By Bob Kramer, June 27, 2013 at 7:04 pm
“Sometimes we stare so long at a door that is closing that we see too late the one that is open” – Alexander Graham Bell
There’s been a lot of Supply Chain Finance activity in the food & beverage space this year as we can now add them to the list of industries where SCF has become a standard business process, along with truck manufacturing, DIY retail, appliance manufacturing, auto parts retailing and brewing. What industries might be next? Let’s look at what supply chain characteristics indicate they can benefit greatly from SCF:
- Industry concentration. Are there a limited number of large global players? If so, their spend with each supplier is likely to make up a material amount of the suppliers revenue so SCF will have greater value for suppliers.
- Spend concentration. Is the buyer’s spend concentrated among suppliers. Same as above, this means their spend with each supplier is likely to make up a material amount of the suppliers revenue so SCF will have greater value for suppliers.
- Long payment terms, greater than 45 days. Longer payment terms mean more cash flow gain for suppliers from SCF.
- Higher percentage of sub-investment grade suppliers. These suppliers will gain more value from SCF.
- Capital intensive supply chains. Suppliers here will value cash flow and reducing working capital requirements very highly.
If an industry meets any one of these criteria, it should be a good candidate for SCF.
By Bob Kramer, June 21, 2013 at 9:43 pm
“I have never met a man so ignorant that I couldn’t learn something from him.” – Galileo Galilei
A common theme I’ve seen in commentary on initiatives to extend payment terms is that it is unfair or unethical. Typical of these comments is a blog post from John Williams in Management Today.
John and others aren’t concerned about the investment grade suppliers. They’re concerned about the non-investment grade suppliers who may struggle to obtain bank lending and/or have a high cost of capital. Most of the companies announcing payment term extension initiatives are collaborating with suppliers as part of their plan to move to industry standard payment terms. They are offering Supply Chain Finance (SCF) to suppliers who wish to get paid early at a discount rate of say 1.5% per year. Suppliers moving from say 60 to 90 days will actually save money as long as their cost of capital is greater than 2.4%. That’s because it’s cheaper to fund a 90 day receivable at 1.5% than a 60 day receivable at 2.4%. All of the suppliers John is most concerned about will therefore actually be better off. In addition, a supplier with $1 million in sales to the Buyer could improve their cash flow by $137 thousand if they took early payment on day 10 instead of their current pay date of day 60.
John goes on to say, quite correctly, that “there is nothing world class about late payments”. But there is a difference between late payments and long payment terms. Late payments are so challenging because you can’t plan for them. Long payment terms can be addressed more easily. With SCF, suppliers are immune from buyers holding on to payments arbitrarily, for example at the end of a quarter or year. They get paid exactly on the payment due date. If a Buyer like Mondelez simply wanted to “squeeze” suppliers they would not offer them Supply Chain Finance and allow them to take early payment.
So, with SCF offered in combination with the term extension, suppliers, particularly small business suppliers, will actually save money, improve cash flow and gain greater certainty around their cash receipts.
By Bob Kramer, June 14, 2013 at 7:14 pm
“People ask what is the difference between a leader and a boss. The leader leads, and the boss drives” – Theodore Roosevelt
Companies interested in implementing SCF often ask me what questions they should include in their Supply Chain Finance RFPs. I thought I’d start with a post about a couple of frequent RFP questions that aren’t as helpful as they appear. Most of the least helpful questions revolve around a single theme – SCF programs are very, very different from one another depending on the buyer’s supply chain demographics, locations, existing terms, negotiating culture, industry dynamics, etc. Trying to determine how any one program will develop based on what happens in the average program is not very helpful Each SCF program requires a unique design based on the Buyer’s circumstances to optimize results.
