Supply chain finance - is it for you?

1. “Is Supply Chain Finance (SCF) a „must do „ for all organisations?”
The issues to be addressed by SCF?
1) Volatility of demand from unpredictable customers
2) Instability in the supply chain itself due to:
a. Financial insolvency-liquidity gaps at suppliers, loans covenants due
b. Unstable political environment-riots/strikes- Greece, North Africa
c. Logistical issues- Suez canal and other waterways impacted re Iran
d. Unpredictable economic situation- Eurozone- Italy, Portugal debt
e. Natural disasters is past year including droughts, earthquakes, floods
f. Infrastructure failings due to the above
Supply Chain Finance- The simple Solution via following key steps:
Bank Approaches suppliers nominated by the buyer and offers supplier finance terms
Supplier ships goods to buyer
Supplier sends invoice to buyer
Buyer communicates acceptance of invoice to the bank
Bank pays supplier the DISCOUNTED value of the invoice
Buyer pays bank on agreed payment date
However the situation has become somewhat „blurred‟ by Invoice discounting, dynamic
discounting and even receivables factoring as alternative „offerings‟
Definitions and Legal complications have arisen namely:
1. BAFT-IFSA and ICC-SWIFT consider SCF as related only to open account
transactions.
2. BoE-ACT extends further the concept and includes the processes that go beyond
the limits of the buyer-supplier relationship
Also if a factoring contract is in place then it may need carving out by the supplier or
indeed the whole factoring programme cancelled, which may incur considerable cost.
Targeted suppliers may also need answers the following questions, namely:
a) Why do I need this type of financing when none of the above issues impact me?
b) As a supplier with a credit rating equal to or better than the provider of the SCF
initiative then why do I need this extra burden?
c) If the faster payment of invoices does not occur due to lengthy approval
processes will I be compensated?
d) My internal processes are slick, robust and timely so I have no issues like missing
purchase order numbers, date of delivery inaccuracies however the provider has
a reputation for these issues so will they be ironed out first?
Regards, John Mardle Copyright CashPerform Ltd February 2012

2. The following are extracts from various papers/ blogs/articles that have formulated the
above opinions.
Is Supply Chain Finance (SCF) a „must do „ for all organisations?
The Issue
62.7% of global supply chain leaders see demand volatility as their key
pressure point in 2012
A recent global survey of over 400 senior level supply chain focused executives revealed
that, as the global recession continues to put a squeeze on spending and budgets are cut
as part of organisations' on-going austerity measures, nearly two-thirds of respondent
organisations see demand volatility as their key pressure point through 2011/2012. Is
this proof, if needed, that companies are still struggling to accurately forecast demand
levels? And if so can we be doing more to develop the required levels of inventory to
meet demand, while maintaining a level of agility that allows better responsiveness in
today's volatile economic climate?
Demand volatility is just one part (although a large part) of why the supply chain has
been 'strangled' by the lack of credit especially to smaller suppliers, on which the
corporates rely upon.The overall picture that we have established within working capital
over the past 3 years (we have over 20 years in consulting experience) is that inventory
levels, including WIP, are the easy target for organisations to control as it‟s an internal
function that they can 'slash' both from a cost and out-sourcing stand point. However
organisations then forget how various items in inventory have long lead times, high
buying costs (look at metals/commodity pricing) and then cannot satisfy the customers
demand and lose orders.
The demand forecasting needs to start with a strategy regarding what an organisations
proposes to do in the future with regard to selling profitable products and services to
profitable customers. To date this is rarely happening hence liquidity gaps and failing
companies.
Initial Solution?
You‟ve decided to implement a brand new supply chain finance programme and you‟ve
convinced your key suppliers to sign up. There‟s only one problem – your suppliers can‟t
get paid as quickly as everyone expected because your own invoice handling processes
are not up to scratch. So…
What is the solution? The financial crisis gave treasurers the incentive they needed to
take supply chain finance seriously. Until 2008, there was little evidence that all the hype
around this product had translated into significant corporate take-up. But during the
crisis, when corporates had more cause to worry about the survival of their suppliers –
as well as their own working capital needs – supply chain finance began to look a lot
more attractive. Today, there are clear signs that supply chain finance is becoming a
mainstream solution.
Deciding to implement a supply chain finance programme is one thing – getting the
programme up and running is quite another, however. One of the biggest obstacles
corporates face here is convincing their suppliers to sign up to the programme. For one
thing, many suppliers may simply feel they do not need financing. Others may have a
credit rating almost as high as their customer, meaning that they would not stand to

