Published: July 01, 2013
While supply chain finance is currently a very popular solution for many European corporates, its implementation provides many hurdles far beyond the typical scope of the treasury function. Many treasurers still see it as a single point solution, while it is actually a multi-facet challenge requiring the involvement of various functions and stakeholders. If it is not properly addressed, the programme will eventually fail to deliver the full range of benefits expected by corporates.
Lessons learned from supply chain finance implementations that PwC has supported over the past months show that some of the points needing particular attention are the buy-in of various functional areas, strategic drive and clarity over roles and responsibilities of the different internal and external parties involved.
Corporate liquidity is still challenged, and corporates are taking appropriate measures to optimise their working capital, as PwC’s latest European working capital study suggests [1]. However, with an overall declining days payable outstanding over five years, it also showed that the area of trade payables is still overlooked as an opportunity to optimise cash. Buyer-centric SCF programmes can be the ideal tool for this purpose, but only if the following obstacles are appropriately managed.
When selecting the appropriate funding providers for SCF, make sure to leverage sweetspot of banks. Looking only at your current relationship banks or purely from share-of-wallet considerations is only acceptable as long as these already have global capabilities and are present in the geographies from which you are sourcing. Your SCF banks should not only be the market of your buying organisation, but ideally be present in the sourcing market. To on-board a maximum of suppliers in these foreign markets, corporates will be able to benefit greatly from local bank operating staff to support the on-boarding in the local markets by speaking their language, and understanding suppliers’ requirements and needs. Secondly, performing typical procedural requirements and regulations on banks’ know-your-customer (KYC) with suppliers in remote locations adds an additional layer of complexity, and can even break the deal. Given the continuing focus on the bottom line and the growth of sourcing from emerging markets, such as Asia, the disconnect will continue to become more pronounced for many organisations.
Furthermore, a bank’s local branch will use this opportunity to strengthen relationships with these suppliers, and not regard it uniquely as a burden to please the buying organisation. On several occasions, we have witnessed a certain reluctance on behalf of the banks to on-board suppliers that are considered to be ‘non-strategic’ and where current spend volumes are not high enough to compensate for investments made by the banks. This issue is even more pronounced if the chosen bank’s capability is based on a partner in the given location, where the partner is also not domestic in the given country. Hence, carefully designing the programme structure and selecting the right partners upfront saves costly surprises later down the road.
Compared with other projects in the treasury area, implementing SCF is definitely an exception, as the number and diversity of different stakeholders involved is very high. This leads to higher complexity to manage, and hence the corporate treasurer will need internal alignment and buy-in, especially with colleagues from procurement, as to what the activities are that the organisation will perform and what the banking partner is expected to provide. It is important to involve all related parties early on in the process. Recently, we have seen examples of corporates where this split has not been explicitly enough defined, and a few months down the road the project is ‘stuck between chairs’, has only attracted a couple of suppliers, and is far behind benefit expectations.
For example, we encountered a European pharmaceutical player where during the initial ramp-up tasks had not been allocated properly towards the banks, or internally in the organisation between group and entities. Eventually, this led to a poor programme, where after 18 months since the start of the programme only a few suppliers had been enrolled successfully.
Achieving the buy-in of multiple stakeholders also requires speaking a common language. It is only natural that the roll-out needs to be managed by the buyers and purchasing managers who will communicate further towards the account manager or sales person of the supplier. This is already a challenge in itself, where the corporate treasurer is required to leave his comfort zone, overcome corporate silos and act as a change manager. A second hurdle exists on the side of the supplier: the easiest way to achieve mutual agreement and with that fast on-boarding is when you speak to finance and treasury at the supplier’s side. At an implementation at a global FMCG, this had been a cause for concern for one Top 10 supplier. The sales person did not appreciate the benefits of joining a SCF or had individual objectives that were not aligned with this proposition. Such common situations can reduce the overall chances of success, as the first sales contact might straight away close the door on this topic, but it will certainly take more time to achieve the full expected benefits. Fruitful discussions can take place only after the right counterparties from the supplier organisation have been identified. This is also an area where the strength of supplier relationships becomes vital: if the level of mutual trust is high then the supplier will be much more open to enter such discussions.[[[PAGE]]]
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Depending on the size of the programme, it makes sense to have a centralised focal point to drive its development and to be the first point of contact for any issues arising, who will be able to liaise internally on one hand, with IT/Procurement/Accounting/AP/Treasury and on the other, liaise with external parties, such as the SCF bank(s), platform and other service providers. Figure 1 provides an overview of the different stakeholders that such a role typically manages. In the past, this was typical of many large retail organisations which set up dedicated teams. Nowadays, we see corporates from all sectors centralising the management of SCF programmes with dedicated individuals, and we recommend such set-ups in larger implementations.
Successful programmes have set, prior to the launch, clear objectives of what the programme is expected to deliver. As for any project, defining common goals and focus will help overcome functional and departmental boundaries within the organisation. Clear KPIs and target setting will help here too, to provide transparency on progress and guidance. For SCF, these have to be agreed jointly with Procurement. Historically, procurement staff are very often only incentivised for reducing annual budgets, or such things as TCO (total cost of ownership), but rarely for liquidity or cash-related items. Often, they have simply been asked to comply with payment terms policy, where in many cases compliance is difficult to monitor on a regular basis. In order to achieve maximum success, metrics and incentives will need to include SCF specific elements, and a separate reporting on the programme ramp-up is useful to avoid slippage. As one example, we recently encountered an international manufacturing business that had designed a very attractive programme with the house bank, which, however, due to lack of strategic sponsorship and drive, did not spread outside of the corporate treasury department and hence did not thrive.
In the current constrained environment, it will be in corporates’ best interest to overcome these hurdles, as many suppliers will embrace this opportunity, which, if successfully implemented, can be a significant driver in strengthening supplier relationships.
| Notes 1- PwC European Working Capital Annual Review 2012 “Working Capital: never been better. What the top performing companies are doing differently”. |
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