Many businesses recognise that there can be value to be had by paying customers early in return for better prices, or extending payment terms to better manage working capital while also introducing a supply chain finance programme.
But last year Darling Ingredients International (DII) – the international business formerly known as Vion Ingredients which Texas-based Darling Ingredients acquired in January 2014 – found that it was paying some suppliers early and some suppliers late. But there was no real rhyme or reason for that. “That was just general practice, part of a process that had been there for years,” says Martijn van Steenpaal, Netherlands-based treasurer of DII.
DII formed a project team, assisted by a consultant, to analyse the company’s working capital position and practices relative to its peers and the rest of the parent group. “This analysis resulted in an action plan to improve underlying processes,” Steenpaal says. “We concluded that we were not really operating the same across the globe. So one element was to standardise our processes more.
“The other action we took was to see if we can organise in a different way and train and develop people to be specifically focused on the timely payment of customer payments,” he says.
The analysis not only identified those opportunities to improve processes but also examined payment terms on the customer and supplier side. “What we recognised was that we pay suppliers on relatively short terms versus what we see in the market. On the customer side we receive our money relatively late. So there’s a gap between payments and receipts and that gap is financed by us, though some of those differences exist for good reason,” Steenpaal says.
DII is now giving some thought as to whether to introduce a supply chain finance programme. No decision has been made – in fact, the company is really just starting to consider some of the issues that have to be factored in – but Steenpaal’s view is that, “from a conceptual point of view, the use of supply chain finance programmes is good, I believe. I think in a lot of cases it can help create liquidity in the chain and it can definitely create win-win situations for customers and suppliers,” he says.
How such a scheme is implemented would be crucial to its success, he says. What Steenpaal would not want to do is to adopt the tactics of some “aggressive” multinationals that offer supply chain finance programmes but at the same time extend payment terms “excessively”.
“The EU regulations say that, generally speaking, payment terms should be a maximum of 60 days,” he notes. “Four months – 120 days – is pretty excessive. When you are trying to optimise your working capital, 120 days does not feel like the right thing.
“DII believes that supply chain finance should bring advantages for both parties and simultaneously should also add value for our suppliers. Only then it will be a sustainable financing source for our supply chain in the future.”
Steenpaal has come across situations where customers impose longer terms and supply chain finance programmes in a way that makes all the benefit accrue to the customer. “Their approach seems to be that it’s a ‘win’ for the one who initiates the programme. It’s nice if it also benefits the supplier, but that’s not their primary objective,” he says.
Pressure on payment terms
One challenge which many companies face is that there is pressure from their customers to accept longer payment terms than they have with their suppliers. In fact, that is one of a number of reasons why Darling Ingredients International is considering the use of supply chain finance.
“If we proceed with implementing a supply chain finance programme my personal belief is that it could definitely have benefit for many of our key suppliers,” he says. “Of course, we would like to create a win-win situation because we are at this moment confronted with the issue of financing the gap between our payable terms and our receivables terms. So [the question is], can we benefit together?”
Steenpaal insists that how a supply chain finance programme is launched and communicated is critical if suppliers are to be enthusiastic adopters. Many of DII’s suppliers operate in traditional industries. The company takes by-products from the meat processing industry and converts them into products for food, feed and fuel applications. Go just a little further into the supply base and you will find livestock farms.
“Therefore, we are considering whether this is something our industry is waiting for. Personally, I believe yes. If it is difficult to get access to liquidity, then this could be a solution.” A pilot programme may be a good way to demonstrate to stakeholders within the company and in the supply base that supply chain finance can also be “helpful in strengthening the relationship with the supplier,” he says.
“Supply chain finance is a relatively modern thing and some feel that it may create complexity. Communication is key. The internal and external stakeholders have to be convinced the arrangement is really a win-win.”