Obstacles are inefficient, follow your intuition, free your inner soul and break away from tradition, let’s get it started, let’s get it started in here- The Black Eyed Peas
If there’s any industry that should implement Supply Chain Finance en masse it’s the global Automotive industry. It’s capital intensive with financing either expensive or restricted to both large and small suppliers. Further, in North America, supplier relationships have historically been strained among General Motors, Ford, Chrysler and their suppliers. That’s changing though and SCF can help maintain the positive momentum in supplier relationships.
The key for the US OEMs will be to maintain the momentum and demonstrate to suppliers that prioritizing supplier relationships is a strategic rather than short term initiative. Ford’s global purchasing chief Tony Brown indicated that Ford will continue to improve supplier relationships, stating that suppliers represent a lot of the technology on our vehicles and manage a lot of the cost. What better way to help the stability of the supply chain and help suppliers manage costs than by providing cash flow visibility and on-demand working capital financing through Supply Chain Finance.
From Supplier Bankruptcy to Supplier Responsiveness
While the credit markets have thawed for investment grade companies, there is still a chill in the air for non-investment grade corporates. They face very high financing costs and limited credit availability. While the supplier risk concern during the dark days of the credit crisis was supplier bankruptcy, the concern I’m hearing from clients now is supply chain responsiveness. Will suppliers be able to finance the working capital necessary to meet growing production schedules?
The demands on suppliers will be even greater than on the OEM’s themselves. For example, according to the Wall Street Journal Going forward, a big question is how well suppliers are positioned to ramp up production. That’s why Caterpillar took the unusual step late last year of visiting with key suppliers to ensure they had the resources to quickly boost output. In extreme cases, the equipment maker is helping suppliers get financing there could be bottlenecks and shortages as suppliers miss shipments or turn away orders because they can’t afford to buy the materials or hire more workers to do the job.
“This is not going to go smoothly,” predicts William Strauss, senior economist at the Federal Reserve Bank of Chicago. “I’d be very surprised if everyone could grow at the rate they desired.”
SCF could provide tens of billions of dollars in financing for the North American Automotive supply chain to help them ramp up production. Of course, the key word is “could”. Supply Chain Finance hasn’t been possible for most North American OEMs and Tier 1 suppliers because financing wasn’t available for non-investment grade buyers who wanted to implement SCF. That has changed though.
In the first quarter of this year we’re seeing non-investment grade SCF programs obrain funding for the first time since the onset of the credit market turmoil nearly 3 years ago. It may require more banks per SCF program as well as non-traditional sources of financing (e.g. non-commercial banks) but we are able to get non-investment grade programs funded now. So, OEMs and Tier 1 Suppliers, let’s get it started!
Published May 10, 2010