Governments are doing all they can to fight the recession short of throwing the kitchen sink at the problem. Given the importance of cashflow to corporate survival, could there be some role for supply chain finance (SCF) in the war against recession, asks Justin Pugsley.
Governments around the world are quite literally pulling out all the stops to fight the deepening recession. In the UK, for instance, on the macro level there have been the bank bailouts, the fiscal stimulus and deep interest rate cuts. The micro approach has been to allow small firms to defer some of their tax payments and local authorities have been told to speed up paying their suppliers. That will no doubt help many firms. Banks, some of which now have the government as a shareholder, are having their arms twisted to lend more to small firms. Although the government has stated it won’t get involved in the running of banks, that is likely to be put to the test as the economy deteriorates further next year with predictable consequences on corporate solvency.
The latest round of measures, most from the recent budget, are designed to help small firms with their cash flow, especially given that they’re particularly vulnerable during a downturn. Small firms are more often than not finished off by late payments and bad debts rather than falls in sales.
Ironically, recession could prove to be an opportunity for supply chain finance, and one in which the government could play some sort of role. And right now governments, many of which face elections in the next few years, might be particularly receptive to any initiative, which keeps businesses in business and voters in jobs. It’s also a way of showing that banks are really trying to help their smaller customers in a constructive way.
Simply put, SCF is a means to bridge the conflicting desire of suppliers wanting to be paid as soon as possible and buyers wanting to delay making that payment as far as possible into the future. When times are bad that “expectations gap” inevitably widens with suppliers losing out. With a bank sitting in the middle and with a properly structured supply chain finance programme, the two parties can get what they want. Near instant payment, will of course come at a cost to the supplier, but it should be cheaper than alternatives such as overdrafts. Meanwhile, the buyer gets their longer payment terms and the bank bridges the gap by lending to the supplier off the usually stronger credit rating of the buyer. It then collects the payment directly from the buyer’s bank account once it is due.
So how could the government get involved? It could play a facilitator role. It could try and persuade the big multinationals that sit at the top of the supply chain to roll out such initiatives more quickly and pervasively. As well as leading an informational campaign targeted at high level management, government could even look to see if there is any legislation it could pass to stimulate a faster pick-up of SCF. It could even set an example by using SCF itself – national government spends billions a year on products and services. Thanks to the Gershon report, which sets out proposals for efficiencies in public spending, many arms of government already use electronic auctions and reverse auctions to lower the price of the goods they purchase.
Even countries like China, which is now such a crucial player in global manufacturing, should look at how companies operating within its jurisdiction could benefit from SCF.
Indeed, if governments start bailing out big non-financial corporates, those too big to fail, it could push through such programmes. The government could provide some comfort to banks supporting the SCF programmes of the corporates in question that they will get their money back.
Besides, many of the big corporates are worried about their supply chains. Pushing out payment terms to embattled suppliers doesn’t look quite so clever with many being so integral to product delivery. The more enlightened have already cottoned on to that thanks to the vulnerabilities inherent in just-in-time production/delivery, optimised inventory management and outsourcing.
Trickle down theory
A really innovative approach, if it could be done, would be to ensure all players in a given supply chain benefit from SCF. This reflects the fact that each corporate in a supply chain has its own network of suppliers and all need to sustain their cashflows.
Simply put, if the company right at the top of the supply chain, a supermarket or an OEM, with the help of its bank makes sure that accelerated payments made through its SCF programme set off a domino effect of faster payments all the way down the supply chain – right down to even the smallest suppliers. A kind of trickle down effect. That would provide liquidity right the way through the supply chain and give all the various players more certainty over solvency issues and the delivery of crucial components. The potentially lower funding costs could even help make a given supply chain more competitive and that could feed through in making the firm at the top of the food chain that little bit more competitive or profitable. It would be a case of the end buyer providing the strength of its credit rating to its supply chain in a vertical, multi-tiered fashion rather than just across the top layer.
It would more than likely involve all the various suppliers and their suppliers all having access to the same payments platform, which should greatly facilitate synchronised payments.
Admittedly to make that happen would be hard (just getting SCF going has proved challenging enough). It would be complex from an administrative point of view, probably involve all parties signing up to agreements and all would have to agree to participate in the first place for the initiative to be of any real value. Organising all of this would be time consuming.
But with the will and the technology, surely a multi-layered SCF programme could work, at least for some industries, corporates and suppliers? And in a sense is that not the most logical progression for supply chain finance?
Indeed, could this be a challenge for one of the new breed SCF platform providers? With thinner management structures, a lack of legacy and bureaucratic structures and entrepreneurial flair they are in an ideal position to think out of the box and come up with some sort of workable solution. It would then be up to the banks and the relevant corporates to use the platform.
Still such a solution may be just a pipe dream. Nonetheless, if corporates are to secure their supply chains they will have to start thinking hard about how they’re going to keep some of their suppliers in business, especially as the downturn digs deeper.