Published: September 01, 2010
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.
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.
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Many of Bayer’s suppliers are large corporations with a strong credit rating. These companies are unlikely to be attracted to a supplier finance programme, while smaller suppliers without direct access to capital markets or suppliers with a credit rating lower than Bayer’s A-rating have the opportunity to derive considerable value. Suppliers that have joined the programme can use an online tool provided by Santander to choose which invoices to finance. The supply chain finance programme is also closely integrated with other financial processes such as e-Invoicing (figure 1). Bayer wanted the process from e-Invoicing through financing and payment to be as efficient and automated as possible. Electronic invoices are stored in the ERP, with a flag on those suppliers that have joined the programme. An invoice file is transmitted automatically to Santander and data is populated directly into the supplier finance portal.
Although Bayer completed the project within a reasonable time scale, there was a variety of challenges that needed to be addressed. The first of these was the management of change for internal stakeholders. This included changes for the Treasury department as well as operational changes affecting the Procurement and Accounts Payable staff. The selection of the right banking partner with focus on the bank’s track record with supplier finance programmes and its process efficiency were considered essential to the success of the project.
A second challenge was to remodel the relevant processes in the ERP, and then integrate this with Santander to ensure the smooth two-way flow of invoice and financing information. Only once internal processes and integration had been established could the service be offered to suppliers.
Thirdly, and perhaps more surprisingly than these two elements, suppliers were initially often reluctant to join the programme and it took considerable effort to educate them and articulate the benefits to them. Some are still reticent as they may be concerned about the impact on covenants in existing financing contracts or do not yet see the advantages. To help with this, Santander has provided a calculation model to illustrate the upside potential, which may not otherwise be intuitive. To date, the take-up rate has been around 20% of target suppliers, but this figure is likely to increase in the future.
Looking ahead, Bayer will roll out the programme globally. The company will continue to work with Santander across Europe. For North America Bayer might choose a banking partner with a stronger local presence to encourage greater take-up amongst local suppliers. Bayer continues to be very satisfied with the services received from Santander and the smooth way in which the implementation has taken place. An important factor in the success of the programme was to be ready with internal processes before introducing suppliers. Introducing the programme was also an opportunity to identify inefficiencies that had not surfaced before and to upgrade these internal processes. Finally, selecting the right partner with the expertise, support capability and geographic reach was essential for success.
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