3. benefit from a significantly lower cost of credit under the programme. Attempting to
convince unsuitable suppliers to join the programme is unlikely to lead to success. While
some corporates have attempted to bring all of their suppliers onto a supply chain
finance programme in one fell swoop, this approach can result in a lot of wasted effort
and it is widely agreed that a targeted approach is more likely to yield results.
Choosing which suppliers to focus on in the first place is essential. Before we speak to
the supplier, we gather as much information as we can on the supplier‟s situation. One
big obstacle on the supplier side is that they may already have a factoring contract –
they can‟t sell the same receivables twice. This means that they either have to carve out
their factored receivables or cancel the whole factoring programme, which is not
affordable for most suppliers. This all has to be checked out before the first on-boarding
attempt.
The Simple Supply Chain Finance (SCF) Theory
Let‟s look at how the SCF process can work in simple terms:
Bank Approaches suppliers nominated by the buyer and offers supplier finance terms
Supplier ships goods to buyer
Supplier sends invoice to buyer
Buyer communicates acceptance of invoice to the bank
Bank pays supplier the DISCOUNTED value of the invoice
Buyer pays bank on agreed payment date
Once the right suppliers have been identified and brought on board, the hard work is
over – at least in theory. In reality, as more SCF programmes have gone live, some
unexpected stumbling blocks have started to emerge. For suppliers, the key benefit of a
supply chain programme is that an invoice approved by the corporate buyer can be paid
straight away, rather than 30, 60 or 90 days in the future. All very well, but what if the
approval of the invoice itself is a lengthy process? If approving the invoice takes the
buyer 38 days, the supplier still faces a significant wait before payment can be received.
For a number of corporations, improving these processes is on the to-do list – but it is
probably not at the top of the list. The 38-day approval process might be glacially slow,
but if suppliers are paid after 60 days this delay does not directly impact them. The
implementation of a supply chain finance programme may mean that this area needs to
be tackled more proactively. “A lot of CFOs like supply chain finance because it enables
working capital for the supplier and longer payment terms for the buyer,” explains one
procurement officer who wished to remain anonymous. “They want to bring more
suppliers onto the platform and discover that internal processes are standing in the way.
Then it becomes clear that something needs to be done about the root causes.”
In order to deliver the promised benefits of supply chain finance to the company‟s
suppliers, it is clear that the processes surrounding invoice processing need to be slick.
In some cases, the obstacles arise from the suppliers themselves, as purchase orders
are missing off or the supply address is incorrect. It‟s usually the same candidates. That
might be a reason not to offer those suppliers inclusion in the programme.
The Latest Thinking?

4. In September 2009 the Bank of England (BoE) asked UK stakeholders to form a
working group, chaired by the Association of Corporate Treasurers (ACT), to
review the supply chain finance market. In July 2010, the working group
published 'Supply Chain Finance - Report of the Supply Chain Finance Working
Group'. The conclusions are that SCF covers a wide spectrum of funding activities
including:
o Supplier-driven programmes - receivables factoring/discounting, both with
and without recourse to the seller of the receivables.
o Purchasing cards - inventory, both supplier-owned and funded inventories.
o Buyer-driven receivables programmes.
The International Chamber of Commerce (ICC) and SWIFT are working on a
series of common financial product definitions adopted by corporations in their
trade operations and supported by the technology of SWIFT‟s Trade Service Utility
(TSU). The objective is to provide standard rules and market practices for open
account products.
Each association has set for itself the laudable goal of providing a useful perspective on
SCF to its community members. These initiatives, however, are not coordinated and may
have the unintended consequence of maintaining (if not increasing) the level of
uncertainty surrounding a generally accepted meaning of the term SCF and what actually
makes up any SCF offer. For example, the definitions of SCF given by the three groups
differ in two main categories:
3. BAFT-IFSA and ICC-SWIFT consider SCF as related only to open account
transactions.
4. BoE-ACT extends further the concept and includes the processes that go beyond
the limits of the buyer-supplier relationship
For example, 'B2b finance' may indicate those forms of financing where the buyer
(capital B) supports the financing of the operations of its supplier (i.e., the small b, as
the supplier is usually a smaller-in-size partner). This category could comprise all the
buyer-centric financial solutions (or, as the BoE-ACT paper would say, "buyer-driven
receivables programmes" - BDRPs) such as reverse factoring and letters of credit (LCs).
'b2B finance', in turn, with the initial small b, could describe the supplier-centric
financing instruments such as invoice discounting, factoring, and dynamic discounting. In
these forms of financing, the supplier is usually the B2B partner with a smaller business
turnover, and thus it can be properly represented by the small b.
My definition of SCF is that it is the set of financial instruments that optimise the working
capital of supply chain management processes. Again, you can replace SCF with B2B
finance and the sense of the definition remains consistent.
Treasury Functions Awareness Levels?
Supply chain finance is a relatively recent addition to the treasurer‟s toolbox. As such,
some of the practical obstacles to implementation are only just beginning to become
apparent. This is particularly true of setbacks which relate directly to inefficiencies within
the corporation‟s own processes – a situation which few treasurers are prepared to admit
to in the public arena. In order to avoid these pitfalls and deliver the expected results, it
is clear that the implementation of a supply chain finance programme should go hand in
hand with a thorough review of the company‟s purchase-to-pay processes