There was something a bit different about the fourth annual Supply Chain Finance Community Forum event this year. As in previous events, supply chain finance professionals from the corporate world, finance providers, technology solution vendors and business schools came together to discuss best practice, evolving ideas, and learning experiences.
But the presentations – in particular, the real-world case studies – gave the clearest picture yet of the potential of supply chain finance. The market is still clearly developing and has further to go. But what came across was that the financing mechanism is being deployed in innovative ways with a lot of strategic thought about what it is meant to achieve and who the corporate’s partners should be. We’re not simply seeing tactical deployments – or ‘More of the same’, in other words.
A joint presentation by Ronald de Boer of Windesheim University and Rob Kortman of PwC launched the Supply Chain Finance Barometer. This survey showed that supply chain finance has already taken hold in the corporate environment. Almost half of respondents currently have a supply chain finance programme in place. For companies with revenue over €1bn, that figure rises to two-thirds. And three-quarters of SCF programmes currently in place have only been launched within the last four years, demonstrating the rapid growth of SCF. Satisfaction levels were high and many corporates had plans to extend their SCF programmes.
Graeme Reynolds from Vodafone presented a good example of how supply chain finance is extending its reach. Much of the conventional wisdom about SCF says that it is more typically used by companies to provide an early payment mechanism for their larger, more strategic suppliers. Vodafone, however, is taking a different route. In 2011 it launched a traditional, single-bank SCF programme with Citi for its larger suppliers. But Vodafone began to consider the implications of relying on a single bank for a programme that was very important to Vodafone suppliers. Serious problems could arise, for example, if that bank decided to no longer offer supply chain finance as a product. In 2013, a second single-bank platform was launched, with Deutsche Bank. Both programmes remain in place and are successful.
Increasing the reach
But in recent months Vodafone has gone much further, using a technology platform from Taulia and an additional financing arrangement from Greensill Capital – which in itself is a novel arrangement as it sources funding in part from corporates that have spare cash, and which can, therefore, benefit from other companies’ supply chain finance programmes.
The big step is that these arrangements make it easier to offer SCF to all companies in Vodafone’s supply chain, Reynolds said. “This can really benefit SME suppliers that we have. They can benefit most from access to the cheap and critical finance that SCF can provide them.”
Vodafone’s emphasis on the strategic importance of its supply chain finance partners was followed by a presentation by Lufthansa’s Alexander Pawellek who spoke about how the airline decided to use a multi-bank finance arrangement (to avoid putting “all our eggs in one basket”). More significantly, Lufthansa – a conventional business in many ways – decided to be the pioneering client of CRX Markets, very much a new kid on the SCF technology block. One of the key advantages, Pawellek said, was that “CRX offered an auction mechanism for the different banks that are participating. Competition for our customers is part of our DNA, so we thought this was the kind of approach we need on all fronts of our business. That’s why the CRX Markets offer fits perfectly with what Lufthansa does.”
A breakout session looked at how supply chain finance is being used around the globe. In China, finance for distributors takes SCF downstream and logistics service providers play a significant role. At the end of the conference, Michiel Steeman, executive director of the Supply Chain Finance Community, commented: “I have a feeling that China is leapfrogging the western European economies in its use of supply chain finance, largely because the banking market is not there for SME suppliers.”
Nick Vyas of USC Marshall talked about some of the key strategic drivers in the supply chain – drivers as diverse as the growth in the eager-to-consume middle classes around the world and the innovation of two-hour delivery by Amazon. Vyas was also keen to emphasise the importance of growing the talent pool among SCF professionals: the market is only going to grow and become more innovative, so it needs the brightest people. Dieter Goerdten from Switzerland’s PostFinance demonstrated an innovative inventory finance structure, showing how supply chain finance is about more than just reverse factoring of receivables.
“Bring it as a win-win.”
Martijn van Steenpaal of Darling Ingredients said that SCF “strengthens supplier balance sheets, improves supplier margins, and increases the scope to negotiate”. Perhaps most importantly, he said, “SCF is an integrated process. If you bring supply chain finance to the table, bring it as a win-win. The relationship with suppliers can be improved when you have supply chain finance that is good for your supplier as well.” He took great care to say that supply chain finance “is not just another way of bullying your suppliers”.
The issue about payment terms and supply chain finance was debated in sometimes heated fashion in a session about the accounting treatment of payables when there is an SCF programme in place. There are some quite clear dos and don’ts when it comes to structuring SCF schemes so as to avoid trade payables being reclassified as bank debt – though auditors don’t always agree on the details. Whether that actually matters or not depends on the type of business involved – in particular, whether the financial reporting implications have knock-on effects in terms of investor perception or pre-existing debt covenants. But one thing that could be agreed on was that transparency and communication with investors were essential.
SCF, CSR and the environment
In one of the most talked-about sessions – indeed, one which later that evening won the Innovation Award in the Supply Chain Finance Awards – was a presentation by Frank Wächter of sporting goods company Puma, which is tying “bonus and malus” finance rates for suppliers to their social responsibility and environmental sustainability achievements. “We rely on long-term external partners and we take responsibility to make sure that the products we buy are produced in fair and honest and environmentally safe conditions. That is what the programme is addressing.”
Beata Wandachowicz-Krason from Philips said of the Puma programme: “Different ways that supply chain finance can be utilised is something that maybe we talked about as a theory a couple of years ago, but now we can see supply chain finance being offered as a reward for being compliant with sustainability. That’s really an innovation.”
Other themes that came out across the programme were the importance of the critical success factors, not least the need for excellent teamwork across functions, spanning not only finance and treasury as well as procurement, but financial reporting and IT as well. “Stakeholder management is critical when setting up an SCF programme,” said Vodafone’s Jim Tapper.
It is also apparent that the most critical success factor is ensuring that corporates are clear about what they want to achieve in their SCF programmes. “It’s only if you are very clear about what it is you are trying to achieve that you can be confident that you will develop a programme that meets those needs. It needs to be more thought-through and more strategic in order to really focus on the value-drivers,” said Reynolds.
More to come
There is still more to come in the supply chain finance arena – developments that will have profound strategic significance. Michiel Steeman noted that there has, as yet, been not much progress in pushing SCF beyond tier 1 suppliers into tier 2 or even tier 3. “I expect it to be picked up in coming years especially with risk issues coming into play,” he said. Blockchain – which everybody talks about but not so many people are actually doing anything about at the moment – “seems likely to develop an internet-style standard”. At the moment, however, it isn’t clear what that standard will be or where it will come from. “Once that standard is there we will see great growth in the use of that technology.”
Then there’s the emergence of the circular economy, which changes the rules about ownership and logistics. “Circular business models will need proper financing models,” said Steeman, adding that the SCF Community is very keen to start a research project on this.
So supply chain finance has clearly come a long way since the first SCF Forum in 2013. But far from plateauing, it still has many mountains to climb.