19 August 2014 | Jonas Schoefer
Our recent working capital analysis of Europe’s largest companies appears to confirm a trend we’ve seen developing in recent years – growing adoption of supply chain finance (SCF) initiatives.
Companies that want to set up an SCF mechanism need to ask themselves two questions: ‘do I fully understand my supply base?’ and ‘do I have the right technology platform or banking partner?’.
The best way to deal with the first question is to conduct a supplier segmentation to target suppliers with specific initiatives relevant to their situation. This should group the supply base into four ‘buckets’ based on high or low value/opportunity and high or low market complexity, and be followed by a risk analysis to determine the most appropriate approach (e.g. unilateral or negotiated). Strategic and bottleneck suppliers for both levels of risk are good candidates for SCF.
Once the technology platform and finance partners are secured, a quantification based on the supplier segmentation and targeted strategies should then be made to create a business case, prior to implementation.
SCF implementation typically lasts three to four months and requires a strong collaboration between finance and procurement. The first and toughest step is to define the requirements and start adapting the ERP systems. At the same time, targeted marketing campaigns should be launched to educate vendors about the new facility.
Who buyers choose to enrol is a key success factor in an SCF implementation. If the supplier base is properly understood from the analysis and segmentation, then the chances of success increase significantly.
Just before the adaptation of the ERP systems, a live test on a limited sample should be conducted to identify any flaws in the process. At the same time, the training for the enrolled suppliers can start and continue until the end of the implementation. Finally, the SCF is rolled out throughout the company, incorporating the insights gained in the pilot program.
SCF is an innovative way to improve the buyer’s working capital position at the same time as improving the suppliers’ financial stability. However, SCF is not right for every supplier or supply chain and buyers should select their supplier partners in an SCF relationship with care. Just one difficult vendor can destroy a programme. The good news is once the structure is built, SCF can help the financial position of the buyer and the supplier even as it increases the stability of the supply chain.
☛ Jonas Schoefer is a director at working capital specialist REL