David Wuttke is Assistant Professor of operations management at the EBS Universität für Wirtschaft und Recht, one of Germany’s leading private business schools. His research projects include supply chain management, how firms adopt supply chain finance (SCF) and why some adopt quicker than others. He has also founded the initiative www.scf-knowledge.com.
Here, Luca Gelsomino, Academic Director of the Supply Chain Finance Community, asks Prof. Wuttke about the key findings of his research
Gelsomino: Could you outline your background and experience in SCF?
Wuttke: I’ve worked on SCF issues for several years and examined, besides the technical component, also the importance of the managerial side and interplay of different disciplines. This is what I still find exciting and why I dedicate my studies to better understanding SCF.
I started my dissertation on financial supply chain management in 2010 and three papers were published since then; the first focuses on basic understanding of financing in supply chains, including the adoption of several SCF schemes, including reverse factoring. The second, based on six European case studies, considers the adoption process of SCF. SCF isn’t an easy innovation to adopt, as it requires a complex process with specific stages that we identify along with the necessary adjustments.
In the third study we leverage the insights from these case studies to build an adoption model that looks at SCF adoption in the same way as we look at diffusion of innovations. This model enables us to characterize different types of SCF adopters: fast adopters, late adopters or even those firms that should never adopt SCF.
I’m also working on three more projects, each relating to adopting SCF and the decision-making process. They’re based on real data from collaboration with a leading SCF provider, who likewise wanted more insight into the drivers involved in adoption.
The first new paper relates to payment term extensions. We know SCF supports extended payment terms, but not how much of an extension is feasible or realistic. In theory, we’d expect suppliers on longer initial payment terms to benefit more from SCF adoption, and, therefore, to agree to longer payment terms extensions.
But what does this theory mean in practice? Applying it strictly to practice suggests a supplier on 90 days payment terms gets and extra 90 days, but a supplier on 10 days only 10 extra days. Theoretically optimal, practically,… at best interesting. So is it true that the more you payment terms you already have, the more you extend?
We test this systematically to find what’s actually going on… this is still work in progress and subject to change, but it looks like quite the opposite of the theoretical prediction is true – the longer the original payment terms are now, the less they will be extended.
The implications are significant: we can support buyers in getting a better idea of what payment terms and extensions are realistic. That’s important when putting together the business case for adoption. Moreover, SCF providers can use the results to improve onboarding strategies, estimate the benefits and decide how programmes should be structured.
Gelsomino: Do larger companies fear they might extend payment terms too much?
Wuttke: One aspect is whether dependence is a driver of payment terms extensions. So we also looked into what percentage of the supplier’s business is with these SCF adopting buyers. Taking the annual spend and dividing it by the supplier’s total sales tell us how dependent the supplier is – just 1% of total business, or as much as 20%? This reflects whether the buyer is in a powerful position. Interestingly while we would expected that to be highly significant, in most cases it’s not really driven by who holds the bargaining power in driving the extension.
The second paper in progress is together with Prof. Eve Rosenzweig from Emory and Prof. H. Seb Heese from NC State University and looks at SCF adoption. It addresses something puzzling. SCF is a great innovation for all involved parties – suppliers get their money faster and cheaper, buyers have extended payment terms and there’s benefit for SCF providers, too. However, managers at buying firms told us their biggest challenge is that many suppliers are still reluctant to use SCF and less quickly on board.
We were curious as to what drives adoption speed for suppliers. From the buyer’s perspective, if you launch a programme it’s key to onboard a good number of suppliers quickly. Otherwise you lose momentum.
So we’re interested in adoption rates and took two sets of drivers. The first set is ‘rational efficiency’ drivers. We consider here first supplier size, with a simple rationale: bigger organisations have better access to financing, while smaller suppliers need SCF more and, therefore, adopt faster. We further hypothesize that suppliers with larger financing cost reductions also adopt SCF faster.
But while ‘rational efficiency’ offers one set of explanations, there’s more in the organisational environment. So a further set of drivers we’ve identified in different settings considers three sources of institutional pressures. One is that where there is high dependence, we’d expect suppliers to adopt faster. We call these ‘coercive pressures’.
We also consider normative pressures; when the supplier sees that SCF is an approach regularly used by the buyer, he might be more inclined to adopt quickly. When only a few other suppliers are on board, the supplier can regard himself as a ‘guinea pig’ and an exception rather than the norm which fosters a bit more hesitation.
Suppliers also observe other suppliers in their industry. This also puts significant pressure on suppliers, who do not want to discover they’re the only one in their industry not using SCF. Overall, we found support for both types of driver that affect the speed with which suppliers adopt SCF; interestingly, though, coercive pressures do not accelerate the adoption. Our sample analysed over one thousand suppliers in more than 50 SCF programmes. The results are extremely interesting for buyers who seek to have a smooth onboarding process with high adoption rates right from the start.