A couple of examples:
1. What percent of suppliers on your SCF platform trade their receivables for early payment? This isn’t very helpful for a couple of reasons:
a. We’ve got some SCF programs where the buyer wanted all of their suppliers on the program, have very short terms (eg 30 days), have dispersed spend and didn’t ask for any term extensions. Suppliers on those programs tend to trade less often, about 30% of dollar value is traded. We’ve got even more programs where the buyer has concentrated spend and long terms where suppliers trade nearly 100% of invoices by spend. The average is over 70% but the standard deviation is high so the averages aren’t very useful.
b. This really shouldn’t matter to most Buyers anyway. Generally their goal is for SCF to support a term extension initiative, not to have a high number of suppliers trading receivables for early payment. Trading rates only come into play when the buyer self funds but you wouldn’t want compare trading rates in a bank funded program to a self funded program. They dynamics are very, very different.
2. What percent of the suppliers you work with agreed to a term extension. Again, this seems like good information but not all term extensions or supply chains are created equal. We have some suppliers who are trying to extend terms from say 90 to 105 days and others moving from 45 to 120 days. Naturally the success rate is different under those two scenarios, never mind that buyers have different levels of spend concentration, leverage supply chain demographics, etc. Like question #1, the average might seem to provide information but the standard deviation is so large that it confuses more than it illuminates.
By Bob Kramer, June 6, 2013 at 7:11 pm
“What counts is not necessarily the size of the dog in the fight – it’s the size of the fight in the dog.” – Dwight D. Eisenhower
One of the trends in SCF that has emerged is the movement to bank independent SCF technology platforms that allow multiple banks to participate directly in an SCF program rather than through a single bank’s proprietary SCF platform. CFO magazine conducted a survey of corporates and 2/3 said open, bank independent platforms were a requirement for success with SCF. As McKinsey & Company stated, “Any bank, regardless of size and ambition, must recognize current market expectations for openness… in the best-case scenario, we expect that as this market grows, big global banks will likely experience a loss of market share”. As Enrico Camerinelli, an SCF analyst, said on his blog recently “Banks have largely ceded supply chain finance for large corporations to electronic marketplaces like Primerevenue, Orbian, Ariba (an SAP company) or any of the eMarketplaces.” There are only a handful of banks left who cling to providing SCF solely through their closed, proprietary SCF platforms.
There are several specific reasons why the market is moving in this direction. A few of the key ones are:
- Pricing efficiency. A bank independent SCF platform enables the large corporate to utilize the bank that offers the best price in each region rather than a lead bank who controls pricing to all participating banks. Further, pricing remains efficient since banks must compete on price rather than a lead bank monopolizing pricing.
- Deeper supplier access. Banks often don’t want to fund particular suppliers, for example suppliers that are too small, have existing liens on receivables, are located in certain jurisdictions, have particularly long payment terms, etc. With a bank independent SCF platform the SCF technology provider can always find a bank to fund each supplier situation.
- No syndication costs. With a bank proprietary SCF platform, the lead bank charges syndication fees to other participating banks who then add those fees on to the SCF rate charged to suppliers. There are no syndication fees with a bank independent technology platform.
Markets generally migrate from closed proprietary solutions to open solutions as they mature and we’re seeing that with SCF.
By Bob Kramer, May 30, 2013 at 9:15 pm
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe” – Abraham Lincoln
The Association of Corporate Treasurers recently published a summary of their most recent breakfast update. At the breakfast it was agreed that one of the main benefits of SCF for buyers was that it is “a good incentive to get suppliers to agree to extended payment terms, which then improves the buyer’s working capital.”
On the same day the breakfast was held, Euromoney published an article titled “Supply Chain Finance Still Viewed With Caution Among SMEs”. These two trains of thought are, of course, connected.
With or without SCF, large corporates are focused on driving free cash flow through working capital improvements and extending supplier payment terms is one way to accomplish this objective. For companies looking to extend payment terms, third party funded SCF is an excellent support tool. It helps mitigate the negative economics of the term extension to the supplier by completely eliminating any cash flow impact and partially or completely mitigating the cost impact. That said, SCF should not be traded for extended payment terms. For many reasons, this approach will hurt the term extension initiative. Payment terms are part of the commercial arrangement between buyer and supplier and should be negotiated on that basis, not traded for financing.