Rosy Hill reports from the Supply Chain Finance Summit.
Is supply chain finance a win-win for both buyers and suppliers? That was the question posed by Tony Duggan, chief executive officer of Crossflow Payments in his presentation at Supply Chain Standard’s Supply Chain Finance Summit in London in December.
“The type of market conditions we’re seeing for supply chain finance are relatively unprecedented,” he said.
“With supplier payment terms increasing up to 90 days, suppliers are seeing benefits, such as access to cash as they need it, competitive rates, immediate payment of invoices, and the ability to engage with new customers who have long payment terms.”
Duggan said that buyers are also seeing huge benefits, including facilitating their own payment strategy, strengthening their relationships with suppliers, and supplier sustainability-minimised risk.
But procurement is a key factor in the success of supply chain finance, according to procurement director ME at Arriva, David Loseby.
Arriva, part of the DB group, runs more than one million passenger journeys a year via trains, trams, and buses, and is present in the majority of mainland Europe.
“We have to work with a number of different transport authorities in a number of different countries to run such a diverse service,” he says.
“As a business, we are fortunate enough to be able to fund our own acquisitions and business assets, with our very own branch of sales and assets finance.”
Loseby posed the question; why do you want to go down the route of supply chain finance?
“You need to be clear about it, and be able to set your idea to paper, so that you understand, and have a universal agreement across the company as to why you’re actually doing this.”
Supply chain finance should be there to support a business objective, for example to support an investment in infrastructure, he said, but warned that a limit in both the duration and the investment in a project itself must be imposed, and respected.
“You should think about supply chain finance as a project, and not something you do forever, because there is a cost to it, a cost to your business.
“There are often issues with ‘who owns it?’, but that doesn’t matter. The important thing is that a senior in a business, who is linked to the decision-making within that business, takes responsibility.”
Loseby added that establishing an individual criteria and knowing who you are going to work with up front, would ease the process when it comes to a supply chain finance project.
Network Rail’s approach to supply chain finance came under scrutiny when Jim Carter, head of contracts and procurement operations, presented a case study explaining the group’s strategy. He examined the challenges of stakeholder engagement and the feedback from the project.
Explaining the reasons behind the company’s full-scale supply chain financing programme, Carter said that with critical suppliers falling, supply chain resilience was key.
“Our goals for the scheme were to turn the supplier signal green, respond to supplier needs, leverage our low cost of borrowing, and be a good corporate citizen,” he said.
“All that with the objective to not extend payment terms.”
Having researched the supply chain finance market, Network Rail had what it calls a critical decision to make; funding the financing itself, or using a bank.
The business assessed the contractual terms of its suppliers and its own historic payment performance.
“We had a pretty good track record,” said Carter.
“The previous year we’d paid 95 per cent of our suppliers on time, so it was definitely something to think about.”
But with so many stakeholders to manage, many of who had different views on supply chain finance, challenges arose.
“Our group finance director was keen to see some sort of return on investment, but from a procurement prospective, it was more about actually helping suppliers.
“And departments like corporate affairs wanted in because of the reputation impact.”
Network Rail assessed three main options; a manual solution, an in-house technical solution, and a third party provided option.
The manual solution proposed give access to online iSupplier portal, to make manual requests for early payment via email.
“It meant we could move pretty quickly, but we knew it wouldn’t be very scalable, and it would put pressure on the accounts available,” continued Carter.
“We wouldn’t have been able to offer it to hundreds, but to few of our larger suppliers, particularly in the construction market.”
The in-house technical solution would be built by the IT department, to fully interface with ERP systems.
The company said this would enable dynamic early payment requests that could be automatically processed.
“This was all about how we could use our IT function to customise and extend the function of the scheme.”
And the final technical solution was to outsource supply chain finance through a third party.
While Network Rail saw benefits to this, such as the expertise of providers likely to meet business needs, and it being scalable and available to all, the weaknesses were somewhat more important.
These included limited appeal to larger suppliers with no cash flow issues, and a three to four month development cycle needed to build interface with the ERP system.
Option one was chosen as the final decision, with the company initially trialling a six-month manual solution.
“The pilot was really successful,” said Carter.
“We got great feedback from suppliers, but our ability to negotiate discount rates with this model was limited- more functionality was required for full deployment.”
Network Rail decided the requirements could only be met by a third party, and so began the tender process.
But the firm continued to run its manual solution alongside the third party one, which, having now traded some £733 million at an average of 20 days early, has proven to be an overall success.
In a session entitled Supplier Finance Unchained, Louise Beaumont, chief sales and marketing officer, of Platform Black, looked at alternative strategies for securing supply chain finance. Platform Black provides a cloud-based platform for invoice trading and supply chain finance. The SCF system works by allowing companies to validate supplier’s invoices online so that the suppliers can auction them on the platform. The idea is that approved debts from credit-worthy business attract highly competitive bids so suppliers get better rates of finance than they might through their bank.
The Summit was opened by Enrico Camerinelli, senior analyst at the Aite Group, who looked at the development of SCF from traditional factoring. He pointed out that many factors are now looking at extending their range of services to more sophisticated SCF schemes.
But to extend the value of supply chain finance to smaller suppliers particularly means moving into the area of pre-invoice finance. The problem for traditional finance providers, such as banks, is they have little or no visibility of the supply chain in question.
The bigger picture
But, said Camerinelli, a lot of work is now being done in the area of dynamic supply risk management – in particular there are organisations that are now building risk profiles to enable pre-invoice finance to be priced just as insurance companies price policies based on risk profiles. When such profiles are available, they could have a significant impact on liquidity in areas of the supply chain that are simply not reached at the moment.
Loseby joined Camerinelli and Cranfield University’s Simon Templar for the afternoon panel session. Templar said he had recently worked with a student who looked into how to use supply chain finance to fund assets within a supply chain.
“There’s a possibility that supply chain finance can play a part within that,” he said. “A SME for example, could use a contract to finance all future assets, so I think there is a chance for supply chain finance to play a more important role within that area.”
But when it comes to supply chain finance you do not have to invent anything new, according to Camerinelli.
“It’s all already there, so is there a need to say factoring, for example, is part of supply chain finance? That’s all just terminology,” he says.
“There’s now a big attention from banks on the correlation between the physical and financial supply chain, and how the two connect.
“Now it’s clear that supply chain finance isn’t just a fashion, banks are being forced to look at the bigger picture.”
Templar believes that the concept is now not just about companies, but about supply chains. The lecturer discussed supply chain finance from a researcher’s point of view on the day, focusing on how supply chain managers make decisions, and how they take into consideration profitability, accountability, and app utilisation. Agreeing with Camerinelli, he said: “We now have to move away from an individual company perspective, towards a collaborative perspective along the supply chain.
“Supply chain finance is not just about cost reduction and supply chain performance, it’s about business growth; profitability, cash flow and asset utilisation.
“Supply chain managers need to understand that when they make a financial decision, it does have an impact on each of these, and this impact will affect the whole business.”