Why Not?

The value of many men and books rests solely on their faculty for compelling all to speak out the most hidden and intimate things. – Friedrich Nietzsche

One question I’m often asked by companies evaluating Supply Chain Finance is, “Why wouldn’t a company implement supply chain finance?” Most companies when first exposed to supply chain finance see the benefits straight away. Costs, capital, and risk are reduced for participating suppliers. The only question is how many suppliers will participate in the benefits. Most companies are looking to gain more than simply improving the financial health of their suppliers, though, but even if that’s all they accomplished it would seem the return would be worth the seemingly low costs associated with implementing SCF. A closer look at those costs shows that while some are readily apparent others are much less obvious. Let’s look at the main costs to the buyer of implementing supply chain finance:

1. Technology Implementation and Program Management This is the obvious one. The cost to implement the SCF technology platform can vary widely among technology providers on a percentage basis but is not large in relation to the potential benefits. Generally, the technology implementation can be done with internal IT resources at a cost of $50,000 to $200,000. Naturally, this will depend on factors such as the number of geographies involved, the number of ERP systems which feed data to the SCF platform, etc. In addition to the technology implementation costs, the SCF program will require some program management resources on the part of the buyer. This generally does not require hiring additional resources but may take full-time equivalents depending on the services provided by the SCF technology/services provider and the scope of the SCF program.

2. Credit Capacity With bank funded SCF programs, banks will acquire payables/receivables from suppliers without recourse back to the supplier. This means the ultimate credit risk for the bank, as it is for suppliers, is with the buyer. Financing provided to suppliers will, therefore reduce the bank’s credit capacity with the buyer and this is an issue for some buyers. For example, a buyer who may be considering an acquisition, share buyback, etc. at some point in the future may not want to reduce the credit capacity they have with their relationship banks. In this case, they will want to select bank partners where they do not have a credit relationship and where they most likely will not look to meet their own liquidity needs.

3. Payment Flexibility Some companies hold supplier payments at certain times of the year such as at the end of fiscal quarters or, in the case of some retailers, during the holiday season. They also may process credit memos or offsets to reduce the value of invoices for things like damaged or non-conforming materials. With some SCF technology platforms, once a payable is uploaded to the platform the amount and maturity date of the payable can not be changed. However, other SCF technology platforms do allow credit memos / offsets to be uploaded to change the payment amount. Also, some SCF platforms allow for certain days to be “blacked out” as payment dates. For example, the last week of a quarter or last two months of the year could be blacked out as payment dates thus pushing payments due during those periods out to the next available payment date and providing the payment flexibility necessary to maintain current AP practices.

4. Opportunity Cost This is by far the biggest potential cost associated with Supply Chain Finance. If the SCF partner can’t rollout the SCF program to address the needs of some group of suppliers (eg certain geographies, currencies, specific types of suppliers, etc.) or can’t effectively support the buyer’s negotiations with suppliers, lost working capital improvements can easily exceed $100 Million. Further, for bigger programs, if liquidity can’t be sourced from multiple banks, suppliers will lose access to hundreds of millions of dollars in low cost financing.

The larger costs associated with implementing SCF are those that are, at least initially, the least well understood the impact on the buyer’s credit capacity, payment flexibility and the opportunity cost of picking SCF partners not well suited to meet the buyer’s objectives. Fortunately, those large cost items are all impacted by the choice of the SCF partners and can be significantly reduced or eliminated by choosing the right partners for the buyer’s objectives.