For the treasurers and procurement directors who gathered at The Ritz for the latest meeting of the Working Capital Forum on 15th June, there was little doubt that a supplier finance strategy was an idea whose time has come.
With a couple of exceptions, all were either engaged in, or about to start, a review of working capital or supplier finance in their companies, which ranged from global automotive suppliers to medical, industrial and retail giants.
All were aware of what some called the ‘first wave’ of supplier finance projects , which concentrated on extending Days Payable Outstanding (DPO), so freeing cash trapped in working capital for other uses. But for at least two of the corporations present, who spoke under the Chatham House Rule, the issue wasn’t a desire to pay later- rather, they were interested in using surplus cash to offer early payment to suppliers in return for discounts, reducing the Cost of Goods Sold (COGS) and directly boosting profits.?
These two apparently contradictory objectives served to demonstrate that there is no single ‘correct’ objective when starting a supplier finance programme – but there were other variations. At least one corporation was using supplier finance to reduce risk in the supply chain, while another spoke of the ethical requirement to ‘do the right thing’, especially for smaller suppliers in tougher economic times.“Overwhelmingly, it was procurement rather than treasury which was leading the push for supplier finance”
Underlying the discussion was a ‘snap poll’ commissioned by the Working Capital Forum and its sponsor for the day, Taulia. The short report on its findings (which can be downloaded here) showed that, for the 26 corporations who responded, the goals for a supplier finance strategy covered a wide spectrum , though the most popular was still working capital optimisation.
Getting internal agreement to such a strategy presented difficulties for many around the table. With one exception, it was procurement rather than treasury which was pushing for supplier finance initiatives. One procurement director said that treasury in his organisation was resolutely opposed to supply chain finance, believing that it simply added cost. Others mentioned the critical role of IT in ensuring that a supplier finance programme was successfully integrated into the business.
Source: Working Capital Forum
For many at the lunch, a key element of any supplier finance strategy was to reach down beyond the top tier of suppliers into tier two and three, where small but critical suppliers might need support. One gave the example of a small software company which was responsible for a critical piece of code.
As the meeting ended, treasurers and procurement directors were exchanging ideas on how to surmount some of these obstacles and looking forward to future meetings. Working capital forum director Mike Hewitt announced that future meetings were already being planned for London, Manchester, New York and Stockholm.