Buyers and their suppliers have much to gain from collaboration between finance, procurement and their banking partners
Financing tools have long been used by treasurers as a means of improving a company’s working capital position with its suppliers. But until now a vital ingredient has largely been missing - procurement.
While some global leaders in procurement already use bank financing tools to enhance their supply chain partnerships, the practice is not widespread. In many cases, finance and procurement operate as separate entities, with disparate and even competing priorities. We’ve seen unfortunate examples of this disconnection, such as when the finance department for one company mandated a global supply chain financing solution to a group of banks, only to have the programme delayed indefinitely because procurement hadn’t been consulted.
If the two teams communicate, it’s clearly easier to marry procurement’s agenda of building strong supplier relationships, reducing costs, controlling risks and realising efficiencies with finance’s objectives of reducing cash conversion and unlocking value trapped in the supply chain.
There are a number of ways to classify the maturity of a procurement function, but one popular methodology uses a five stage spectrum consisting - in ascending degrees of maturity - of price, spend control, performance, total cost of ownership and value. At the initial stage the focus is primarily on reducing prices and mitigating basic risks, but as one moves along the spectrum there is increasing sophistication in terms of managing the supply chain as an asset. By the time one reaches the midpoint of the maturity spectrum, four key supply chain priorities begin to emerge: agility, innovation, corporate social responsibility (CSR) and risk management.
A banking partner that is in regular dialogue with a customer’s procurement function can make tools available to suppliers that can help manage these four priorities:
Agility: Suppliers with access to post-shipment working capital can more easily adapt to fluctuations in demand, and suppliers with access to their own pre-shipment financing can support their own supplier relationships without seeking additional working capital to cover a demand bulge.
Innovation: A buyer that is providing suppliers with access to cost-effective funding is well placed to benefit from supplier innovation, whether contractually or as goodwill.
CSR: Sustainability is a major theme for global corporates and its success or failure can have huge reputational implications. If a bank understands the context of a supplier within the overall supply chain ecosystem, it may be able to make capital funding available or offer a more attractive borrowing rate that would not otherwise have been possible. Two US buyers we’re working with, for example, are looking both to support the capital expenditure needed to make their supply chains greener and to tie funding conditions to each supplier’s performance against sustainability objectives.
Risk Management: The failure of a key supplier, or a dramatic decline in the availability of a critical component, can have huge ramifications for a buyer. One large European industrial company provides support not only for their direct suppliers, but for the second and third level down in their ecosystem. They provide relevant data to the bank, and even train the bank’s relationship managers and credit teams on their specific needs. Suppliers who have tailored support for their cash flow or currency exposures are able to pay their own suppliers punctually and to continue operating through market disruptions.
Banks have been providing supply chain finance solutions for hundreds of years, but their new challenge is to work with procurement to recognise the value of strategically important buyer-supplier relationships, then to provide solutions in a localized, bilateral way.
By sharing information, and understanding the buyer’s strategic priorities, a banking partner with a developed global network can ‘’go deeper’’ into a company’s ecosystem and provide value to both buyer and suppliers through a programmatic approach. This helps achieve the procurement objectives of agility, innovation, CSR and risk management.
Providing financing and other banking solutions for top tier suppliers is only a fraction of what is possible. Tools and solutions can be offered several tiers further down the supply chain; recognising the nature of each supplier’s relationship with the ultimate buyer and attaching value to the information they provide. At HSBC we are involved in several complex supply chains where financing tools are available for tier two and tier three suppliers. The result is a stronger, safer and more cost effective supply chain.
One of the most exciting aspects of supplier financing is how it connects with technology. Distributed ledger technologies, such as blockchain, have the potential to make supply chains faster and more collaborative. When coupled with supplier financing and supplier management platforms, digital solutions can already enable procurement to view and fine tune supply chains in near real time. Procurement officers can see the impact of financing as it percolates through their ecosystem, and make adjustments to encourage particular behaviour or to boost performance in a specific area.
There is much to be gained by closing the loop between a company’s finance and procurement functions and its banking partners. Though procurement might not naturally regard supplier financing tools as being relevant to their objectives, in reality their potential to drive efficiency throughout the supply chain makes them both relevant and valuable.
Stuart Nivison is global head of client network banking at HSBC