Gelsomino: Did the data indicate how many suppliers consider their programme successful?
Wuttke: It’s difficult to determine from the data, which shows how many suppliers the buyer has and how it works, but not the effort they put in. The true answer to your question actually depends on buyers’ expectations. One buyer might consider 20 suppliers a great success and another, who has put in a greater team effort, less so. Overall, my impression is that managers and those in charge of the bigger programmes generally appear happy with their programme, though I cannot pin-point this to any specific KPI.
What’s clear are the agreed terms for using an SCF platform, but not the exact cost of capital the supplier would pay if it wasn’t used. It’s a number suppliers won’t share voluntarily; if they shared it with anyone their margin would be gone.
Coming back to the overview of my current projects, the third study, also together with Prof. H. Seb Heese, examines two main modes the supplier can use in SCF. One is automatic, where you use SCF for each invoice once approved. Or you can use SCF manually – you check each invoice, decide the date on which you want to discount; for instance, whether you want to be paid immediately or wait until the due date for the full amount or anything in between.
The advantage of waiting is that you pay less of a discount as the interest goes down. In theory, SCF offers such attractive rates that all suppliers should use it when compared to their opportunity costs. Yet many still choose not to. What are their motives? And for those using it manually – how are they using it? What makes them discount an invoice? What is their discount rate and what should drive it? We devised a couple of predictions on how they should use it, what the discount is and the time after which they discount. We tested this against the data, to gain insight into what’s driving it.
This group of “manual” suppliers is actually interesting and will play an even bigger future role. The data also shows that suppliers who employ manual discounting tend to be larger firms with bigger business volumes.
Gelsomino: More SCF providers are moving towards multi-scheme platforms. Will this affect buyers and suppliers if the invoice can potentially be purchased by the service provider?
Wuttke: Hard to answer; each programme differs in its detail. Although we try to define exactly what SCF is, it’s difficult to put it in the broadest terms.
But more firms are entering the market and getting established. Newer players seek to provide innovative services and solutions; some make a real difference while others have little impact but the core of SCF will definitely be advanced further.
Gelsomino: Turning to scf-knowledge.com, what is its aim?
Wuttke: My new project www.scf-knowledge.com started in early 2017. The idea was simple and one where I believe the SCF Community has been thinking in similar terms – bridging the gap between academia and practice.
The objective is to inform executives, managers, and students who want to learn more about SCF. We seek to disseminate SCF knowledge with academic rigour, grounded in empirical and theoretical research, impartial and focused on managerial implications and relevance. The platform is positioned close to academia and we want to stay neutral, investigating both SCF’s strengths and weaknesses as objectively as possible.
When we launched it, we considered our audience and decided it should be managers of corporates and SCF providers. Our list of registered users shows a mix of buyers, corporates, SCF providers and students. The project is still evolving; the first year attracted 7,000 visitors, despite not being actively advertised, which we consider a great success.
We aim to develop further and increase the number of registered users. Having added units on empirical and analytical research, we now want to reach more firms and those offering SCF for more case studies.
The website content is also suitable for students. I actually use a similar idea in my courses at EBS. This method is known as blended learning. Sessions are available online so students can (and have to!) watch them before coming to the classroom, where we then discuss them and take a deeper dive. I believe some of the sessions on www.scf-knowledge.com are interesting here, too.
Gelsomino: You see some distance between academia and the practice of SCF – what causes that separation?
Wuttke: Managers are interested in what they need for a more successful SCF programme – they want insight today, not in five years. For them, it’s focusing on the bottom line impact.
From an academic perspective the interest is often more on a fundamental understanding, looking less at what’s working right now but more on what might work in the future. It’s getting a better understanding of how operations and finance interface and work together. It is also typically that a study takes several years until it gets ultimately published.
When you publish in a top-tier journal, you also look at what has been done in terms of research. Recently the number of studies into SCF it has been increasing, with more fundamental and different questions being addressed and they also have increasing relevance for managers. Yet, not all of those studies can be applied 1:1 in practice.
A further perspective is data availability. Managers like data-based evidence of how SCF works and how it might apply to them. What they like less are assumptions that make a model analytically solvable. They prefer data-analysis, but that’s tricky as there isn’t that much data-based SCF material available to analyse. Currently, I have been observing a broader tendency to support research by sharing data.
I believe and hope that more firms will follow and share their (anonymized) data, so that we, academics, can provide them with the answers they are looking for.