Sportswear company Puma is already one of the pioneers in the use of supply chain finance (SCF) as a tool to improve sustainability standards across the fashion industry’s complex supply networks after setting up its first programme back in 2016.
Over the past three years, awareness around the negative impact of the fashion industry on the environment and people has grown, with the sector widely recognised as the second biggest contributor to climate change after energy production.
With consumers increasingly being urged to be more conscious of both the quality and quantity of their clothing purchases, Frank Waechter, global director treasury and insurance at Puma, tells SCF Briefing it is time to expand the scope of the existing programme to create an even more attractive proposition that will encourage more suppliers to raise their standards.
SCF is a vital tool to help improve sustainability practices across the industry, he says.
“Supply chain financing is the most logical way to really push sustainability into financing when working with third-party suppliers.”
Puma first embarked on the use of sustainable SCF three years ago when it joined forces with the International Finance Corporation (IFC) – a private arm of the World Bank. Jeans manufacturer Levi’s also worked on a similar scheme set up and run by the multilateral.
The Puma vendor financing programme works whereby the financing partner would discount the suppliers’ invoices based on both Puma’s credit rating as well as Puma’s supplier rating of that supplier.
The supplier rating is based on Puma’s assessment of the company’s adherence to its internal social and environmental standards – based on an audit. The more effort the supplier makes to attain certain standards, the more attractive the discount is on their pending invoices.
The private sector banks have the risk appetite to pay invoices in certain markets, whereas IFC has the risk appetite to take on suppliers in riskier emerging markets.
The programme was set up to meet Puma’s need to find a solution to improve buyer-supplier relationships as its business expanded. The company distributes goods to around 120 countries and has more than 300 manufacturing suppliers, with the majority based in Asia.
“It was visible that Puma was growing dynamically, and we needed suppliers that could go the extra mile. We wanted to provide something that benefited our suppliers. Secondly, we wanted to bring sustainability into play,” says Waechter.
“We as an industry rely heavily on external partners and we want to be able to control the supply chain. This doesn’t just mean cost-cutting. Our consumer just expects that the branded product – such as Puma – that they buy is produced in a fair, honest and sustainable way,” he adds.
Environmental impact considerations of the fashion industry were also becoming more relevant with the climate change debate becoming increasingly urgent. These considerations sat alongside existing concerns about working conditions and labour rights of those working for external suppliers.
While Puma already had internal sustainability standards that suppliers had to reach before working with the company, it wanted something in place to incentivise suppliers to go above and beyond that average required standard.
“The purpose of the programme was to drive impact – it was not for everyone producing for us. If suppliers are beyond average in sustainability and can go the extra mile, they would have access to the programme,” he says.
“You want to trigger an impact, which is why we did not make it not available for everyone, only for those whose sustainability rating is above average or reached world-class standards,” he said.
Uptake of the programme remains steady at around 20 to 25 per cent of eligible suppliers, he says. “We are far above $100 million worth of financing per year.”.
For Waechter, it is important that the programme is an instrument for positive change both environmentally and in terms of buyer-supplier relations. It shouldn’t just be a means of increasing payment terms for the buyer, as so many other SCF programmes set out to do.
“Buyers tend to increase payment terms to increase DPO numbers. We did not do that – we are convinced that would have negatively affected our sourcing costs or the relationship with suppliers. We want to improve the relationships with suppliers and not put another burden onto the suppliers and then present a solution to suppliers,” he says.
The next step in the use of sustainability-linked SCF is the creation of a wider industry standard rather than a reliance on each buyer’s internal system, remarks Waechter. This would avoid suppliers being subject to numerous and different auditing processes by each company they work with. The plethora of audit requirements is something NGOs such as the Paris-based BSR have highlighted as one of the barriers preventing wider take-up of sustainable SCF programmes.
“Regarding sustainability ratings, we are now trying to bring about an industry standard and we are working with competitors in the industry. This is important for brands like us – we do want to save our suppliers having to have multiple audits with different buyers,” says Waechter.
“That is why we team up with associations, NGOs and some industry peers working in this area so we can get a more industry standardised approach to check sustainability,” he says.
With fewer audits to complete, more suppliers are likely to consider signing up to SCF programmes.
Three years in, Waechter is keen to provide the market with some concrete data on the impact of the programme as well as identify further barriers preventing suppliers joining the platform.
Puma is working with Windesheim University of Applied Sciences in the Netherlands and the SCF Community to put together an impact analysis.
“We are doing analysis on data and doing a survey and conducting qualified personal interviews,” he said, adding that he hopes to be able to present some research findings towards the end of the year.
Purchase order financing
He also expects the soon-to-be launched Puma Vendor Financing 2.0 programme will entice those more reluctant suppliers on-board by enabling suppliers to be paid even earlier than before.
The expanded programme will mean that suppliers could also seek discounts on their purchase orders and not just invoices, ensuring them faster access to finance.
“It would enable us [the SCF programme] to increase the financing period for suppliers by more than double. That will be a real supply chain financing in line with suppliers’ working capital needs,” he says.
“If you think about when the supplier sends out their invoice to secure early financing, the supplier has already incurred costs such as labour or raw materials. The terms on which we are doing the financing now are not fully compliant with the real working capital needs of suppliers. Vendor financing will help gap this bridge,” he says.
These advancements in sustainability-linked SCF reply on recent rapid improvements in technology and data analytics. Puma worked with Infor Nexus on the original programme and is continuing to work with the tech firm on the expansion of the scheme.
“The new programme would not be possible if we were not able to access data on purchase orders. If we didn’t have data and history of data in the system, banks wouldn’t be able to assess the risk properly, and provide risk-sharing on this pre-financing,” he says.
“Our suppliers won’t need to carry out any further technical implementation, it is already done as they are already on the programme – it is just another module on available to suppliers on the platform, which should improve the acceptance rate,” he says. This ease of implementation onto existing systems applies to the current SCF platform as well, he adds.
The new programme is due to be piloted later this year, and available next year. It will be available to all suppliers regardless of their geography, with IFC covering the higher risks and a private sector bank expected to be brought in to cover regions where IFC is not active.