One of the largest supply chain finance programmes in the world has proved so popular with suppliers, there isn’t enough funding in place yet to keep suppliers satisfied – though perhaps, soon, there will be.
What’s more, the hugely successful scheme was implemented in near-record breaking time. That, in fact, was one of a number of reasons why steel group ArcelorMittal South Africa won the Supply Chain Finance Award for the manufacturing and industrial category last December.
And yet the whole project came about almost by accident.
Heinrich Pretorius had been in the treasury manager role at ArcelorMittal SA for a little more than a year after joining the steelmaker from KPMG when the head of accounts payable received an email from Propell, a business that offers supply chain finance programmes to companies in Africa, in partnership with PrimeRevenue.
“At that time, I was quite keen on implementing various kinds of working capital initiatives,” Pretorius recalls. “I really, really liked what they brought to the table.” He was sure that the scheme would be appealing to ArcelorMittal SA’s many small suppliers. Having carefully scrutinised it, “I couldn’t find any issue with it,” he says. “It kind of looked too good to be true.”
What was appealing was the fact that it could give ArcelorMittal SA a cash flow benefit by extending payment terms while helping cash-strapped suppliers who don’t have ready access to affordable capital.
“The fact that there’s a benefit for both parties was quite a draw for us,” Pretorius says.
The proposal was examined by the CFO and then presented to the chief executive in early 2015. Within five minutes the CEO said, “You’ve got three months to implement.”
“The success has been self-fulfilling”
Three months. “The harder the targets, the quicker it will get done,” Pretorius says. “I had to drive the team very, very hard. I have a very competent team around me. It was really focused: weekly steering committee meetings with specific actions that had to be met – and very harsh rules if targets slipped. I probably gave up sleep for a while, but it was a very driven project.”
So much so that, reputedly, it’s been the second-fastest SCF programme implementation worldwide. Things slowed down a bit after that, however. “This was a brand new concept in South Africa,” Pretorius says, “So obviously there was a bit of scepticism at the time.” But the company kept the explanation of the scheme quite simple – and promised suppliers that, if they didn’t think the programme worked the way ArcelorMittal SA said it would, then they would put suppliers back on their original payment arrangements. “To date, we haven’t had anybody come off the programme,” Pretorius says.
The company has actually negotiated a deal with Barclays to allow it to go over 100% of the agreed facility to accommodate some of the suppliers over the month-end.
The steel industry – then and now – had been suffering from volatility and overcapacity so suppliers were tempted by the opportunity to get access to additional liquidity. In fact, the company made another commitment to suppliers to win them over: the invoices of suppliers joining the programme would be processed within five days of receipt. That’s an immediate benefit for suppliers, who can tell within a week if there is a query or delay on their invoice and then deal with it.
And with ArcelorMittal SA’s payment terms now being 60 days from month-end, suppliers can typically get payment 75 days earlier than they otherwise would. Pretorius says the scheme was quite slow to get going at first, “But now, we’re literally emailed on a daily basis by suppliers who want to join the programme. We had to go and market it at first, but now it’s just ‘word of mouth’. The smaller suppliers are knocking on our door to join. The success has been self-fulfilling.”
So successful has the programme been that it is now running at full capacity in terms of the funding available. The initial target was for the facility to reach 50% capacity utilisation by December 2015. Even that target was “a bit aggressive”, Pretorius recalls. The funding was actually around 80% utilised by that time, 96% by the following January and fully-utilised by February. The company has actually negotiated a deal with Barclays, the finance provider, to allow it to go over 100% of the agreed facility to accommodate some of the suppliers over the month-end.
Now, with about 50 suppliers on the programme and another 70 more queuing up to join, Pretorius is negotiating to double-up the financing available: “We’re the highest-utilised SCF programme in the world. We’re extremely proud of our programme and we want to find a way to extend it,” he says. “There’s always a point where you reach saturation and that’s where we’re at. We now want to grow the programme and so we’re working on phase two.”
When the programme was launched, it was made available to all of ArcelorMittal SA’s suppliers though, as Pretorius says, the vision was always that it would be of most help to the steelmaker’s smaller suppliers. “And that’s also where we expect to grow this facility,” he adds. “For [the benefit of] smaller suppliers.”
Pretorius won’t go into details of how suppliers benefit from cheaper financing costs, other than to say that SMEs ordinarily might be able to borrow at a few hundred basis points over prime (the policy rate in South Africa is currently 10.50%), but with the SCF facility they can typically get access to cash at less than prime.
“This is not an IT implementation, it’s not a financial implementation, it’s not a legal implementation. It’s all of it: it’s a total business implementation.”
Heinrich Pretorius, ArcelorMittal South Africa
Tech firm Propell, which works in partnership with PrimeRevenue, says on its website that one of the steelmaker’s suppliers, Premier Logistics Solutions, reduced its financing cost by 16% per annum compared with traditional invoice discounting rates. “We’ve been greatly assisted by Barclays in terms of our financing terms, to make sure that it’s not an expensive funding line,” Pretorius says.
Of course, ArcelorMittal SA is benefitting, too. “We managed to unlock a billion rand [£60m; €69m] in cash flow for the company,” he says.
“Just a few hiccups”
What was the most important lesson Pretorius learned during the process? “You need to surround yourself with the right people. We had a multi-tasked team: the lawyers, procurement, IT, Treasury, our financial controllers were involved. This is not an IT implementation, it’s not a financial implementation, it’s not a legal implementation,” he insists. “It’s all of it: it’s a total business implementation.”
Having headed up not only such a successful implementation but the second-fastest, as well, there can’t have been many things that went wrong. “Just a few hiccups,” he says. “This is a programme we’re very, very proud of as a company. We’re very grateful for the award that we received. It was nice to get the recognition, especially as a local South African entity.”
But what, we ask, would he do differently, if he were to go back and start again? “I’d find out who the fastest implementation was,” says Pretorius, “and beat them by one day.”
Can you match ArcelorMittal SA’s achievements? Entries are now being accepted for the 2017 Supply Chain Finance Awards. Full details available by clicking here. Deadline: Friday 1st October – Awards ceremony at the Supply Chain Finance Community Forum in Amsterdam on 29th November.