Supply chain finance is a solution which involves multiple stakeholders across the organisation. However, while many companies have supply chain finance programs in place, all too often these programs are set up without fully aligning the departments most crucial to the project’s success – namely treasury and procurement.
Securing the full support of procurement can make the difference between a program’s success or failure. After all, procurement is responsible for maintaining a healthy and strong supplier network in order to meet the company’s purchasing needs. In reality, it is the procurement team who will have to do all the work in terms of negotiating with suppliers to put a supply chain finance program in place. The number of suppliers on-boarded onto the program will directly impact the program’s success.
It is therefore essential to make sure that the goals of treasury and procurement are aligned before embarking on a supply chain finance program – and to leverage both teams’ expertise during implementation.
Supply chain finance brings significant benefits to both buyer and supplier. The purchasing company can improve its working capital position by extending supplier payment terms, as well as mitigating risks and securing business continuity. Meanwhile, suppliers can finance their receivables at a favorable rate, based on their customer’s credit rating.
But while a supply chain finance program may bring sizeable benefits to the purchasing company, a lack of alignment between treasury and procurement can hinder the success of the program if not properly addressed. This lack of alignment can manifest itself in different ways. For one thing, the procurement team may be protective of supplier relationships which have taken years to cultivate. For another, treasury and procurement teams often have competing objectives:
- Treasury may be tasked with optimising the company’s working capital position – namely by getting paid as early as possible, by paying suppliers as late as possible, and by minimising the amount of time that inventory is held.
- Procurement may have some quite different goals, such as reducing the cost of goods purchased. Instead of minimising inventory, for example, procurement may wish to benefit from bulk discounts – in other words, prioritising cost reduction over working capital benefits.
The same kind of tension can arise when it comes to supply chain finance. If the procurement team has an incentive plan based on minimising costs, they may be more inclined to favor early payment discounts, whereby suppliers provide a discount on their goods in exchange for early payment – such as offering a 2% reduction if the bill is paid within ten days. The treasury, on the other hand, might argue that extending payment terms from 30 to 60 days, in conjunction with a supply chain finance program, would better fit the company’s working capital goals.
This friction can lead to difficulties when it comes to implementing a supply chain finance program. Even if a program is expected to generate working capital improvements to the tune of $300 million, the procurement team needs to be fully onboard if the project is to succeed.
The first step in improving collaboration is to remove some of the competing stakeholder interests. This means that the procurement team should have specific objectives that are related to working capital optimisation, and should have an incentive structure designed to reward performance in this area.
Procurement should also be involved in the supply chain management project at an early stage, and should be consulted frequently during the course of the project. This might include setting objectives, designing the program and managing the program, as well as playing a critical role in negotiating new terms with suppliers.
In particular, procurement should be able to advise on the following points:
- Which suppliers, or category of suppliers, should be approached with an early payment program?
- When did the last contract negotiation with commercial terms take place?
- What type of negotiation culture does the company practice?
- Do any of the company’s suppliers present significant risk exposures?
Cross-functional collaboration doesn’t have to stop at treasury and procurement. Other areas such as accounts payable can also play an important role in the success of a program. One company, for example, tasked the procurement team with negotiating suppliers up to payment terms of 60 days. Once these terms had been agreed, accounts payable then called the same suppliers to discuss a supply chain program that would enable them to get paid within five days – in exchange for extending terms by another 15 days. Most of them agreed.
In conclusion, aligning treasury and procurement isn’t just a ‘nice to have’. Without sufficient collaboration between the two functions, a supply chain finance program may fail to achieve critical mass. The procurement team can play a crucial role in the project’s success – but only if the team is fully invested in the project.
By Eric Riddle, EVP, Supply Chain Finance Solutions, Kyriba.