Strengthening the supply chain through supplier finance tools

The importance of treating and finacially supporting the supply chain as a strategic asset is increasingly appreciated by leading corporations


Strengthening the supply chain though Supplier Finance tools
The importance of treating and financially supporting the supply chain as a strategic asset is increasingly appreciated by leading corporations, which is perhaps unsurprising given the potential advantages. There is the headline benefit of reducing the risks inherent in supplier failure, but there are also various additional opportunities, such as faster inventory turnover and higher earnings. Nevertheless, realising these opportunities depends upon a collegiate approach.  

While treasury is often the instigator of supply chain financing schemes, it would be naive to assume that it alone can drive its successful implementation. Without more general buy-in across the organisation, schemes will often either be abandoned or deliver sub-optimal results. Apart from finance functions, one of the most important departments to engage is procurement, as this will often be responsible for promoting the benefits of any scheme to suppliers. This was underlined by a recent meeting of the Supply Chain Finance Group of EuroFinance's Treasury Network, where the importance of obtaining procurement buy-in was repeatedly stressed as being critical to the success of supplier financing schemes.

Increasing dependence on global supplier networks
This internal sale has become somewhat easier in recent years due to the geographic expansion of supply chains. As markets have become more global in nature, businesses are looking further afield for both customers and suppliers. In order to remain competitive on the supply side, companies have significantly expanded their supply chains in terms of both size and complexity. Production and supply activities that may once have involved only two or three domestic suppliers can now involve dozens of suppliers in multiple countries that are linked together in a complex network of interdependent relationships.
While this may deliver cost or innovation advantages, it also increases the risks. Monitoring the financial health of a critical local supplier is more straightforward than one that is thousands of miles away. Therefore, an essential part of maintaining global supplier networks is the identification and monitoring of key suppliers. Companies with the most advanced supply chain management techniques have established processes that segment suppliers in terms of their importance to the business and review this automatically on a regular basis.

Support strategic relationships
However, identifying strategic supply relationships is only the first step towards supporting them effectively in order to minimise risk and maximise productivity. While conventional ways of achieving this, such as prompt payment, may deliver from a procurement perspective, they do so at the cost of treasury objectives, such as days payable outstanding (DPO) targets and minimising cash tied up in inventory.
Fortunately this circle can be squared by using supplier finance management solutions for key suppliers. These allow key suppliers to receive payments from a financing provider (typically a bank) against invoices that have been approved for payment by the customer, thereby easing the suppliers' working capital pressures and improving their financial stability. As the financing costs for these payments will typically be based upon the buyer's stronger credit rating, suppliers may also benefit from a lower cost than they could achieve independently by other forms of finance.
At the same time, buyers can potentially negotiate their DPO and discounts. The net result is that buyers' treasury and procurement functions can improve key metrics while simultaneously supporting strategic supply relationships with cost effective finance.

Flexibility and scalability
A better-funded supply chain improves its reliability, but it can also enhance its flexibility and scalability, which can prove a crucial advantage for a buyer. For example, if a new product exceeds sales expectations, it is critical to ensure that supply can be scaled up to meet that demand without disruption.
Supplier goodwill is a vital factor in dealing with sudden demand change. If suppliers feel that they are valued and supported as a strategic relationship by initiatives such as supply chain financing, they are likely to attach a similarly high reciprocal value to the relationship. In practical terms this will also make them more likely to prioritise a strategic buyer's orders, even when those orders may unexpectedly fluctuate in size. The programme may also help them by providing extra liquidity to cover these fluctuations.

Innovative supplier relationships
However, this goodwill can also extend beyond suppliers just 'going the extra mile' in areas such as accommodating unexpected urgent orders, to include matters such as product innovation. So rather than the conversation purely revolving around price and delivery performance, suppliers may be prepared to provide product development and enhancement as part of the relationship.
In some areas of the electronics industry this has already become common practice and goes beyond product development to include the manufacturing process more generally. Suppliers may suggest refinements to the way an existing product is made that will improve quality without increasing the price.

Conclusion: a better-funded supply chain is a better supply chain
Armed with the right supplier finance management solutions, buyers now have the opportunity to strengthen their strategic supplier relationships. In doing so, they will enhance their reliability, flexibility and innovation, while simultaneously minimising working capital consumption, unnecessary inventory and transaction costs.
The fact that these benefits include those likely to appeal to both treasury and procurement makes treasury's role as the usual instigator of supplier financing schemes easier in terms of obtaining procurement support. As a result, the probability of such schemes seeing widespread adoption by suppliers increases, as do the benefits for all concerned.

1. Start talking to other departments now; treasury cannot deliver successful supply chain financing in isolation
2. Identify and start monitoring key suppliers as soon as possible; efficient maintenance of global supplier networks and accurate targeting of supplier finance cannot be achieved without this
3. Use the intelligence derived from point 2 to offer supplier finance management solutions to key suppliers; the quicker this is done, the faster substantive quantitative and qualitative returns will accrue
4. Use the benefits to suppliers from point 3 to start negotiating additional in other commercial areas, such as discounts and payment terms.
5. Flag up to other departments the value of non-financial opportunities arising from point 3, such as key supplier involvement in product development

HSBC is here to help forward thinking businesses optimise their supply chain and thrive in the global marketplace. Speak to your local trade specialist today about Supply Chain  Solutions