Lifting the Kimono on Supply Chain Finance Data

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It’s not often you get to look at someone’s raw data. Most private vendors when discussing their business will talk in percentages, but not numbers.

So I was intrigued when Orbian recently opened their supply chain finance data with the European Business School and Fraunhofer Institute to test the following hypothesis:

Is Supply Chain Finance primarily used to bargain for payment terms or is it a tool for collaboration and harmonization of terms between buyers and sellers -that is, by introducing SCF, do buyers seek to extend terms as much as possible?

Their conclusions from looking at their data: SCF is a powerful tool for assisting buyers and suppliers to manage working capital and liquidity. Their data show buyers secured on average 42 days DPO extension; suppliers using SCF secured a 75 day working capital reduction. The 42 days DPO number is a simple arithmetic mean of the 56 Buyer organizations that were included.

They suggested that the most significant factor is that of payment harmonization, or establishing standard procurement terms by the Buyers.

Generally, if companies are considering term extension, they would just like to add 15 or 30 days onto their terms and be done with it. But the world is not that simple. By having supply chain finance or reverse factoring, buyers can offer a subset of their supply base an option for early payment. What Orbian’s data is saying is that when they do, it is 75 days of DSO improvement.  PrimeRevenue had shared some data with me previously and 75 days seems to be the magic number.  PrimeRevenue’s average payment acceleration was 75 days (101 to payment in 26 days).   See PrimeRevenue's data supports efforts on SupplierPay

Obviously, many suppliers offered SCF or reverse factoring do not take it up. This is borne out from both private discussions with companies, vendors and banks. There are a variety of reasons (encumbered bank lines, onerous KYC requirements, poor program communication; upfront enrolment costs including auditor opinions on true sale; concerns about funding being sustainable, etc.). So for the large percentage that did not use this technique, it becomes a payment term extension.

But this really speaks to a larger question of how companies should approach payment harmonization, term extension, supply chain finance programs, and other early pay techniques such as dynamic discounting.

  • Are you looking to put all 40,000 suppliers on some early pay technique or just a small subset of larger spend suppliers?
  • Is working capital and payment something that you want to exclude as part of the Buyer-Supplier negotiation process by paying suppliers promptly or not?
  • Are you looking for a non bank (less compliance issues) or do you need to feed your relationship banks?

There are no simple answers. But in the philosophy of keeping it simple, we can see that reverse factoring does offer a working capital benefit on both sides. I would like to see the PrimeRevenues and Taulias (and Orbians) of the world do a much better job of lifting the kimono a bit to inform the market.

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