SCF Optimisation in Three Words: Supplier Relationship Management

Treasury and procurement should be strong partners, especially when it comes to managing supply chain finance. Yet despite the advantages for all parties of such programmes, often there are not enough hours in the day to get the best from them. Enter the third-party supplier relationship manager. Andrew Burns, Vice President Europe, C2FO, explains.

With the best will in the world, any programme of improvement that involves the participation of two exceptionally busy corporate functions such as treasury and procurement, and potentially thousands of external partners in a modern supply chain, is asking a lot.

Take supply chain finance (SCF), for example. The potential advantages are well laid out for buyer and supplier, yet with time and resources stretched to the maximum on both sides, managing a programme so that it delivers the best possible results is often challenging. As a result, relationships can suffer and, in the worst-case scenario, supply chains can be broken with disastrous consequences.

The vast majority of early payment and SCF programmes are signed off by treasurers, but then handed over to procurement for implementation. With neither function able to educate, onboard and systematically manage suppliers beyond a small, select group, many suppliers are left to struggle with liquidity issues. The threat is all too real, and during the pandemic, many supply chains became severely compromised at an alarming pace.

But there is a way to ease the pressure and ensure SCF reaches the parts it needs to quickly: the third-party supplier relationship manager (SRM). It’s a role that only select SCF providers such as C2FO offer as part of their programme. While SRM is well known to most procurement professionals, the concept remains largely unfamiliar to most treasurers. For Burns, as VP of Europe for C2FO, the world’s largest platform for working capital, serving more than one million businesses globally, it’s time to address this oversight.

SRM role

Even where a large company has incorporated a category manager into its procurement structure, handling multiple supplier relationships effectively remains a challenge, he notes. Obviously, strategically important suppliers will be mainstays on procurement’s radar. However, time constraints on category managers often dictate that the remainder go largely unnoticed, along with their financial needs.

The objectives of procurement cover responsibility for cost-cutting, negotiation of payment terms and the internal provision of working capital metrics such as DPO (days payable outstanding). These downward pressures often sit uneasily with the constant push for more innovation to be delivered by suppliers. With weaker cash flow, they may struggle to innovate, and even survive.

Procurement needs to reach out in a more effective way to its supplier base, to ensure continuity and creativity, especially in testing times. By inviting a third-party SRM to become an attachment to the procurement organisation and charging it solely with the execution of the operational work that supports procurement’s strategic duties, the pressure is eased significantly, says Burns.

Something as seemingly mundane as keeping up-to-date details of the right contact person for procurement activities is challenging when thousands of suppliers are on the system. To be effective, rolling out an SCF programme needs the details of every supplier’s finance decision-maker to be correct.

Only then can the value of a programme that offers early payment be explored in context of the firm’s actual and current liquidity needs. Target the wrong person, and an explanation of the programme’s value, and consequently the opportunity it could present to buyer and supplier, will most likely be lost. As Burns notes, if suppliers don’t know about an SCF programme, it will fail.

In addition to finding the right decision-makers, SRMs have a vital role in building an understanding of which suppliers would most likely want to participate in SCF. This requires knowledge of the industry in which each is a player, and the pressures they face at any given time.

Armed with sector-specific information, it then falls to the SRM to speak with the identified individual in each target supplier. The aim is first to explain the value of the programme to that company. For those who decide to enrol, there is help with registration if needed, and a full explanation of how the programme works. Thereafter, it is about maintaining the relationship, providing regular information and updates to help each supplier leverage SCF in the context of its own current financial needs.

The resource demands of this stage are often where internally managed programmes fall down, notes Burns. Indeed, he says, SCF success is built on actively managing each relationship and by taking the time to build trust through strong and effective communication of key information. “Ultimately it is the supplier’s choice whether or not they want to exercise the option to accelerate their invoice payments; if they don’t fully understand the process, they won’t do it,” he explains. It takes time and effort to reach that simple goal, but it does not stop there. 

As part of the active relationship, the SRM alerts the supplier to invoices already approved for early payment through the platform. This helps suppliers optimise their collections processes, but rapid notification also provides valuable forecasting and planning information. This can be especially useful when the offer of early payment comes at a point that enables the supplier to offset a temporary (perhaps cyclical) squeeze on its liquidity.

SCF is nothing new, but Burns believes C2FO’s SRM model is unique. “The conversations that our network of SRMs develop through ongoing interaction with suppliers are incredibly important,” he states. “Our SRMs are the oil that keeps the whole supply chain mechanism working.”

