Reverse factoring programs, which are also accurately described as supply chain finance (although many people mistakenly reference SCF to refer to the broader trade financing or fintech arenas), require a careful internal process orchestration that must include procurement, accounts payable, treasury and executive leadership to be successful. During an outstanding panel discussion led by The Trade Advisory’s Tony Brown at the CFA’s Supply Chain Finance/Factoring World event in Miami last week, two panelists, Kyriba’s Eric Riddle and Wells Fargo’s Stephen Elson, provided contrasting examples of what successful and poorly performing reverse factoring programs look like.
On the “happy” side, a $10 billion firm in the consumer packaged goods space pursued a reverse factoring program to free up working capital because of an executive requirement. The program, which only involved 35 suppliers initially, still ended up freeing up $75 million in working capital in the first year, in large part because of executive alignment between the CFO and CPO and sponsorship and involvement by the CEO, as well as in-the-trenches support from the procurement and accounts payable team members who were actively involved in the program design.
The “horror” example came from a retailer that did not have the same level of internal alignment. Only treasury and A/P were involved in program design and the organization was not successful in communicating the term extension to suppliers, as procurement was not fully onboard with the initiative and suppliers were given a choice on whether they opted in our not. The implementation of the program also happened to coincide with an ERP system conversion, which complicated on-boarding and data requirements.
As a result, uptake was, not surprisingly, low and DPO extension was minimal. The program, which involved 72 suppliers (from only categories that procurement blessed in the end) resulted in only a $5 million working capital improvement, a trivial amount compared with what could have been an immediate nine figure improvement based on the spend/suppliers that could have been involved if procurement had a seat at the early table. For this organization it’s likely a simple inventory optimization or S&OP process could have been far more effective.
If you want to avoid a reverse factoring horror story, do yourself a favor. Make sure that the program as CEO- or board-level sponsorship and initial alignment and involvement of procurement, accounts payable and treasury — ideally with a CFO steering the ship. And make sure procurement not only has a seat at the reverse factoring table but is fully supportive of the initiative, including defining in-scope suppliers and categories from the start.