Supply Chain Finance – a win-win-win situation

20 March 2012

When it comes to cash flow, Buyers and Suppliers want different things. Because credit and access to liquidity remains scarce, cash flow is coveted by both parties in a trade relationship: Buyers want to hold cash as long as possible and Suppliers want to collect cash as quickly as possible. Suppliers especially require cash to manage their own working capital as well as growing their businesses. Unfortunately, the opposite is also true. Lack of cash will strain liquidity and prohibit growth, potentially even disrupting the ability to supply goods or services.

Supply Chain Finance (SCF) program can help bridge the gap between suppliers and buyers by providing a solution that improves working capital and cash flow. According to the Procurement Intelligence Unit (PIU), deploying an effective supply chain finance solutions can help firms improve working capital by as much as 7.5 per cent of annual spend. In fact, in a 2009 survey, the PIU found that if 94 per cent of the surveyed organizations had adopted SCF they would have generated annual savings of at least $10 billion.

How Does Supply Chain Finance Work?

A Supply Chain Finance program introduces a financial partner – a bank for example – into the trading relationship. The Bank (or Banks) will pay the Suppliers the invoice amounts, less any finance charges, within days of the Buyer approving the invoices and the Bank(s) will then collect invoice payments from the Buyer, usually later than the original invoice date. The finance charges are based upon the Buyer’s credit relationship with the Bank.

  • The Supplier ‘wins’ because they receive payment early and at terms that are likely better than what they could achieve if they arranged financing on their own.
  • The Buyer ‘wins’ because they are able to delay payment and are able to do so without negatively impacting Suppliers’ Cash flow. The Buyer also benefits because their Suppliers have the liquidity they need, reducing the risk of disruptions due to cash flow problems.
  • The Bank ‘wins’ because they are able to generate revenue for essentially low risk financing. In addition, Banks generate new business opportunities with potentially new customers, indirectly increasing the demand for other banking services.

Keys to a Successful Program

Although the benefits seem clear, there is still a certain amount of under-exploitation of this approach, particularly among smaller firms. “Organizations recognize there is a lot of work involved to properly deploy a Supply Chain Finance program to their global supplier network”, stated Abhi Saigal, Director of Supply Chain Finance at Kyriba. “If you don’t have the right technology in place, administering the program will be too manually intensive for almost any organization”, continued Mr. Saigal.

Collaboration within the organization is also important for success. Supply Chain Finance used to be the responsibility of procurement, for example, but this prohibited visibility and information sharing. Today, Treasury, Credit Managers, and Procurement all work together to ensure that the supply chain has optimal access to liquidity. Not only is this a valuable risk management tool to ensure the supply chain is well funded, but it also demonstrates commitment to support Suppliers which only serves to improve Buyer-Supplier trading relationships.

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