From the October 2010 issue of Treasury & Risk magazine

A Lifeline for Suppliers

Supply chain finance programs flow into the mainstream as a working capital solution that keeps suppliers afloat in a rough credit environment.

As supply chains become more interdependent, skirmishes over working capital advantage are taking a toll. It's time for a new approach, says Wayne Evans, vice president for procurement at DHL Global Business Services, a Plantation, Fla.-based subsidiary of Germany's $66.2 billion Deutsche Post. DHL had a plan to optimize working capital in its supply chain: push terms out to 60 days. Now it's changing that plan. "Initially, we thought that 60-day terms would be the solution, but we're finding that it's not that simple," Evans says. "There's benefit to extending terms, but also a cost. If we pay for our suppliers' cost of financing their extended [days sales outstanding], and their cost of financing is higher than ours, we're not getting such a good deal.
 
"We're still shooting for 60-day terms where possible, but we're trying to understand the implications of extending terms, and that is not simple," he explains. "We're analyzing those consequences case by case, looking at the total cost of ownership and trying to make the best business decisions. We're having conversations with suppliers to better understand their situation and maybe find better solutions together."

Supplier pricing is not very transparent, he adds. "You often don't know how they build in their cost of credit, so you don't know what that is costing you."

"We're moving to an elegant financing solution that can work at the specific invoice level and offer very flexible financing quoted in basis points per day," says Kurt Adams, senior vice president of strategy and program management for U.S. Bank Corporate Payment Systems. "Today's systems provide a high degree of visibility and certainty around such transactions."

SCF platforms like those offered by Prime-Revenue and Orbian have brought a "communications breakthrough," claims Bob Kramer, vice president of working capital solutions at PrimeRevenue in Atlanta. "There has been a tremendous increase in the visibility into cash flow. Once an invoice has been approved, it's posted for suppliers to see. They know right then when it is scheduled for payment. They know if it has been approved for the full amount or less. Knowing in advance that payment is guaranteed on a definite date is a big advantage for suppliers."

While supply chain finance (SCF) programs are proliferating, they are still more the exception than the rule. "Fifty-nine percent of the companies we benchmark are not using them significantly," reports Kurt Albertson, procurement advisory practice leader at the Hackett Group.

In addition to the impact that SCF programs have on both the buyer's and supplier's working capital, the programs affect the buyer's spending, in that early-pay discounts reduce its costs, as well as the efficiency of the settlement process, Albertson says.

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