There is a Finnish saying that if you try and steer your car forward by looking into the rear view mirror, you’ll probably encounter some unintended off road terrain. However, in order to share our outlook at OpusCapita on the year 2017 regarding Supply Chain Financing (SCF), a short glimpse to the past year and the current market environment is in order.
The global economy continued to improve in many areas and there are quite a few positive signs suggesting that growth will continue to steadily pick up the pace over the coming years. The major stock markets have climbed to a level that is higher than before the latest financial crisis back in 2008. Furthermore, we have seen a significant increase in investments especially in certain industries, such as Construction for example. However, on the other hand political and economic turbulence has been with us throughout the year 2016 and GDP growth is still modest in most major regions. Not to mention any other concerns that some companies or markets might have. Did I mention Brexit already? Let’s not even begin to go down this rabbit hole.
Business afterall is global today. From a single company’s point of view continuous globalization has opened the whole world for business and most of the customers and suppliers are scattered all around the world. This brings new counterparties and currency risks, a need for hedging and efficient account structures. Also, companies face fierce competition in areas that traditionally have been sheltered within their local region. At the same time new regulations like Basel III are constraining capital and lending from the banks. Even though cash is available at low rates, it definitely is not the case for all companies. Lack of liquidity is one common reason for supply chain disruptions, which can be a mayor risk factor regardless of a single buyer’s strong financial performance within a supply chain.
Treasurers are increasingly and painfully aware that there might well be millions of trapped cash in their working capital. According to J.P. Morgan’s estimation, the total amount of trapped cash is more than $1 trillion for non-financial firms in the S&P 500 index. Simultaneously, many companies are contemplating how to invest excess cash on a short term due to negative interest rates and they are facing challenges to find attractive investment opportunities from the more traditional financing instruments. The common consensus is that the interest rates will remain low for the years to come. And this is why companies need to find innovative ways to maintain and nurture their supply chain.
Let’s take a 180˚ turn and look at the other side of the table: procurement. Procurement is seeking for ways to improve supplier relations and to secure a preferred customer status among their strategic suppliers. At the same time the trend of extending payment terms continues, although initiatives such as the EU Late payment directive tries to keep it under constraint. Nevertheless, global competition enforces buyers to drive tough bargains towards their suppliers.
It is fair to say that for a CFO, CPO or Treasurer there is a lot to consider both from an external and internal point of view. This might lead you to argue that this could be the worst timing for a company to consider launching an SCF program.
On the contrary. Most companies have understood that they need to ensure not only their own competitiveness, but in many cases even more importantly, the well-being and efficiency of the entire ecosystem around them. Luckily we have witnessed an enormous and positive leap in collaboration between two main functions that contribute towards the success of an SCF program, which are Treasury and Procurement. Today’s top performers build their success on top of efficient supply chains and ecosystems, where they are able to maximize their own efficiency without destroying value from other parts of the organization. For sure, working capital is still a key metric for SCF programs, but topics such as supplier risk mitigation and social responsibility are catching up quickly. Another approach which is clearly gaining speed relates directly to the current financial market environment. After all, what could be a better investment opportunity than to pay your invoices earlier and to gain double digit annual returns from the discounts? It is basically a short term risk free investment.
There is more to it . Procurement is in the driver’s seat after an SCF program has been launched. But how to measure the benefits or the successes of the SCF program from Procurement’s point of view? The benefits differ between supplier segments. Some of the benefits can be measured directly and others indirectly. A company can measure KPIs such as e 1) cost savings 2) amount of released working capital 3) the average payment time or 4) Days Payable Outstanding improvement. And indirectly 1) spend consolidation 2) value add through strategic suppliers and 3) by reaching a preferred customer status. However, one common nominator and important KPI relates to the supplier onboarding ratio. If you are able to reach high percentages it means that you are both managing your procurement operations efficiently and offering your suppliers an SCF solution that they can join digitally with ease. It is 2017 right, superb customer experience is naturally the foundation for everything, Supply Chain Finance included!
During 2016 we at OpusCapita worked with more companies than ever before by helping them to shape out an SCF roadmap that exactly fits their needs and supports their business goals. We have been challenged by our Customers to meet their goals and demands deriving from both internal initiatives and outlooks in the economic environment. Our customers are seeking for SCF solutions that have the ability and flexibility to offer a comprehensive and versatile solution that meets their demands today, while at the same time not forgetting about both known and unknown requirements of the future. The common themes that surface in pretty much all our discussions relate to corporategoals, is the focus more towards cash flow, working capital and impact on the balance sheet or margins, investment opportunities and impact on profit & loss statement? What is the desired funding source: third party funders (banks, non-bank funders) or the buyer’s balance sheet? How to create the onboarding strategy towards large and medium enterprises, whilenot forgetting about the strategic small suppliers? What are the ways to ensure liquidity sustainability and minimum impact on credit capacity while maintaining competitive margins? How to take into consideration the global reach, including the funding strategy from a regional perspective, multi-currency and time zone support? What is the value of having no restrictions on the number of suppliers than can be invited to join the program? The list might feel slightly exhausting, but managing the complexity in a professional way sets the tone for a successful SCF program.
Surveys and statistics also support the development we have seen in our daily work. The SCF Barometer, a survey conducted by PwC and the Supply Chain Finance Community, shows that companies are mainly utilizing SCF to release working capital, which is why Reverse Factoring is the most popular financial instrument under the SCF umbrella. Treasury is the main initiator for an SCF program, while Procurement plays an important role during the implementation and roll out towards the supplier base.
According to the SCF Barometer key drivers for supplier selection are the strategic relationship and spend amount. In most cases, a limited number of suppliers joined the program. For the spend coverage, the 80/20 rule applies: In almost 80% of the SCF programs only up to 20% of the spend is covered so far. SCF programs are generally considered as a success and around 80% of the companies will look into further extending their SCF programs.
Oh yes, I almost forgot – how about the outlook for year 2017? It is still early stages, but based on the foundation that was laid in 2016, and the demand deriving from the market, we strongly believe it is going to be a record breaking year for the Supply Chain Finance community in general and us at OpusCapita. During 2017 we will see Blockchain technology being infused to Supply Chain Finance and this could well disrupt the entire industry in the future in a profound way. So sit tight in the driver’s seat, the future for SCF looks extremely bright!
Tuomas Unhola has over 15 years of experience in business development and consulting mainly within the Financing Industry. In his current role he helps companies to improve their working capital efficiency without decreasing the economic performance of the entire supply chain.
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- World Bank (2017). Global Economic Prospects: Weak Investment in Uncertain Times. Available at: http://www.worldbank.org/en/publication/global-economic-prospects
- J.P. Morgan. (2015). The name is Cash, just Cash. Available at: https://www.jpmorgan.com/jpmpdf/1320692503971.pdf
- PwC and Supply Chain Finance Community. (2016). SCF Barometer 2016. Available at: http://scfacademy.org/scf-barometer-2016/