What’s The Supply Chain Finance Objective?

You wore our expectations like an armored suit- Michael Stipe

What is the objective of implementing a Supply Chain Finance solution? What do buyers and suppliers expect? I see so many SCF pitches focus on the financing aspects: how much financing, at what price, for what tenor, in which currencies and geographies, etc. Yet providing financing isn’t the objective. As discussed previously Supply Chain Finance is ultimately a supplier relationship management tool. It reduces cost, working capital and risk throughout the supply chain. But a tool is not a solution. What is the solution required to meet the expectations of the supply chain leader, that is, the buyer‰? For some the SCF objective is simply to improve the financial health of their supply chain. For others it is to reduce pricing or reduce dependency on letters of credit. For most however, the objective is generating incremental cash flow from extending supplier payment terms. The cash flow generated from SCF can be enormous. We often see gains greater than $100 Million for a Fortune 500 organization without negatively impacting supplier financial health. But the cash flow gain doesn’t come from financing. It comes from the SCF solution provider designing and implementing an SCF program that, among other things:

• Customizes payment terms based on payment terms benchmarking and develops unique negotiation approaches by commodity class, geography, supplier, etc.

• Supports the procurement or merchandising organization’s supplier negotiations with training in how to use SCF in those negotiations (not just what SCF is), tools like supplier benefits calculators and individual supplier research.

• Addresses unique supplier situations like suppliers with pre-existing liens, suppliers in bankruptcy proceedings, etc.

• Reaches suppliers in jurisdictions like the BRIC countries of Brazil, Russia, India, China and other developing economies such as Eastern Europe and Mexico.

• Automates the supplier marketing, on-boarding and training processes.

• Leverages technology that is configurable to business rules/processes such as credit memos and supplier funding requirements.

An effective SCF solution begins with a configurable multi-bank technology platform and associated liquidity. But it must also include effective program design and services to support the procurement/merchandising teams as well as suppliers. Without those elements, a trillion dollars in bank financing generates zero dollars in cash flow gain for the buyer. Ultimately it’s the procurement organization that needs to execute against the working capital and cash flow objectives, not the treasury or finance functions.