We have often heard that, structured properly, supply chain finance creates a win-win situation for both buyer and supplier. But organisations such as PUMA and Levi Strauss have discovered how supply chain finance can also be a force for social change, helping suppliers improve their environmental sustainability performance as well as enhancing their working conditions.
At the 2016 Supply Chain Finance Forum in Amsterdam, Frank Waechter, senior head of treasury and insurance at PUMA, told an enthralled audience how the company had set up a new type of SCF programme – one where the finance rates offered to suppliers are directly linked to their sustainability and ethical practices.
Simply put, the better a supplier is at ensuring it is environmentally-friendly and takes seriously its responsibility towards its workers by providing fair wages and safe working conditions, the better the rate they will be offered as part of the supply chain finance programme.
Speaking to SCFBriefing, Waechter describes the start of the programme as a natural step in PUMA’s evolution. “The idea came after we had implemented new processes and IT technology in our sourcing landscape. We used the opportunity to introduce a new piece of software to connect everybody involved [suppliers and third-parties] with a single platform, GT Nexus, which we now use for any kind of purchase-related communication.”
A supply chain finance programme was the final step in a fully-centralised purchasing process and a move that was welcomed by PUMA’s suppliers. It was at this point that the International Finance Corporation (IFC), a member of The World Bank, approached PUMA to see if the SCF programme could be combined with sustainable practices. For PUMA, which has a long history of incorporating environmental standards in its manufacturing processes, the IFC’s proposition helped extend into the supply chain the company’s core values.
IFC had been successfully financing SCF programmes that had sustainability goals built into them. The first such programme was launched with Levi Strauss and Co in 2014. Its roots go back to 2001, when IFC and the UN’s International Labour Organization (ILO) came together to provide advice and monitoring of factories in the garment sector.
The IFC’s role is to help plug funding gaps that arise in parts of the world where finance is in short supply. “You might have a Korean investor in Vietnam, with access to Korean financial institutions at fairly good rates,” says Farzin Mirmotahari, senior operations officer at IFC. “But you also have smaller suppliers which virtually find it impossible to get any kind of financing from local banks, because they don’t have enough collateral, their personal guarantees aren’t sufficient, and so they’re really left out. IFC’s main role is to improve access to finance for these underserved companies.”
From the buyer’s perspective, things aren’t much better, Mirmotahari says: “For the buyers, they come to us and say, ‘Well, I have a programme in place but it’s not active in Bangladesh or Vietnam.’ The added issue is that a lot of banks are pulling away from emerging markets, and so the coverage isn’t there. These are precisely the regions where IFC is interested in providing financing.”
Where the IFC comes in to fill the financial gap it also carries out assessments on the environmental and social impact each workplace has. Mirmotahari says “For our regular business – which is long-term debt – in every single transaction we do in emerging markets, we conduct a thorough review of the company’s environmental and social practices. So, especially if we’re investing in something like a steel plant or a cement plant or oil pipeline, we have teams of specialists who review how these companies perform. In supplier finance, this is a bit of a challenge. If you’re talking about dozens and dozens, even hundreds of suppliers, it’s completely not cost-effective for us to go and review every single supplier on-site.
“Also, in the apparel and footwear sectors, for example, there are already multiple and sometimes repetitive audits of suppliers, and adding to these audits increases the burden on suppliers. ”
Mirmotahari says IFC made the decision to work with buyers who had advanced systems to monitor and evaluate their suppliers. The likes of PUMA and Levi Strauss already carry out detailed audits and have invested heavily in this area, so it made sense to partner with these buyers also in supply chain finance. On the basis of the buyers’ environment and social management systems, suppliers can then be approved for financing. “At first, this could be seen as an obstacle,” Mirmotahari says. “We would have to tell buyers that, on top of everything else, we also have to review how you are managing the environmental and social performance of your suppliers. You can imagine, the CFO of a company may not be exactly thrilled by having to do that extra step. However, bringing in tiered financing and providing suppliers with a financial incentive to improve their environment and social compliance, created a win-win-win between the buyers, suppliers and IFC.”
PUMA, however, has a system which rates suppliers in terms of how they’re performing on environmental and social criteria. “We found that their systems were quite advanced and thorough,” says Mirmotahari.
The PUMA project on which Waechter and Mirmotahari collaborated was the first of its kind in Europe. It differs from others in that the programme was offered not only in developing countries where the IFC would facilitate funding, but to all suppliers across the spectrum. Larger suppliers were to be financed through one of PUMA’s core banks, BNP Paribas (BNPP). Waechter says: “Our intention was to bring this to all of our suppliers, regardless of where they are located, including emerging countries such as Bangladesh, Vietnam and Pakistan which might need IFC assistance or elsewhere where other banking partners are available. After a tender between group core banks, we decided to bring BNPP in. This acceptance was based on the prerequisites that BNPP joins the GT Nexus platform as a funding partner and apply the sustainability-based price grid of the programme, also used by IFC. This way, BNPP became the first market-listed bank accepting a sustainability-based interest rate grid for a SCF programme.”
The implementation of the project was done on the basis of PUMA’s own models and standards which were reviewed by the IFC. Mirmotahari says, “Each brand [the IFC works with] has developed their own metrics and while they are all very similar, they differ in their rating scales and in some methodologies which we review.”
On PUMA’s side, Waechter explains that the implementation was different to other SCF programmes, because in addition to the typical finance colleagues, the chief operating officer’s team – responsible for sourcing and corporate social responsibility (CSR) – also came in. They are the interface to PUMA suppliers and the driver behind the PUMA social and environmental rating, which is one important factor of the financing costs in the SCF programme.
Waechter was keen to stress that this exercise wasn’t a means to extend payment terms, but more a response to growing demand from suppliers for a SCF programme and the wish to incentivise suppliers’ investment in CSR programmes.
Another benefit of the programme is its flexibility. “Suppliers may make use of this programme at certain times, but they do not have to notify someone. They just click into the platform and apply for early payment for specific invoices without having to notify us or a bank or somebody else,” says Waechter. “Normally, when they sign up to other programmes, they have to notify the buyer and that would make it apparent that they are in a weaker position, probably.”
PUMA’s programme was launched in April 2016. Since then, 7% of their 300-plus suppliers have joined, covering approximately $40m-worth of invoices on a cumulative basis. Suppliers have positively embraced the programme. “Some of our smaller suppliers don’t otherwise have access to alternative or cheaper financing sources. The bigger ones who sign up have already got a very positive sustainability rating and may make use of the programme to benefit from the non-recourse character of advanced payment (for example, at a key balance sheet date),” says Waechter.
The IFC currently has four similar programmes live and another four in the pipeline. Waechter’s and Mirmotahari’s belief in the future of such programmes is supported by a recent study by Tufts University which reviewed the IFC-ILO Better Work Program and which showed that improved working conditions led to better productivity in workers in Vietnam, directly benefiting the bottom line. “In the last few years,” says Mirmotahari, “companies that perhaps didn’t take sustainability as seriously before now see it as one of the primary risks to their business and there is a greater realisation that financing and sustainability need to be more closely linked in order to achieve better results.’’