Bank of America Merrill Lynch’s Baris Kalay explores what it takes to implement a successful supply chain finance program.
Best Practices for a Successful SCF Program
Europe’s low interest rate environment, reflected in the European Central Bank’s holding of the benchmark refinancing rate at zero percent, continues to have implications for both buyers and suppliers in the region. Many larger buyers, seeking to hold onto cash longer for use in other revenue generating aspects of the business, have lengthened payment terms with their suppliers. Furthermore, the low rates are affecting the aim to maximize returns, passing increased pressures along to suppliers. In many cases, the suppliers facing the greatest deal of liquidity pressure are smaller organizations. This is why Supply Chain Financing (SCF) is becoming a key form of financing for mid-cap companies as well as SMEs.
The growing popularity of SCF amongst SMEs can also be attributed, in part, to the “domino effect”. SMEs often begin using SCF programs as suppliers, where they quickly realize the benefits that this method can hold on liquidity and risk management needs for all parties involved. Through this, when it comes to dealing with their own payables, these firms are more apt to implement similar SCF programs for their own suppliers. In a similar manner, this is likely to continue down the chain encouraging more firms to adopt their own programs.
That said, supply chains are becoming increasingly more complex with new operational frameworks and technology. To ensure the continued success of SCF programmes in Europe and elsewhere, firms must consider several essential points.
Stakeholder Management – First step for success
One of the common problems banks face when implementing an SCF program is the organizational misalignment between key stakeholders. It is not uncommon to see procurement executives, unaware of decisions taken by the treasury or technology teams, who are not informed early enough for system integration. The subsequent delays caused by this misalignment can last months. Best practices point to the existence of “senior sponsors” within the organization as they can align stakeholders and manage the implementation, execution, and growth phases.
Data – How analysis can help to achieve goals
According to a PWC paper on SCF, a typical SCF programme covers 20% of the spend value and includes less than 100 suppliers. This same study shows that supplier appetite and the supplier on-boarding process are on the top of the list for influencing both success and bottlenecks.
Choosing the right suppliers is a function of supplier segmentation, which depends on how well banks analyse data. Banks that can understand the supplier’s requirements and offer them a variety of alternatives in addition to SCF, will be able to provide additional support to corporates to help them achieve their goals.
To help our clients unlock opportunities in working capital, at Bank of America Merrill Lynch we analyze the data holistically, without any product silos. This allows us to cover the full supplier spectrum by offering a number of solutions such as commercial cards for smaller suppliers.
Growth – Marketing and Distribution
Eighty-four percent of the companies that have existing SCF programs intend to enhance their SCF solutions. This commitment shows that successful programs do help organizations to achieve their targets. Two crucial factors enabling the growth of SCF programs are credit capacity and the increasing number of suppliers joining the programs.
Banks and corporates should continue their productive relationship during the lifetime of the program. When it comes to dealing with suppliers, continuously marketing SCF, arranging joint events, and regular visits are key to best practice.
Most corporates see SCF programs as an important reciprocity tool for their bank relationships. To avoid multiple types of documentation and KYC standards, they usually chose a “leading bank” to run the programs. They then involve relationship banks ensuring that credit availability in the program can match the increasing requirements. Selecting a leading bank with a wide investor network and know-how on Risk Distribution is a must for maintaining program growth.
SCF is becoming increasingly popular among corporates, as it addresses key components of working capital optimization, and creates enhanced transparency and efficiency across the supply chain. Successful implementation and management of these programs requires close cooperation across multiple functions and stakeholders. A holistic view across the payment spectrum is also crucial, as it will enable companies to enhance cash flow, improve Days Payable Outstanding (DPO), more effectively control financing costs, and strengthen supplier relationships. A deeper data analysis across all payment segments is key to achieve all these goals.
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This article was part of TFG’s third issue of Trade Finance Talks: Trade Wars & Tradetech, launched at Sibos 2019. This free issue gets into the detail of trade wars, trade flows and geopolitics, as well as looking at how digitisation and fintech is bridging the trade finance gap. You can read the full edition for free here.