Implementing a supply chain finance programme to secure a consistent and stable procurement ecosystem has become popular among many large companies in the last few years. Muhammad Zubair, Managing Director, Regional Head of Global Trade Finance for the Middle East at Crédit Agricole CIB, discusses how these efforts can be sustained in the long term.

 

Global and local corporates are becoming increasingly focused on the importance of adopting an efficient working capital management solution due to the increased risk of supply chain disruptions brought about by the Covid-19 pandemic. With plenty of examples of successful implementation across the Mena region, supply chain finance (SCF) has emerged as the most popular solution for working capital management.

With SCF, also known as reverse factoring, large corporate buyers invite their suppliers to join a programme to obtain early payment at low financing costs based on the buyer’s credit risk, rather than their own. In some cases, suppliers may get access to working capital financing at funding costs as low as 2% over respective benchmarks instead of paying 8 to 10% over respective benchmarks by sourcing funding through their own financing channels.

While companies are generally able to successfully deploy SCF programmes, it is unfortunately the case that not many have been able to sustain the gains over a long period of time. As such, it is worth investigating what measures successful companies have taken to maintain their triumphs with such programmes over the long term.

Define the core target

The core objective could be to inject liquidity into a company’s supply chain in order to remove financial risk, to extend payment terms with suppliers to improve their working capital, or to deploy a company’s own cash to pay their suppliers early to generate returns via a dynamic discounting programme – or a combination of all of these ambitions.

Each of these targets has a significant implication for the selection of the SCF provider, the structure or design of the programme, the selected suppliers and various other aspects such as legal and accounting treatment.

Quantify the real opportunity

Having a clear objective does not necessarily mean that it will also stack up against the company’s own supply chain ecosystem. Some companies lack the willingness of senior management and the procurement team to sustain a large-scale programme. Other buyer organisations may not have sufficient leverage over their suppliers or the required negotiating power to extend payment terms with their supplier base. Others may simply not have the negotiation culture to achieve their true potential in payment term rationalisation.

As such, it is crucial to analyse the company’s independent supply chain ecosystem, beginning with a detailed spending and working capital analysis, a proposed terms benchmarking exercise to understand what payment terms or discounts the suppliers can bear, and what can be achieved within specific timeframes.

Seeking commitment from the right stakeholders

While every stakeholder within a company aims to achieve the organisation’s overall goals, they are naturally all driven to ensure that their specific objectives and needs are met. At times, this can create conflict between various departments, as their individual objectives do not always align. In the case of an SCF programme, this becomes a reality if the benefits of the programme are not properly communicated to every stakeholder. There may be reluctance by these departments to alter their processes if the reasons for the changes are not clearly understood or if the benefits of the programme do not seem to pertain to them.

Seeking collaboration across various stakeholders is crucial for the implementation of a successful SCF programme, given the potential for competing stakeholder interests.

SCF is often an afterthought or a reaction to an initiative by treasury or finance departments to extend payment terms. However, to deploy and sustain a SCF programme in the long run, it is important that treasury, procurement, accounts payables, legal, accounting and the IT department commit to working together closely, and agree and support common KPIs and incentives.

Deploying the right structure

Once the decision is made to start a SCF programme, and all stakeholders have committed to its successful implementation, the company must then decide on the relevant structure. This will have implications for the choice of financial institution to fund and support it, the legal documentation, the time required to set up a programme, and many other aspects. It is by no means a simple decision.

A company has three main options when selecting the structure for its SCF programme: a buyer can set up its own SCF platform, it can work with the platform managed by his relationship bank, or it or use a multi-bank or a platform provider, as operated by fintechs.

Crédit Agricole CIB’s perspective and value add

At Crédit Agricole Corporate and Investment Bank, we have the expertise to help our clients on the journey of deploying and sustaining a successful SCF programme. We also have the ability to offer maximum flexibility on the structure, and clients have the choice of Crédit Agricole CIB’s proprietary platform, or a partnership with a third-party platform provider, or they can participate as part of a multibank platform.

Crédit Agricole CIB also plays a leading role in the sustainable finance space, with a longstanding commitment by the bank to act every day in the interests of our clients and society at large. Crédit Agricole CIB has developed a sustainable SCF offering, through which we can help our clients by advising on how to obtain the relevant ‘green’ certifications from applicable agencies, how to set up a sustainable SCF framework with their partners, and how best to communicate their activities in this area.