Following the Innovators — Supply Chain Finance

Even though the concept of supply chain finance should be nothing new to most savvy types involved in procurement and accounts payable technology buying decisions, I still remain amazed with the limited uptake in the market. But perhaps things are starting to change, at least in certain industries. A recent Retail Week article suggests that at least some retailers -- albeit only a handful -- are beginning to target working capital management initiatives that do not necessarily negatively impact suppliers (unlike traditional approaches such as arbitrarily extending payment terms). The article introduces one supply chain financing option, noting the approach "works by the supplier selling its invoices to the bank at a rate discounted against the credit rating of the retailer. The bank then pays the supplier when the supplier wants payment, and the retailer pays the bank in line with normal payment terms."

However, it's worth pointing out that both banks and non-banks (e.g., hedge funds, private equity funds, new factors) are interjecting themselves into the equation as well, building greater liquidity -- and in theory, lower financing costs -- into the marketplace. In recent years, there have been a few different approaches to the supply chain financing game. Banks are beginning to interject themselves more frequently into discussions with buying organizations (both procurement and accounts payable), bringing both their own and third party technology. Spend Management providers are also delivering solutions, in some cases leveraging their own transaction hubs and clearinghouses (e.g., supplier networks). And targeted independent solution providers -- in some cases with third-party banking relationships already established -- also have their place in this ecosystem.

What will it take for supply chain finance to cross the adoption chasm? I think one of the major limitations for many organizations is a lack of adequate visibility and control around the overall payables process for the majority of suppliers. Until companies focus as much on the second "P" as the first in "P2P", it will be difficult to take full advantage of supply chain financing options with suppliers throughout their supply base. But perhaps the even greater challenge is educating and incenting procurement organizations around working capital management -- both their own as well as suppliers -- as opposed to just savings and cost avoidance. Until this happens, perhaps as an outgrowth of supply risk initiatives going on at the moment, I suspect that companies will continue to deploy supply chain finance solutions in a scattered and ad-hoc manner versus as comprehensive and systematic initiatives (and that's in the best of circumstances).

Jason Busch

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