You’ve decided to set up a supply chain finance programme for your company. You know from the numerous conferences you’ve attended, articles read and multiple conversations with peers in other companies that the use of SCF can bring clear tangible benefits to a buyer’s bottom line.
But before you eagerly head out to market to find the ideal SCF provider – stop and think. Does this SCF programme align with broader goals of the company? Do other departments in my company even know what supply chain finance is? What format will this platform take?
You know you have a great idea, but first it is imperative to effectively communicate this to your company, secure the support of other departments and establish a strong business case for the project.
Before you draw up your design, you need to have a clear SCF strategy. What is the purpose of your platform?
Once you have defined your reasons, you’ll need to ensure they fit with your company’s wider ambitions. This will help convince your peers that are less familiar with SCF that your project is worth investing in.
The main incentives for setting up a SCF scheme usually revolve around three factors.
- Its impact on financial performance helps release working capital you could use for other needs.
- It can have a positive impact on a company’s operational and delivery performance – helping keep suppliers in business.
- It has an increasingly relevant use as a tool for hitting corporate social responsibility (CSR) goals.
Once your strategy has been identified, it is worth assessing the company’s readiness for SCF to anticipate any hurdles the company may face.
These readiness assessments can often reveal a limited level of awareness within the company about SCF – and, if this is the case, it could be wise to think about organising training sessions or workshops on the product. You could bring consultancies in at this point to run the assessments.
Again, the better understood the product is,the better the different stakeholders will work together on implementing the platform.
Now you are ready to draw up a design or feasibility study. You may chose to bring in consultants now if you haven’t already, or the company may have the in-house capabilities to conduct the research.
Step 1: Working together
A vital part of the design process is to co-ordinate the involvement of different departments across the company. Procurement and treasury will play a central role in the implementation of the SCF programme, but there will be other areas to consider as well.
The legal team, accounts and IT will all need to understand the goals of the project. IT will be involved in managing interfaces between the selected SCF provider and the company’s internal systems for instance. Finance teams will be assessing the financial risk of the product and ensuring the trade payables are treated correctly from an accountancy point of view.
At this stage it could be useful to set up a project team that will manage the process and bring together project leaders from each department.
Step 2: Categorising your suppliers
The next step is to review your supplier base to figure out which SCF solution would work best for which supplier or type of supplier.
It’s a good idea to try to segment them into categories, and I recommend using the Kraljic Portfolio Matrix that divides suppliers into four groups based on how they impact a company’s profit and how much risk they present to the supply chain.
The four groups are: strategic suppliers, who typically have a high profit impact; leverage suppliers; bottleneck suppliers, and routine or non-critical suppliers.
By categorising suppliers, you can work out which suppliers you should invite on to the SCF programme.
For instance, a buyer is likely to approach its relationship with its stationery supplier in a different way to that large supplier producing a specific piece of technology its products depend on.
Geographic location of suppliers can be important. Suppliers in riskier regions suffering from regular bouts of political upheaval could pose greater risks to supply chains.
The buyer will also reap different benefits from different types of suppliers. Putting suppliers that requiring high levels of spending on to the platform could free up large volumes of working capital, whereas other suppliers could be on-boarded to minimise the operational risks they pose.
There may be little point on-boarding other types of supplier that have little impact on profit at all.
The suppliers themselves will also have different reasons for wanting or not wanting to sign up to SCF programmes. You’ll need to consider the acceptance rates in each group of suppliers.
Suppliers will likely compare their current rates of local funding to the rates offered by your SCF programme. If they already have access to cheaper financing, the platform will be less appealing.
Step 3: Review internal payment systems
At this design phase, you need to review your internal purchase-to-pay (P2P) systems to ensure your SCF programme is a success.
If your ability to purchase, approve and pay for goods and services is too slow it defeats the point of an SCF platform which aims to bring the financial benefits of early payment to suppliers.
Usually buyers should aim to approve invoices with five to 10 days to ensure SCF remains attractive. To achieve this turnaround, automation of P2P systems and the use of e-invoicing systems is vital.
Step 4: Building your business case
Your initial idea is beginning to take shape. You’ve held workshops and inter-departmental meetings which have helped build up internal support for the programme.
The end is in sight, but first you need your senior management to get on board and release the required resources for the project.
To achieve this, you need a strong business case outlining the costs versus the benefits to your senior management team. They need to be convinced that the benefits – be it financial or strategic – will be worth the initial outlay.
Examples of costs incurred in the setting-up process could be the cost of hiring external consultants; legal expenses for defining the contract details between the buyer and suppliers, or the costs of automating your P2P processes.
The benefits are, of course, numerous and will hopefully align with your business’s wider goals.
Backed by your persuasive business case, you will – fingers crossed – secure a ‘yes’ from your top management.
Now you are ready to embark on the next stage: Selecting the right SCF provider for your requirements. Fortunately, you’ve already put in so much groundwork, you are well prepared for the challenge.