The Whole Nine Yards

The Whole Nine Yards  Tactics without strategy is the noise before defeat- Sun Tsu

Last week I spoke about how an supply chain finance service provider needs to support the buyer’s Procurement or Merchandising team in their effort to optimize supplier payment terms. I’d like to get into a little more detail on how best to do that. Specifically, a best in class implementation should include the following support services provided to the buyer’s Procurement team:

1. Provide payment terms benchmarking specific to the commodities the buyer purchases. Benchmarking also needs to take into account the buyer’s geography, industry and supplier relationships. Commercial considerations such as length of contract, sole or multi-sourced commodity, etc. must be included.
2. Identify optimization opportunities, based on the information described above, in collaboration with the buyer’s Procurement / Merchandising team.
3. Determine supplier approach and messaging based on the optimization opportunities. Messaging needs to take into account the supplier’s business characteristics including their corporate objectives, business drivers, economic impact of any term extensions and the supplier’s value of capital.
4. Prioritize suppliers for rollout, identify quick wins, determine objectives and KPIs and pull it all together into a strategy to achieve meaningful and continuous working capital efficiency improvements.
5. Train the Procurement team and provide them with support and tools throughout their negotiations (eg. Supplier Cards and other multimedia tools). In addition, tools should be provided to the Procurement team to monitor progress against objectives, ensure strategy compliance and incorporate actual results into program deployment.

By providing these services, the supply chain finance provider can deliver a whole product to the buying organization that maximizes working capital efficiency and cash flow improvements and minimizes time to value. It is much more effective than a one size fits all approach to suppliers. A study title Maximizing the Value of supply chain finance conducted by the Beta Research School for Operations Management and Logistics (van der Vliet, Reindorp, Fransoo) looked at the expected returns of implementing a one size fits all strategy (line 1) vs a customized supply chain finance strategy (lines 2 and 3). You can see the expected return are greater for a customized supply chain finance approach.

Many may find it comforting to think that using supply chain finance to support supplier payment term negotiations is just a math exercise where one simply determines the supplier’s cost of debt, compares it to the supply chain finance rate offered and calculates the appropriate term extension which suppliers will happily accept. I wish it were that simple but as we have discussed in the past, there are many reasons why this rate arbitrage approach will significantly reduce the potential benefits of implementing supply chain finance. Proof of this is the many suppliers who participate in supply chain finance yet have a higher cost of debt than the supply chain finance program rate. Buyer’s and their supply chain finance partner need to go much further than simple rate arbitrage.

They’ve got to examine industry best practices around payment terms by commodity class as well as the suppliers’ key business drivers. That’s a lot of work for the supply chain finance services provider but, to paraphrase a famous expression, no pain no cash flow gain. Large buyers can generate several hundred million dollars in operating cash flow when using supply chain finance properly to help optimize payment terms. The gain for doing it right is significant and even if best practice improves performance by only 20% that’s still an advantage of $20 Million to $100 Million in additional cash flow resulting from best practices vs an average implementation.