Financing the chain—September 2013 print issue

Recent trends in supply chain finance help procurement take advantage of a shrinking world

October 3, 2013
by By Michael Power

As supply chains lengthen to accommodate global sourcing patterns, banks now offer new and innovative ways to finance those longer supply chains. Emerging trends in supply chain finance offer organizations ways to do this.

Supply chain finance represents early payment tools companies can provide to their suppliers allowing them to get paid early. Typically, the buyer wants to pay as late as possible, says Jason Palmer, director, Canada trade head at Citibank. Meanwhile, the supplier is looking to be paid as early as possible. Supply chain finance allows for a discount on the buyer’s receivable.

“The supplier receives the money early and they pay a small discount fee, but the buyer still ends up paying on the original due date,” he said. “The bank basically bridges the financing from the time the supplier would like to be paid until the time the buyer would like to pay.”

Recent trends in the practice include using supply chain finance to manage early discount programs, Palmer says. In commercial terms negotiations, suppliers sometimes offer discounts if the buyer pays early. For example, a 2/10 net 30 arrangement means two percent is deducted from the invoice if a buyer pays a supplier within 10 days. Recently, these types of arrangements have been put within a supply chain finance program.

Another trend, Palmer notes, is using supply chain finance to accomplish sustainability or corporate social responsibility goals. Certain companies, such as those with sustainability or CSR practices, can be invited to join a supply chain finance program, since it’s a form of financial support as the supplier is paid early.

“We’ve seen it used as a means to support small businesses operating around or near a company,” Palmer says. “You could also use it as a tool to support sustainability. It’s a carrot.”

Organizations can also dedicate supply chain finance programs to a specific spend or supplier category. Companies can use a program to support organizations that they buy transportation services from or launch a program targeting fuel suppliers, Palmer says.

“Not a program that’s suitable for all suppliers, but a very targeted program with a smaller number of the same type of suppliers,” he says.

Suppliers in China
Canadian retailers are using supply chain finance—or more specifically, payable finance—when sourcing from multiple suppliers in China, says Ben Arber, head of global trade and receivable finance, Canada, at HSBC. For example, retailers often negotiate 60-day terms with those Chinese suppliers. Many Canadian retailers have long-standing overseas relationships but still want the best deal without harming suppliers’ interests.

“We’re seeing increasingly in the retail space and other industries those retailers offering finance to their suppliers—in China, in my example—off the back of their stronger credit rating,” Arber says. “Usually, a bank will provide that finance. Whereas an invoice may say the retailer will pay the Chinese supplier on day 60, suppliers can get finance on day-one.”

The supplier gets paid immediately, while the cost of that finance is almost always lower than if the supplier had gotten it from a bank in China, since Canadian retailers often have lower finance costs than small- to mid-sized Chinese companies with borrowing costs of eight or nine percent.

“Being paid early and having a cheaper cost of working capital for a Chinese supplier is a pretty major benefit,” he says.

That can also give a retailer leverage to push their terms from 30 to 90 days, Arber notes. Or, the company can request to pay two percent less on the goods because of the working capital benefits they’re giving the supplier.

“Those are the sorts of conversations we’re seeing happening a lot more because that payable finance option wasn’t really there 10 or 15 years ago, and it’s now easier to put in place in today’s environment,” he says.

Another trend in supply chain finance specific to procurement involves the use of Chinese currency, the Renminbi, when buying in China rather than paying in US dollars as is often the case, says Arber. Many Chinese suppliers prefer US currency because they can add a small margin to protect themselves against foreign exchange risks. In recent years, that five percent has become more of a profit driver than a means to cut risk. But if Chinese suppliers quote in Renminbi, buyers automatically save that five percent.
“It’s a fairly quick and straight forward way for procurement functions to actually save three, four, five (percent), sometimes even more than that on their next purchase from China,” he says.

Still, supply chains have challenges, like ensuring product quality and timeliness of delivery (even with long-term suppliers), says Arber. Letters of credit can give purchasers peace of mind that what they’re buying is going to be delivered on time and to the standards they expect, he notes.

And as supply chains globalize, Canadian procurement will deal with suppliers in more challenging locations. “The challenge is managing the complexity and risk involved in those sorts of supply chains,” he said. “There’s complexity in keeping tabs on administration, invoicing, inspections certificates, quality assurance for those goods moving along the supply chain.”

Organizations can help ensure their supply chain finance programs run smoothly, says Palmer of Citibank. For example, ensure procurement and finance are on the same page. Program roll out affects various parts of a company, so clear communication between buyer, bank and supplier is a benefit. He also recommends choosing a bank with a solid track record in supply chain finance.

“Suppliers need to understand the value of the programs,” he says. “They need to understand how to use them and how to accelerate the payment. The programs only work when suppliers enroll, so very clear messaging to suppliers is critical.”

In using supply chain finance and related tools like dynamic discounting, Rinus Strydom, chief marketing officer of Hubwoo, recommends cutting paper invoice presentment and lengthy approval processes. For example, if an organization approves invoices on day 20 or 30 of a 2/10 net 30 arrangement, they lose the ability to offer those early payments to suppliers. A best practice is shortening the approval cycle to day one for the bulk of invoices. One way to do that is by maximizing catalogue-based orders. Organizations can put preferred suppliers into a multi-supplier catalogue, similar to online shopping companies like Amazon.

“By using those preferred suppliers in catalogues there’s an already agreed upon price,” says Strydom. In business network catalogues such as the one Hubwoo operates, suppliers update pricing and buyers can approve those updates. When the supplier invoices, they’re simply flipping a purchase order into an invoice. Maximizing PO-based invoicing and electronic invoice presenting can also help speed up the invoice approval process, he says.

Strydom recommends that procurement and accounts payable communicate adequately and remain on the same page for supply chain finance projects. “If procurement and accounts payable can agree on using the same on-boarding vehicle upfront, it pays dividends downstream.”                  b2b