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Supply Chain Finance = Payment Term Extensions?

By , July 7, 2010 at 9:52 pm

“Innovation comes only from readily and seamlessly sharing information rather than hoarding it.” – Tom Peters

Most corporates I speak with about Supply Chain Finance have the same impression of its benefits – mitigating the negative impact of extended payment terms on suppliers.  The link between SCF and extending payment terms is so strong one would almost think that new payment terms occur simply by implementing SCF.  Of course this isn’t the case.  I think we need to take a step back and think about what SCF does and the opportunities it creates for organizations which implement it.

There is no doubt SCF provides significant benefits for suppliers.

An SCF solution accomplishes this through two automated services.  The first, automated payables presentment and settlement, allows buyers to display approved payables data to suppliers through a web-based portal.  It also gives the buyer the ability to settle those payables electronically at maturity date.  Suppliers can view which payments have been approved by the buyer, how much they have been approved for (including any offsets) and exactly when they will be paid.  This information is generally provided 30 to 90 days in advance of payment date.  It provides suppliers with much greater visibility into their future cash flows which reduces the working capital required to hedge payment uncertainty.  Suppliers can work to resolve payment discrepancies well in advance of payment due date rather than waiting until they receive a disputed payment amount.  Just as in supply chain physical flows, technology is allowing suppliers to replace a safety stock of an asset (inventory or cash) with information.  As one of our clients, Sainsbury’s, put it ”This is a fundamentally new way of managing the financial relationship we have with our suppliers. The PrimeRevenue-powered system provides additional benefits giving suppliers the information they need to better manage their financial flows”.  Further, once suppliers have viewed their scheduled payments they can opt for next day early payment at a discount rate based on the credit risk of their customer.  This cash flow visibility and on-demand liquidity are generally provided at no cost to suppliers who only pay a discount fee if and when they use SCF to receive early payment.

The benefits of SCF for suppliers in terms of improved liquidity, cash flow and reduced costs are clear as are the positive implications for the financial health of the buyer’s supply chain.  SCF is at its core a supplier relationship management tool.  It allows buyers to collaborate with suppliers through information sharing that provides significant and quantifiable supplier benefits.   How buyers choose to leverage those supplier benefits is of course up to them and many choose to use SCF to support an initiative to extend or harmonize supplier payment terms, though of course there are many other supplier initiatives that SCF can support, including price reductions.  Many SCF providers offer services to help the buyer utilize SCF in their supplier initiatives so buyers will want to match their initiatives to the SCF provider that best supports them.

But let’s keep in mind, Supply Chain Finance = Supplier Relationship Management Tool, not payment term extensions.