Focus Shifts to Finance as Supply Chain Pressure Mounts

London - 5 February 2007

Over 70% of large European corporates still looking to extend payment terms with their suppliers, shows new research from Demica

According to new research from working capital solutions specialist Demica, over 70% of large European corporations will actively try to extend payment terms with their suppliers in 2007. With suppliers already operating on squeezed margins, further downward price pressure could lead to instability in supply chains across Europe. However, in a positive move to relieve this ‘tug of war’, the research also reveals that European corporations are turning to their relationship banks for new, collaborative financing techniques that improve cash flow and release working capital to the mutual benefit of buyers and suppliers.

After years of streamlining the physical supply chain, organisations are now looking elsewhere to push the boundaries of supply chain efficiency. Demica’s research illustrates the shift in attention to the financial relationship, where there still remains much potential for improvement. When asked about the financial techniques that would best serve them during the next two years, respondents from Europe’s top 500 companies cited ‘relationship banking’ and ‘supply chain finance’ above all other working capital management techniques (see Table 1). In the Nordic region, however, large international firms were emphatic that pressure on buyers to extend payment terms was far greater than the European average and also that growth in usage of ‘supply chain finance’ would outstrip even relationship banking over the next two years.

For Europe’s banking community, the continuing corporate reliance on their services is hugely encouraging. In a further qualitative stage of Demica’s research, leading European banks unanimously testified to burgeoning demand from their corporate clients for supply chain funding techniques, and the majority of banks surveyed claimed to either offer supply chain finance programmes already, or to be actively developing a range of products. Banks are evidently responding quickly, recognising that these new funding techniques offer more attractive margins than traditional bank financing, as well as presenting a valuable opportunity to extend existing customer relationships.

Banks felt that the principal industry sectors most benefiting from the growing range of supply chain finance techniques would include automotive, retail, hi-tech, manufacturing and logistics.

Phillip Kerle, Chief Executive Officer, Demica, comments, “Although corporate buyers are still seeking extended payment terms, there is the growing realisation that they cannot simply squeeze suppliers to achieve this. Further pressure could jeopardise the very stability of essential supply chains, which runs the definite risk of disruption to production processes. Our research shows how corporates are actively turning to relationship banks to create a financially efficient supply chain, balancing the conflicting pressures of improved payment terms, reduced prices and better cash flow.

“It seems that ‘supply chain finance’ is now recognised by corporates and their relationship banks as the most important tool for freeing up working capital currently trapped in the process. Whilst the US is undoubtedly ahead of Europe in its awareness and use of SCF techniques, demand is growing strongly in Europe, with the Nordic countries appearing to be the most enthusiastic early adopters.

“Financiers are beginning to automate the funding process, making the most of the key efficiencies of lending against the invoices which would be lost in the time it takes to process manually. Many banks are already harnessing advanced technology to give all parties a transparent view of each stage of the funding process, from invoice creation, through advance payment to final settlement.”

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