance is a service which is customized to the needs of the buying organization and the characteristics of their supply chain. It is not a plug and play product. Although there clearly are best practices that lead to much better and more predictable results, different buying organizations can and should implement SCF differently. These different implementation approaches will also impact which SCF partners can best help the buyer meet their objectives. Today I wanted to look at how some potential buyer objectives impact SCF implementation and the selection of SCF partners.

Reduce cost and risk in the supply chain.
For this objective, suppliers will be prioritized based on a combination of strategic importance, insolvency risk and the impact of working capital on demand responsiveness. Given the greater financial distress of prioritized suppliers, the SCF technology will require features to minimize the risk associated with supplier bankruptcy rather than simply excluding those suppliers most in need of improved cash flow. Features such as the ability to easily process credit memos/offsets, the ability to set reserve amounts, the ability to fund suppliers without requiring liens on receivables, etc. will be critical. This objective also places a greater emphasis on a scalable and sustainable liquidity model, one that will finance the largest and most financially distressed suppliers during credit market volatility. Given the importance of critical direct material suppliers and the changing views of financial institutions on firm and industry credit risk, this objective will require a bank independent, multi-bank funding approach. Multiple buyers have already experienced the impact of critical supplier bankruptcies due to the withdrawal or restriction of credit by proprietary, lead bank SCF platforms. Further, although SCF is a ‰”buyer risk‰” model, some banks will not fund specific suppliers which will require the ability to bring in additional banks (eg, we‰’ve seen some banks who won‰’t fund suppliers below a certain credit rating, in certain geographies or who have a high concentration of revenue with the buyer).

Support a term extension initiative or pricing reductions.
Here, suppliers are prioritized based on the potential for payment term extensions or price reductions. This leads to a somewhat different supplier prioritization than if the objective is to reduce cost and risk in the supply chain. Services to support the Procurement/Merchandising team’s term extension negotiations with suppliers are much more critical than with other buyer objectives. For example, payment terms benchmarking, training for the Procurement/Merchandising teams (including web based, on-demand tools), helping determine supplier negotiation strategies (we call it the ‰”playbook”) and supplier sales (vs just education) are all more important than with other SCF objectives. With the potential cash flow gain of $100 Million or more, even if an outstanding services provider achieves results only 20% better than a good service provider, the impact is $20 Million.

Support low cost country sourcing and/or migration from Letter of Credit to Open Account.
Here, suppliers are prioritized by geography and payment methodology. Given the geographic dispersion of suppliers, buyers will want to work with SCF partners who have experience and capability in handling multi-geography SCF rollouts. It is critical for the buyer to ensure that the liquidity model supporting their SCF solution has the flexibility to bring in funding providers to support each required geography. Many US and Western European banks do not support receivables transactions in developing countries in Asia, Eastern Europe and Latin America, never mind all 3. This places a greater emphasis on using a multi-bank SCF solution. These are a just a few examples of the interplay between the buyer’s objectives and Supply Chain Finance implementation strategies and partner selection. Keep in mind there can be different objectives for different groups of suppliers within the same buyer. Buyers will want to ensure that they optimize their SCF program based on their unique objectives and supply chain characteristics.