Supplier Finance to Enhance Working Capital and Reduce Risk
by Michael Friede, Head of Global Procurement Intelligence, Bayer MaterialScience
In late 2008, the Bayer holding company undertook a large working capital project across all business areas. As part of this project, the CFO tasked the working capital team to come up with innovative ideas for increasing days payable outstanding (DPO) without compromising suppliers. Supplier financing was an ideal solution to this problem, with a range of advantages:
Suppliers can take advantage of Bayer’s attractive refinancing conditions, and both reduce their financing costs and increase financial flexibility by accessing a cost-effective source of financing. In addition, they can reduce utilisation of their own credit lines and optimise their own working capital through a reduction of days sales outstanding (DSO).
Bayer can extend its DPO, manage working capital more closely and cut the number of external payments. The risk of supplier bankruptcy is reduced, therefore mitigating supply chain risk, and strengthening ties with suppliers. Furthermore, the overall process efficiency in Accounts Payable and within operation Procurement processes is improved.
In recognition of these advantages, Bayer launched a pilot supplier finance programme with BMS Germany in late 2009, which proved highly successful. Consequently, the supplier financing programme was introduced into live operation in January 2010 and the decision was quickly taken to roll out the programme across all relevant BMS entities in Europe, and latterly to roll it out across the Bayer Group to entities with significant purchasing volume mainly in Europe and North America.
Since implementing supplier finance, Bayer MaterialScience has realised significant benefits. Many smaller suppliers were very vulnerable financially at the end of 2009 and early 2010 so this was a timely solution for them. The relationships between Bayer and these suppliers have therefore been enhanced. Bayer has also benefited both from extended DPO and more streamlined processes for supplier payments.
Appointing a bank for supply chain finance
Most of the banks that already have a strong relationship with Bayer offer a supply chain finance programme. To deliver a supplier finance programme successfully, a bank or an independent service provider needs to have an established solution, the capacity to process high volumes and close integration with customers’ ERP systems. During the evaluation process, it was very clear to Bayer that Santander was well equipped to support their needs. One of the main reasons was the long experience that Santander has with the programme. Santander initially launched its supply chain finance programme 19 years ago in Spain, which has a culture of long payment terms. Since then, the bank has extended its capabilities across Europe, North America and South America. Although originally manually administered, the programme is now fully automated.