Mastering Supply Chain Finance: Five Critical Pieces

by Michael Stitt, J.P. Morgan, 01 May 2013


It seems that everyone loves supply chain financing (SCF) these days. You could even say it’s a winning proposition. Suppliers appreciate the access to affordable liquidity, visibility into payments, and the opportunity to drive working capital improvements. Buyers use it as a tool to streamline the payables process for trade-related invoices.

However, attaining these desirable outcomes is a far from simple proposition. Global firms could accelerate their path to achieving these benefits – and amplify the positive results – if they ask certain key questions earlier in the process, better understand whether SCF is indeed a good fit for their strategic working capital needs, and properly organize the program for success.

There are five critical pieces of information that, if collected and evaluated, can be fitted together to create the most appropriate program for buyers and their suppliers.

Piece 1: Clearly identify SCF goals
The most elementary step when embarking on any project is to clearly understand and communicate the desired outcome. With SCF, you may adopt a buyer-oriented strategy to primarily deliver benefits to your organization without hurting your suppliers.

For example, you might want to standardize terms so as to drive operational efficiencies. Or the objective might be to extend terms to push out payables/DPO in order to drive working capital efficiencies.

On the flip side, you can have a supplier-oriented strategy that supports suppliers with minimal impact, such as providing access to affordable liquidity or transparency into payments.

Or you can combine elements of both approaches that balance working capital savings for you while delivering better supplier relations and enhancing the viability of strategic parts of your supply chain.

Identifying the appropriate balance for your organization will help to determine which SCF levers you will want to pull.

Piece 2: Socialize among affected parties
It’s important to move decisively to create or enhance dialogue among internal teams that will feel the impact of an SCF program.

A successful SCF program involves the cooperation of multiple constituencies – Treasury, Procurement, Accounts Payable (AP) and Technology. They can have diverging incentives and objectives.

Treasury, for example, tends to favor suppliers with less risk in terms of viability, currency, payment and country. Procurement, on the other hand, may be seeking inexpensive, conveniently located supply sources. AP wants to pay in the company’s “home” currency, avoiding exchange rates and fees, and Technology’s goal is to avoid disruption to overall systems.

All are managed under different goals and metrics, which are sometimes at odds.

To get the dialogue started, Treasury representatives should guide the education and discovery process due to their inherent roles in executing working capital strategies, funding of the corporate balance sheet, and managing relationships with external capital providers.

Once supply chain financing is determined to be a strategic program helping to meet working overall corporate financial objectives, Procurement should be consulted to establish a broad basis for cooperation.

An executive sponsor should either have oversight over these teams or should be a senior representative from one of these teams. This person should be empowered to act across organizational lines, and charged with building consensus as well as with demonstrating the firm’s commitment to meeting strategic goals.

The firm needs to carefully consider when AP and Technology should be brought in to the discussion. Both are stakeholders. However, the overall decision should rest with an agreement between Treasury and Procurement. Once this is reached, AP can help understand the firm’s overall spend while Technology can determine the overall impact to systems.

It’s important to recognize that these negotiations can be difficult, and firms can call on their banking partner to share past experience, provide communications materials, and help ensure that discussions do not get derailed.
Piece 3: Consider bypassing the formal RFP
The first step companies often take when looking at strategic projects is to issue a request for proposal (RFP), but supply chain financing is not well-suited to this process. SCF is credit-and relationship-driven, with difficult-to-measure qualitative factors such as implementation capabilities that have been proven to be critical to success.

A strong partner bank, by leveraging their cross-business relationship and insight into the firm’s structure, objectives, and strategic needs, should be able to collect critical data points, conduct analysis, and present a qualified proposal that steers the development of the most appropriate SCF program for you and your suppliers.

A properly communicated and structured program may not need an RFP, or the considerable costs in time, effort and people involved. Often, RFP documents are too broad and don’t take into account other required activities such as formal credit inquiries and the crafting of non-disclosure agreements.

The standard RFP process utilized by Procurement with rigid cost-focused guidelines is not suitable for an SCF solution. The firm runs the risk of soliciting inappropriate responses from vendors that don’t know your business and with which you may not have a trusted relationship, and result in the presentation of unworkable solutions.

Regardless of your decision to issue a formal RFP, you should never rely solely on a paper-based response. Insist on a face-to-face, interactive presentation of the actual solution which opens the floor for a nuts-and-bolts discussion of technology requirements, buyer and supplier experiences, and the communication strategy utilized by your bank to onboard suppliers.

This is a strategic initiative, and it is critical that you have confidence in the plan and those tasked to deliver it.

Piece 4: Provide specific details
Supply chain finance is a strategic working capital management solution, and touches on firms’ capital structures and their relationships with suppliers. As such, intimate, possibly sensitive, details need to be shared in order to structure the most appropriate program for you and your suppliers.

Basic details such as legal entities, geographies, currencies and funding sources are critical. For some banks, funding different currencies is a challenge; others may have comparative advantages.

You should also review the markets in which suppliers reside, the buying firm’s legal entities involved, and the existing legal agreements and credit support structures between parents and subsidiaries. If a parent will not provide credit support to a foreign subsidiary, this affects both credit pricing and capacity – and the higher the pricing, the less penetration of suppliers can be expected.

Large corporate and multinational firms have multiple buying entities that may be geographically dispersed across the globe; hence the provider will need as detailed a briefing as possible relative to the supply relationships these units maintain and are seeking to grow. This should include details about the flows of purchasing between their entities and suppliers so the provider can map what is often a very complex web of relationships.

For example, let’s take the case of a buyer with ten entities in ten countries and with 1,000 suppliers in 30 countries. Often these suppliers may be supplying more than one of those ten entities. These many-to-many relationships have an impact on the ground onboarding requirements and also on the credit structure of any solution.

Piece 5: Understand the timing requirements of your bank
As a buyer, you need to allot adequate time to the SCF proposal process. Providers need to structure a program customized to the firm’s needs, including credit, business, and compliance approvals, among others.

The time required is not due necessarily to banks’ inefficiency. In fact, this cautious approach reflects regulatory considerations regarding good business practice to incorporate thoughtful recommendations on the most appropriate structure for your business.

Solve for success
Once all the pieces have been collected and analyzed, you can begin to evaluate and select the SCF program that best fits your needs and the needs of your suppliers.

In more than 20 years of vendor financing and SCF program experience, the most successful programs I have seen are the ones that took the time to carefully identify program goals, gather the appropriate internal constituents, collect critical details, and work closely with a qualified banking partner. Taking a strategic approach to program planning and evaluation will also allow you to move quicker from initial concept to program execution – a successful solution for everyone.

About the Author
Michael Stitt is an executive director in the Global Trade team at J.P. Morgan and leads the Trade and Supply Chain Finance sales team for North America. This article was first published in the April 2013 issue of the J.P. Morgan Global Trade newsletter and was re-edited for clarity and conciseness.