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Bridging the physical and the financial: using supply chain finance could release cash “stuck” in the chain


Could your supply chain use more cash?

According to ongoing research at the Netherlands-based Nyenrode Business University and Dinalog, the Dutch Institute for Advanced Logistics, collaboration and innovation in current financial models can yield this cash, freeing up capital for more business.

Michiel Steeman, senior researcher at Nyenrode Business University, said it has become more and more important to link the physical and the financial in supply chains, because “with more collaboration you can release cash that is stuck in the supply chain. There are trillions of dollars’ worth of working capital in the EU area because of a lack of optimization.”

“We see a changing set of financial models being used to support the supply chain. Most of the funding in the supply chain comes within the supply chain itself. About 70-80 % of available funding can be found in payables and receivables,” he said. 

Steeman and Twan van Lankveld, Program Manager at Dinalog, presented strategies on supply chain finance during the International Transport Forum in Leipzig, Germany, attended by Transportation Media.

The definition of supply chain finance, said Steeman is “currently moving around” but essentially it refers to financial arrangements in the form of debt, equity, or financial contracts, used in collaboration with at least two supply chain partners, and facilitated by the focal company with the aim of improving the overall financial performance.

It mitigates the overall risks of the supply chain, where 4-8 % of the average cost of a product can be linked back to financial processes and makes the supply chain inefficient. 

“A common scenario would see a company lengthen its finance terms to its suppliers to 90 days for example. But the bank would finance the invoice on Day 1 at the interest rate cost that the company is normally charged with. This is beneficial to the supplier as it provides cheap funding for the working capital,” he said.

He gave the example of NGOs using the purchase volumes of corporates to finance farmer lands and equipment, a strategy that is of interest to many consumer products manufacturers, so they can ensure that the products and materials come into their own supply chains, and in essence “capturing capacity”.

In 2012, UK Prime Minister David Cameron announced a Supply Chain finance scheme would get underway as a boost to SMEs so they could get their invoices paid earlier. 

The scheme allows an invoice to get quick approval so the supplier can then go to their bank and get pre-financing.

“It’s not only about funding but about developing the knowledge for dealing with funding structures,” said Steeman. “It’s quite revolutionary when you think about a normally-50-60 day approval process for invoices, and matching purchase orders, and if you can then bring that back to five or six days and confirm that you’re going to pay on day 60 or get financing on Day 6 using a bank-this is very important in a sector like logistics,” he said.

As sourcing from lower cost countries increases, and with that lead times, supply chains are longer and that whole period has to be financed.

“Suppliers with less access to financing are more of a commodity and currency risk,” he said.

The nature of trade is also changing, to “open account”, he said, moving away from letters of credit” (a traditional way of doing trade, where you create a document of your credit specifics and your money is released).

“Supply chain finance strategy, leveraged purchasing power and the credit quality of the committed buyer are key to supply chain finance,” said Steeman.

But managing debtor risk is an important aspect of supply chain finance. 

“If you get uncertainty in payment behaviour you’re going to need cash buffers so if you can create certainty around payment behaviour (which is largely cultural and differs from country to country), with leveraged finance models you take this uncertainty away and free up cash,” he said.

Supply chain financing can be difficult for corporates to implement, because three functions must work together: accounting and finance, procurement and sourcing, and supply chain management.

The decisions you take towards your suppliers will also have an effect on your financial position and also on your raw materials position on your balance sheet.

The question of when you take legal ownership of supplies could affect your financing. 

Looking at how supply chain finance schemes could evolve, Steeman said there will be shifts from the traditional model of lending facility-based financing. 

In Europe, work is being done to create a supply chain finance network, the SCF Community, which will work with consortia to develop these new finance models.

The SCF community has also developed a learning model, a web-based simulator of sorts called The Cool Connection (www.thecoolconnection.org) that aims to bridge the worlds of supply chain management and finance.

“It puts stakeholders into a mock situation to get a better understanding of the finance roles in supply chain,” said Steeman.

He said a database is also planned that will provide users with access to information about general situations and procedures. 

According to Steeman, alternate financing models are needed to promote sustainability, and could even increase the involvement of the private sector.

“There’s a large liquidity problem in the transport sector, and disputes about invoices. These models can help strengthen and stabilize these groups in the middle sector,” he said.