Buyers Take Note

As activity in supply chain financing increases, more supply-side organisations are beginning to see the benefits of supply chain finance (SCF) programmes. In Aberdeen’s 2008 State of the Market in Supply Chain Finance study, we found companies that actively use SCF techniques reported the following seller-side benefits: lower production costs – 52%, lower DSOs – 43%, and improved business continuity – 38%.

These achievements are without a doubt positive, however, our research has shown there are still a number of challenges that need to be overcome in selecting and implementing supply chain finance programmes, one of the key among them being the lack of knowledge about SCF best practices.

In the study, survey respondents representing the sell-side of their organisations indicated that the top pressures driving them to look to financing opportunities included the pressure to lower the cost of goods sold (54% of seller respondents) and the pressure to shorten DSOs (46% of seller respondents).

Lowering the cost of goods sold can involve a variety of strategies: SCF, in particular, is concerned with lowering the financing – and settlement – related costs that are embedded in the supply chain, as well as contributing to better supply chain costing procedures.

The research also showed that increased improvement of supply chain financing methods can help to improve the core metrics mentioned above.

In addition, these processes can be optimised with the introduction of modern processing and collaboration technologies that allow suppliers, along with buyers, trade intermediaries, and financial institutions to connect electronically and seamlessly transfer and process data and financial flows.

MOTIVATIONS AND CHALLENGES

The road to SCF improvement is full of hurdles. Alarmingly, the key challenge that 49% of supplier organisations want to address is gaining knowledge of SCF best practices. In addition, we found in earlier supply chain finance research, due to the current patterns prevalent in global trade, international suppliers – especially in emerging markets – tend to be more constrained by the lack of automation and needed IT resources to implement collaborative financial supply chain technologies. The current survey confirms that this pressure is still of great importance, as the leading action planned by suppliers in 2008 is targeted at improving visibility and process automation.

This presents an opportunity for global importers: by offering their suppliers the ability to use some of the technological capabilities available to the buyer (such as using a collaborative platform or a payables/receivables/ invoice automation platform), the buyer may be able to extend value to its suppliers and potentially negotiate better commercial relationships.

To succeed in supply chain finance, companies need to not only overcome the internal hurdles (namely the misalignment between the goals and metrics of finance, procurement, supply chain departments) but also to develop a good understanding of their supply chain partners’ goals and problems.

Understanding the motivations and challenges faced by the supply chain partners is the first step in creating an SCF program that will result in a cost-advantaged supply chain.

UNDERSTANDING SUPPLIERS IS ESSENTIAL FOR SUCCESS

The disconnect between the desired goals and the planned actions of buyers and their suppliers is a big obstacle to improving the financing and payment practices in a supply chain. Our research shows that there is not enough communication between the two parties on such key issue as the impact of their trade and payment arrangements on the short- and long-term liquidity and working capital management for the supplier.

For instance, in two key 2006 and 2007 supply chain finance benchmarks less than half of buyer organisations surveyed reported knowing their suppliers’ cost of capital, their payment terms with own suppliers and other financial indicators. Many buyers remain unaware of the vital activity indicators of their suppliers. This means that not enough companies are investigating the potential savings opportunities from tighter collaboration on SCF issues.

SUPPLIER GOALS AND PLANS FOR 2008

Supplier organisations reported the following actions to improve SCF in 2008:

• Implement new technology for better automation and visibility – 52%
• Implement a solution that enables both streamlined transaction processing / document management and access to financing – 35%
• Offer delivery of goods in buyer’s country – 35%
• Increase use of open account terms and financing – 35%

These strategies, along with a pro-active collaborative approach to their relationships with international customers, aim to help global sellers succeed in SCF in the upcoming year.

In developing their tactical steps, suppliers should understand the priorities of their customers – who are largely concerned with improving their own financial metrics and/ or lowering the cost of goods. Sellers should more clearly communicate to their customers both the problems they are facing and the possibilities of concessions or benefits if buyers agree to improve some aspects of the current SCF arrangement.

To achieve cost advantages possible with improved SCF, both buyers and sellers need to adopt a win-win attitude to trading partner relations and arrive at an understanding on how to mutually reduce the overall cost and risk in the supply chain.

Aberdeen’s newest relevant study on trade compliance costs and risk reduction strategies in Global Trade Compliance Priorities in 2008, can be found at www.aberdeen.com