Chain reaction: use SCF to reduce costs
1 August 2007 Beth Enslow
For the Aberdeen Group's Viktoriya Sadlovska and Beth Enslow it is time supply chain finance became common currency.
Over the past two years, Supply Chain Finance (SCF) has been attracting interest from finance, procurement and supply chain professionals. More than two-thirds of companies surveyed by the Aberdeen Group are implementing or investigating SCF to reduce end-to-end supply chain costs
According to three SCF industry benchmark surveys conducted by Aberdeen over the past nine months across more than 350 companies, manufacturers and retailers consider SCF to be an important strategy for gaining financial advantage over their competitors and early adopters have already reported noticeable improvements in business metrics.
Companies with revenues over $1bn are twice as likely to be using SCF techniques and 25% are investigating options or planning enhancements. Medium-sized companies are also taking advantage of these innovations, albeit at a slower rate.
Although SCF instruments have been around for some time, over the past decade advances in technology and growing interest from buyers and suppliers have picked up pace. These two trends are revolutionising SCF.
The rapid development of Global Trade Management (GTM) software and trade finance technologies is giving corporations and financial institutions an unprecedented level of visibility and control of their financial supply chains.
With the participation of financial institutions, some SCF platforms also have direct access to financing. Automated payments, financial and trade document management and access to supply chain credit opens up new opportunities for companies with international and/or extended domestic supply chains. For instance, many buyers are now lowering their cost of capital and helping suppliers get funding, creating lower end-to-end costs.
SCF is a merger of supply chain financing techniques and internet-based technologies, aiming to:
- Automate the exchange of payments, documents and information between all parties.
- Improve visibility and workflow.
- Provide access to financing/credit from financial institutions or supply chain participants.
PRACTICES AND ATTITUDES IMPROVE
The second trend transforming SCF is the evolution of financing terms and customer-supplier relationships. Traditionally, companies have made their suppliers bear the costs and risks. However, this is creating a financially unstable and risky supply base.
Emerging market suppliers rarely have good access to credit and suffer from expensive trade financing. Pushing extra cost burdens onto such companies may force them to delay orders, limit work-in-process inventories or under-invest in quality control as they struggle to find cash.
This leads to downstream delays and problems for buyers if something goes wrong. And to stay in business, suppliers eventually have to put up prices. This is the most pressing issue hindering successful SCF initiatives. The irony is that even though buyers and suppliers are both trying to improve working capital and cash flow forecasting and lower the cost of capital, they are pursuing conflicting actions to achieve this.
TOWARDS BETTER FINANCING
SCF gives companies greater control over their financial processes and more ways to use cash and credit. Many enterprises are seeking more flexibility by switching between external trade financing and their own reserves. This can cut costs, enhance liquidity and improve returns.
The participants of two studies said their most-used SCF arrangements were extending payment terms and early payment discount programmes. However, the future plans of buyers and suppliers differ – by the end of 2007, buyers hope to increase third-party financing of vendor-managed inventory while suppliers want access to receivables financing such as factoring. Research also indicated that letters of credit are being phased out in favour of open account settlement.
Aberdeen classified companies as best in class if they have improved their financial and operational metrics through SCF. Analysing these companies has revealed three best practices:
- Collaborate across functions.
- Collaborate across the supply chain.
- Automate transactions.
BREAKING INTERNAL BARRIERS
Establishing a cross-functional team comprising purchasing, supply chain and finance professionals has emerged as a best practice. These cross-functional teams should evaluate SCF techniques and their potential to lower the cost of capital, cut total landed cost and reduce supply base risk.
It is vital to get management and finance involved: best in class companies are twice as likely to use dedicated finance resources to manage SCF programmes for low-cost country sourcing. Where finance professionals actively create processes and contracts with suppliers, taking their suppliers' cash flow challenges and cost of capital into account, have more reliable and lower-cost supply bases.
AUTOMATING YOUR WAY TO SUCCESS
Many of the companies Aberdeen researched admitted that their financial practices with suppliers and customers were inefficient. Payment and cash flow management processes are often manual and spreadsheet-driven. Yet 50% –60% of firms report that this is a burden. Buyers and suppliers want more automation and visibility of the purchase-to-pay process, while suppliers need cash flow certainty and well priced financing. An online trade platform can resolve both these issues.
A tremendous amount of financial uncertainty and cost can be eliminated by increasing suppliers’ visibility into cash flow, improving payment consistency and leveraging new third-party innovations for financing shipment activity. Staff productivity can also shoot up. One company found that calls between suppliers and its accounts payables department dropped by 90% when it adopted an automated trade platform.
SCF innovators are already leveraging information about physical supply chain processes to assess financial risk and free up the value of goods throughout their lifecycles. This merging of the physical and financial information chains is one of the fundamental advantages of new-breed SCF.
Aberdeen's latest study dedicated to SCF technology – Technology Platforms for Supply Chain Finance – shows that companies are realising that better SCF technology will improve the overall competitiveness of their supply chains:
- The best in class are 50% more likely to be considering or deploying SCF technology to lower immediate processing costs and the overall weighted cost of capital.
- The best in class are six times more likely to have gained significant competitive advantage with the help of SCF technology over the past 18 months.
- 65% of survey participants say they plan to invest in new SCF technologies by the end of 2007.
Best in class companies are also most likely to have payables, receivables or inventory financing available via their SCF technology platform.
GLOBAL BANKS AND BEYOND
Emerging and well-established companies are already delivering SCF financial and technology solutions, including traditional procure-to-pay vendors, SCF start-ups, large banks and financial institutions.
Some technology companies are partnering with financial institutions to gain access to third-party capital, while financial institutions are actively white-labelling SCF technology platforms or developing such technologies in-house.
In Europe, SCF specialists include Burns E-Commerce, Demica, EZD Global, Global Supply Chain Finance, SCF Capital. Active banks include ABN Amro, Deutsche Bank, HSBC, JPMorgan Chase and Standard Chartered.
Early adopters of innovative SCF techniques and technologies have been able to reap significant benefits and take out the financing costs and uncertainty from their supply chains. To make their end-to-end supply chains more competitive, companies have to look closer at the emerging opportunities of SCF and consider the innovative strategies being put forward by the innovators.
For companies that fail to take advantage of the opportunities SCF is offering, the future is clear: as their supply chains become more expensive and unstable, their competitors will be enjoying ever-more competitive terms with their suppliers.