Author: Jennifer Lehman, Marketing and Communications Associate, FCIB
22 Jun 2015
“We see almost every week a new kind of supply chain finance initiative announced”, said Jaap Jan Nienhuis, Senior Consultant at Innopay and a recent presenter on supply chain management at FCIB’s International Credit and Risk Management Summit in Madrid. “There are a lot of new solutions, new companies, and new finance models that have emerged.”
Problematically for those wishing for more standard adoption, supply chain finance management comprises a small minority of the European market. Many companies remain unaware, unclear, or unsold on the value of supply chain finance programmes or the effect they can have on accounting and auditing.
If your company is not advancing in the area of supply chain finance management and its new technological breakthroughs, the competition likely is
Misconceptions and obstacles
Increased economic interconnectivity is at a historical peak. An example cited in the mainstream press, perhaps ad nauseam, is how the perennially volatile Greek debt situation can affect countries like Spain, Portugal and Italy. It speaks of the value of various strategies used to mitigate risk.
Noelia Silvan, Head of Global Commercial Finance and Credit Management at Roche, has spoken about how her corporation uses supplier financing for risk mitigation. However, no permanent programme is in place at Roche. Rather, supply chain financing is typically used in specific cases, for the highest accounts receivable risks. Part of this reluctance stems from cost.
Still, costs are not always as prohibitive as they are assumed to be by those who have investigated such options in years past. Strategies and products evolve, thanks to technology. However, it must be admitted that it remains a significant exercise for any company not regularly using supply chain financing to begin the process. The costs and resources required to make a business case for it somewhat mirror arguments related to an enterprise resource programme (ERP) overhaul, now a trend in its own right.
Also similar is the upside of supply chain finance and ERP improvements: invest with your resources now and come up with the right solution, and it benefits the company for many years into the future. Recent Finance, Credit and International Business Association (FCIB) research has reported that trade credit managers from the vast majority of companies find the process of ERP conversions to be difficult, if not maddening, but were quite pleased with returns from the solution’s profit-boosting efficiencies. This reported success rate jumped even more when representatives from various departments were included early in the process.
When investigating a new supply chain finance programme, it is important to include all relevant internal departments, to avoid a disconnect between what upper management believes is a good fit versus what actually helps the procurement departments day-to-day. Also, working to ensure that the system put in place is accessible for use by virtually all companies is critical. “Procurement departments have to deal with suppliers – some supply chain finance processes that banks put in place to deal with supplier onboarding might not be efficient, especially for non-domestic suppliers”, notes Ad van der Poel, Senior Vice President of Financing Services for Basware. “Setting up a supply chain finance programme comes at a bigger cost and effort if it is not made accessible to all companies. The foundation for supply chain finance is for a buying organisation to have the invoices approved as soon as possible.”
A number of trends are developing within the supply chain finance spectrum. These include the use of e-invoicing networks, a growing number of alternative lenders, and providers using faster data processing and analytics to better analyse risk and reach new customers.
A number of companies use new platforms that more efficiently enable dynamic discounting services and peer-to-peer lending places, which may be seen more as collaborative cash management than financing, technically speaking. Still, much crossover exists, and discounting often serves as a means to avoid some of the more expensive bank lending fees. “In two days, if I think I need money faster, I can send a discounted rate”, Nienhuis notes. “These are the kinds of solutions you see in the market.”
Van der Poel agrees, noting that supply chain finance techniques, from a supplier’s perspective, can lead to quicker cash conversion of net receivables when needed. “This is valuable if you need cash faster to manage your operations”, he says. “And, on the buyer’s side, it comes with extending daily payments outstanding. In that case, the buyer has their available cash longer for it to generate strategic value.”
Consider the following example: if a corporation pays on an account earlier than terms indicate to earn 3 percent in discounts, it can calculate out an annual percentage and apply that to a portfolio, in whole or in part. In many cases, notably for larger companies, it would generate a huge APR that no major financial institution could offer.
“The market is still figuring this out, what risk is in play, what is the right level of risk, and what the right price is to mitigate it”, claims Nienhuis. However, forces beyond the market’s control may be pushing toward solutions like supply chain financing at a faster pace.
With government support, SMEs are getting into the game. Make no mistake – large, medium or small, if your company is not advancing in the area of supply chain finance management and its new technological breakthroughs, the competition likely is. Beyond simply keeping up with the market, supply chain management is getting a boost in other areas.
Government input regarding buyer and supplier payment terms is definitely on the rise in the EU, through efforts like the Late Payments Directive and with key trade partners, as illustrated by the US launch of SupplierPay. Government initiatives are likely to increase and drive opportunities in applying supply chain finance programmes.
In addition, various international regulations are forcing larger banks to reorganise their divisions, thus affecting global strategies and capital allocations. The full impact remains unclear, but van der Poel believes “it could be a boost”.
Regardless, proper follow-up is also critical, as the implementation of any tech-based programme is best viewed as an ongoing process. A 2014 study by Deloitte found that only 26 percent of executives using some sort of supply chain finance network were using data analytics tools and processes to help manage third-party relationship risk. In addition, nearly a third of those respondents reported supply chain fraud, waste or abuse over a 12-month period. A majority of them said their companies had inadequate programmes in place (or no programmes at all) to discover and deter supply chain abuse. “Failure to adequately and actively monitor supply chain relationships can substantially increase a company’s risk of significant financial losses, as well as exposure to legal and regulator investigation, civil and criminal litigation, and reputational damage”, notes Larry Livett, Partner at Deloitte.
Clearly, supply chain finance is moving forward, but much work remains to be done on supply chain finance management.