A pioneering study by GTR and the Supply Chain Finance Community has found that corporates are increasingly looking to supply chain finance as a strategy to create opportunities, rather than as a mere exercise in cost reduction. Shannon Manders reports.
It’s no secret that interest in supply chain finance (SCF) programmes has grown in recent years and, in turn, corporates have increasingly sought to align the financial structure of their supply chains with the physical flow of their goods.
GTR recently teamed up with the Supply Chain Finance Community and the Aite Group to launch a survey amongst (mostly Asian and European) corporates to find out how supply chain finance is progressing in their organisations. The results were comforting to SCF practitioners: SCF programmes are generally taken very seriously by survey participants – to the point that they invest substantial time and resources towards the implementation of these programmes. The survey finds that SCF is increasingly finding its way into companies’ organisational structures.
Although the trend towards a growing awareness of SCF is by no means new, what is innovative, and encouraging, for the market is the way in which dedicated SCF programmes and people are finding their place within corporate organisational structures.
What GTR’s survey finds is that most companies (69%) have a SCF strategy in place, while the majority of survey respondents have a person, or function, within their organisations responsible for SCF programmes. What’s more, those responsible for these programmes (who mostly report to the organisations’ finance or treasury departments) frequently communicate with other divisions within the company. Beyond the expected frequent dialogue with the finance or treasury department, what’s interesting is the rather tight collaboration with logistics, which means that SCF programmes are achieving success when the supply chain is managed comprehensively, from end to end, which is where logistics plays a key role.
“The increased intensity of collaboration across the departments is a direct result of appointing an ‘owner’ for such a programme, which is again in itself an indication of the importance of such programmes within the organisation,” explains Michiel Steeman, executive director of the SCF Community. “If you don’t have an owner, you won’t see that much communication between the various departments. The moment you have an owner, this co-ordination picks up.”
Historically, supply chain finance has been broadly associated with the need to inject capital into the supply chain more quickly and enable lower financing costs. Yet, what our survey finds is that the determining factors in implementing a SCF strategy is, primarily, to “create opportunities” (61 respondents felt that they strongly agreed with this premise)..)
As such, perhaps one of the most relevant findings of the survey is this: that the value proposition of SCF is shifting from traditional optimisation of working capital and operations efficiency to a more strategic level, which allows for the creation of business opportunities (such as finding new trade partners by offering them financial facilities or better payment conditions).
Steeman discerns between SCF drivers when dealing with both suppliers and buyers: “When you go upstream towards suppliers, it’s clear that it reduces costs and mitigates risks, and ultimately creates more loyal supplier relationships, and solidifies those relationships with SCF programmes.” As a result, this creates more opportunities for those suppliers to develop new products and implement improvements, he explains.
“If you look downstream towards customers, it’s evident that SCF is a core element of the sales process: you need SCF to be able to sell your products and you need a financing solution as part of your overall product solution for customers. There’s a very direct link to opportunities and increased revenues.”
Positive results aside, the survey also outlines areas where companies are seemingly falling short when implementing their SCF programmes. A rather disconcerting element is the fact that many companies (31%) are not using an IT platform to manage their SCF transactions, and do not plan to implement one in the foreseeable future.
The disadvantages of such an approach are clear: any invoice that is not automated costs the organisation between €25 and €40 to process.
Christiaan de Goeij, researcher and lecturer, supply chain finance, at Windesheim University, explains: “If you don’t use a digital method of handling these transactions, and the buyer and supplier use different ways to handle their transactions, it is not efficient, and adds to transaction costs.”
It also increases the chances of dispute between buyers and suppliers, which can ultimately cause a rift in their relationship: there is simply too much risk of errors.
To assist corporates in mitigating such risk, there are a number of IT solutions that offer e-ordering and e-invoicing solutions in a bid to make this a more efficient process for buyers and suppliers alike.
Although unable to promote a specific platform, Steeman highlights the necessity of buyers and suppliers using the same IT system.
“A new party comes to the market every month, and I couldn’t say yet which type of IT solution will be the ultimate solution for supporting SCF programmes,” he says. “It’s an extremely dynamic market at the moment.”
Another factor creating a bottleneck in SCF implementation is the lack of a standardisation: 55% of respondents indicate that their company does not have a standard definition of SCF – a phenomenon certainly driven by the lack of classification within the industry at large.
There are numerous initiatives on standardisation in the market and Steeman stresses that, for SCF, this ought to be focused on multiple levels: legal structure, data interchange and accounting treatment. Because initiatives like these take time to come to fruition, he calls on corporates to actively push their service providers towards standardisation.
“When it comes to accountancy, they should demand a common approach to these types of programmes from the accounting world. On the legal side, they should push the banking sector towards a common legal structure,” Steeman says. With regards data interchange, he advocates nudging governments to drive the initiative of electronic invoicing.
Standardisation will be a necessity for banks themselves when programmes pick up in size and they need to syndicate deals and arrange club loans. “They’ll need a common legal language – not just commercial language,” he explains.
What “do” corporates want?
But what is it that corporates want when it comes to SCF? Steeman believes that the survey results indicate that as yet, they remain uncertain. “They know it’s important – they see the relevance for their supply chains, but they have not come to grips with what they want. And all the corporates are at different speeds and stages of development. So I would conclude they don’t know yet,” he says.
Fred de Brabander, global supplier risk manager at Philips, which has been building its global supply chain platform since 2007 with club funding in place, concedes that even the larger companies are not aware of, and have yet to explore, the full potential of SCF programmes.
Yet he disagrees with Steeman’s premise, saying that it’s not a case of corporates not knowing what they want, but rather that they are unaware of the benefits on offer: “Companies have not been informed enough about what this tool could mean for them and what it takes from an implementation point of view to have an efficient tool in place.”
He suggests that it’s up to independent consultancy firms and banks (who may wish to improve relationships) to provide guidance in this regard, though notes that banks are unlikely to be neutral in their approach “because they are looking for opportunities for lending money with a sufficient yield and supply chain financing could provide that to them”.
“A too aggressive approach in acquiring this part of the business could make companies suspicious. That leaves the consultancy firms as a more neutral partner for companies to assess the opportunity,” de Brabander explains.
The survey was conducted by means of telephone interviews with 104 corporates based in Asia (41%), Europe (34%), Russia (19%) and Turkey (6%).
“It’s not the quantity of answers, but rather the quality, that matters,” says Enrico Camerinelli, a senior analyst at Aite Group, and who was instrumental in drawing up the questions and driving the analysis of the results. “The abundance of Asian respondents confirms that this region is particularly interested and attracted by SCF practices and solutions.”
The majority of respondents (35%) work within their company’s treasury or finance department, while there was also a high level of respondents (17%) on the CEO or general manager level.
“This is no surprise as best practices confirm that successful SCF programmes must have a top-down approach,” says Camerinelli.
Key survey findings
▪ SCF is increasingly finding its place within organisational structures.
▪ Corporates are increasingly seeing SCF not only as a way to increase operational excellence, but also to mitigate risk and especially to create business opportunities
▪ If these corporates want to create business opportunities by using SCF, having standard definitions would be a big help. The majority of companies do not have these standard definitions, despite making strategical decisions about SCF. This calls for immediate action.
▪ Once business opportunities have been identified, IT platforms are needed for successful implementation of SCF.