As a neutral third party, SRMs remove any kind of negotiation leverage that may be obstructing the relationship between a buyer and its suppliers, notes Burns. The SRMs’ status helps build trust, which in turn helps reveal the true liquidity needs of each supplier, he adds. Indeed, he continues, most decisions to accelerate payments flow from these conversations. Onboarded suppliers are able to call upon their SRM for impartial expert advice on the best course of action under changing market conditions.

Treasury and procurement benefits

The immediate benefit of SCF for treasury, especially in an ultra-low interest rate environment, is a higher return on cash when it’s deployed as a discounted early settlement for suppliers. If third-party funding is needed to help with working capital as part of an SCF programme, then that is available too. This, says Burns, gives a lot more flexibility in the achievement of treasury key performance indicators (KPIs), whether the focus is on margin improvement, cash flow and DPO, or both.

“From a treasury perspective, the C2FO programme is simple and effective. It’s a decision to allocate a certain amount of free cash, or use our funding network, which can be flexed on a daily or even hourly basis,” he explains.

From the procurement side, the programme removes financing costs that are normally factored into the supply chain because suppliers typically fund themselves through mostly non-negotiable and expensive bank loans.

“By offering an alternative, lower-cost financing, it creates a new area of value and cost savings for procurement, with no regulation or complexity to navigate,” notes Burns. “And suppliers are able to arbitrage their costs by using an early payment mechanism that gives them quick access to liquidity.”

Fixing the past

In addition to buyer time constraints, the high overall administrative costs of onboarding faced by providers – not least the raft of background know your customer/anti-money laundering (KYC/AML) activities and contract work required for each supplier – has all but consigned SCF programmes to the highest-value suppliers only.

“At C2FO, we’ve built a model that requires none of the onerous administrative work, so we can reach out to every supplier and onboard them quickly,” says Burns. The model sidesteps the traditional receivables purchasing approach in favour of leveraging the suppliers’ relationships with their buyers. “It’s more akin to a cash management model,” he comments.

Of course, normal cash management checks still need to be made to ensure payments are not sent to watchlist countries or organisations, but there is no requirement for deep KYC/AML processing. Onboarding suppliers without all the usual documentary demands means the process can be managed entirely digitally.

As Burns explains: “When a supplier comes to our website, there’s a click-through agreement, and then they’re straight in.” Once on the platform, the supplier can choose an appropriate discount for early settlement; this uses a market-led pricing range that effectively undercuts the supplier’s traditional, bank-led funding options.

Each priced invoice can be offered on the platform to the relevant buyer, which can elect to accept the offer from its supplier or not. The source of funding could be the buyer’s cash or a funding partner in C2FO’s network, but it is the buyer’s choice.

It is unrealistic to expect a traditional category manager within a large corporate to reach out to a wide range of supplier sizes and complexities, and engage in conversation about early invoice payment. It’s why most suppliers are not contacted about SCF. And yet clearly there is much to be gained by doing so.

“In C2FO, we segment our SRM teams to cover organisations of different sizes, from enterprise-level corporates to the smallest players. We then take a bespoke marketing and educational approach to each supplier, and that enables us to reach out to all of them in the most effective way,” says Burns. “It’s an effective approach that often yields above a 50% supplier conversion rate.”

One C2FO client, global electronics giant Philips, has 20,000 suppliers spread across 100 category managers. It had an existing SCF programme but knew it was underserving a large portion of its supplier base. By augmenting that programme by C2F0 and its SRM approach, Philips reported that in the first 60 days it had onboarded a further 1,509 suppliers in 60 countries, with return on investment (ROI) achieved in less than 30 days.

UK building supplies major, Travis Perkins, won the Best SCF Award with TMI in 2019 for its work with C2FO. With more than £4.5bn in annual cost-of-goods spend across more than 6,000 small and large European suppliers, its early payment programme and SRM service was championed by Treasury, collaborating with Procurement, IT, Security, Accounting and Legal teams. The programme achieved ROI in seven months, contributing to the sustainability of its supply chain.

Positive outlook

“SCF is a mature product, so the challenge now is how to extend it to more suppliers,” says Burns. He notes that more suppliers are, for example, being offered reduced early payment rates if they achieve higher environmental social and governance (ESG) scores. “It’s certainly a constructive alternative to punishing them by withdrawing trade for non-compliance,” he says.

However, many more companies should understand that suppliers of all sizes and values need to secure liquidity when required, and that an effective SCF programme can help reduce supply chain risk. But the success of these programmes depends upon internal collaboration, making sure the time, effort and expectations of procurement are aligned with treasury and vice versa, states Burns.

“Partnership with a third-party SRM team is key to enabling the entire background workflow of any SCF programme to be managed,” he says. “By easing procurement’s workload and treasury’s working capital pressures, many more suppliers can be brought into the organisation’s supply chain ecosystem, to the benefit of all.”