The latest Working Capital Forum saw treasury and procurement leaders from ten multinationals and two universities tackle the sometimes thorny issue of liquidity in the supply chain, and who is really responsible for protecting it?
What are a company’s responsibilities to its supply chain? And should a company be responsible for the supply chain? These themes were aired at the June meeting of the Working Capital Forum, held at the Dorchester hotel in London.
The discussion was started by Matthew Stammers, European marketing director for lunch sponsor Taulia, who started the dialogue by summarising the recently-published white paper. Taking its inspiration from the well-known ‘value chain analysis’ by Michael Porter, the paper looked at the cash conversion cycle of the financial supply chain. It argued: “When the world’s largest buying organisations with the best credit ratings are effectively pushing the liquidity loading to smaller, less well rated suppliers they are adding cost to the system.”
In other words, if companies that can borrow at, say, Libor +100 basis points (bp) effectively shorten their cash-conversion cycle (CCC) by lengthening the CCC of suppliers that can only borrow at, say, Libor + 250bp, then the financial supply chain as a whole carries more cost.
“The solution, therefore, is that large buying organisations need to take control of funding their supply chain,” the paper says.
“People need to think consciously about what is happening in the financial supply chain when you move the cost of financing around,” Stammers explained. “Apart from anything else, your supply chain will be more costly and, ultimately, you’ll be less competitive on the global stage.”
Flowing from this, therefore, is the argument that the company – and the CFO in particular – needs to take responsibility for the whole of the supply chain, rather than taking a more ‘isolationist’ stance summarised as, “If the business runs out of working capital they go bust. If the supply chain has a problem, well then, that’s a problem for procurement.”
Simon Templar, a visiting fellow of Cranfield University, observed: “I think the CFO’s role is much more holistic than ever. There’s a great role for the CFO in terms of how we create value.”
Valuing supplier relationships
In the ensuing discussion it was clear that, even if they are not consciously thinking in terms of the total cost and of their responsibilities for the financial supply chain, many organisations are, indeed, taking the view that they have a responsibility to the supply chain.
“Our supplier relationships are really a priority for us,” said a treasury professional from a leading company, speaking under the Chatham House rule. “We are focused on really valuing our relationship with our suppliers.” That speaker’s remarks were echoed by others around the table.
Another added that their organisation regarded payment terms extension as unethical, “especially if you’re taking some short-term funding from suppliers and investing it into longer-term projects”.
Prompt payment codes
Several participants said that their companies would be re-signing the revised UK Prompt Payment Code, which now focuses on the needs of SMEs. It also says that companies should pay suppliers within 60 days, but aspire to do so within 30.
For businesses that supply to the government, there is a hard-nosed commercial imperative to comply with the code, said one participant: “The Minister expects you to sign up to it and if you don’t meet it, you don’t get work. It’s a key consideration for some contracts.”
Michiel Steeman, supply chain finance professor at Windesheim University and executive director of the Supply Chain Finance Community, to which the Working Capital Forum is affiliated, gave an update on a similar initiative in The Netherlands. The Betaal Me Nu – ‘Pay me now’ – programme has 20 blue chip Dutch signatories, he said.
All the treasurers and procurement directors around the table recognised that CFOs and boards are paying more attention to working capital than in the recent past.
“It’s all about cash”, said one senior financial executive. It was about earnings per share and profit; it’s now cash. That’s quite a change. It’s been quite an education process to get people to realise that it’s not all about when you make the sale: what’s important is when you’ve got the cash to either reinvest in the business or to give back to shareholders. It’s a very different environment.”
"it’s not all about when you make the sale: what’s important is when you’ve got the cash"
As ever, there is no ‘one size fits all’ solution – and much of the discussion revolved around the distinction that needs to be made within the supplier base between those that should be targeted with a tool such as reverse factoring, those for which another supplier finance tool is appropriate, and those that are big enough to look after themselves.
“The actual amount of money stuck in the smaller supplier group is not that much compared to the rest of the supplier base,” Steeman said, “so you can actually do this. It’s just that some companies are stuck in their policies of paying in 60 or 90 days because they’ve always done it like that across the whole group of suppliers and they don’t make the distinction between the smallest and the bigger ones.”
Jon Barrett, Taulia sales director, commented: “The old way of thinking is that a supplier is as significant as the amount you spend with it. The more modern way of looking at this is to take a more nuanced approach to your suppliers. Work with your procurement guys: they know your suppliers quite well. If a jet engine company is dependent on one company that makes ball bearings, their spend is not enormous – they would never be captured under a traditional SCF programme. But if that business were to get into financial difficulty, there’s no more jet engines.”
The advice from one finance professional was this: “If you’re going to do supply chain finance, do it properly. Do it as a well-considered initiative. Sit back, think about what you’re trying to achieve, and get it right.”