One Company’s Lesson Learned Implementing a Supply Chain Finance program

A global foods company had their Corporate Planning & Analysis unit do a benchmark on working capital metrics with peers.  You know the one, how do we compare with our peers for Days Payable Outstanding, Inventory, Sales, etc.  Are we in the top quartile?  And if you are not on top, it’s likely your CFO will put that in your face and say “You are tying up working capital I can use.”

Still, many companies who take a stronghold approach to extend terms can find themselves in a disaster and find they do not have as much clout in the marketplace as they thought.  They might think they are a big buyer, but find they are small part of their suppliers business. Their suppliers say go pound sand.

So when more and more large corporates are adopting supply chain finance, dynamic discounting, pcard and other programs, it’s natural for any large corporate to stop and take notice.

This particular food giant implemented a SCF program and extended terms to 115 days with a group of suppliers.  They generated $200M in working capital gains with the extension.  The real juice was in extending terms with Freight and ad agencies, marketing and IT suppliers.

In my chat with their worldwide sourcing head, he commented :

It took us awhile to gain traction.  We extended terms with a couple hundred suppliers and 25 suppliers have chosen to use their supply chain finance solution. The majority we have extended have chosen to fund themselves.  One area of success was with early pay suppliers who were offered 1% /10, as we were able to extend their payment terms longer and give them a way to get paid for Libor + 200 versus a 1% discount on invoice value.  

Key Lesson Learned

When asked the biggest obstacle in implementing the solution, it came down to simple block and tackle around paying suppliers with multiple business units, some who have opted in and other divisions that had not.

We’ve had to create an implementation team here.  It’s not as simple as flipping a switch on SAP and saying going forward we will pay this supplier with our vendor. There is a fair amount of work on our side to get all the Purchase locations, remit to addresses mapped to our vendor’s accounts, sometimes it is not all of a supplier, it’s just part of a supplier’s business, one Division says they will do it and another doesn’t.  We have different contracts with different parts of suppliers.  Those become messy because invoices come in and if there is not a purchase order attached to the invoice, and then they sometimes get paid against wrong terms bucket.  We have multiple terms with suppliers.

The lesson here is that supplier onboarding takes more time than just a simple credit arbitrage, ie my funding cost is lower than yours.    Doing so involves getting your A/P department involved early, because it is guaranteed their procedures will change because of the subset of vendors on SCF.  And this change, while seemingly trivial, is not.  Furthermore, A/P receives no direct benefit from this exercise in terms of their own KPIs (remember, they are driven by error rates, automated approvals, etc.)   So work with them early and often, and limit the potential downstream headaches.

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