Sorry Mr Poff, it feels more like a Stick

indexIn a recent Supply Chain finance article in Global Finance magazine, Jared Poff, Treasurer of Big Lots commented, “Our SCF program certainly made our [extended DPO] initiative easier for vendors to accept. It gives them another reason to want to do business with Big Lots.”

Big Lot’s was going to extend supplier payment terms with or without SCF. They could simply have let suppliers figure out how to deal with the cost and cash flow hit on their own. Instead they collaborated with their suppliers and went through the effort to implement SCF, thus giving suppliers a low cost cash flow solution they could utilize if they wanted to.

Although Big Lots was clearly trying to find a Carrot to go along with the Stick, we know Large Corporate Buyers do not go to the expense of implementing a SCF program without clear benefits to them and that is term extension.

The question is do they want Big Lots arranged money?  There are several reasons why they may not:

  • First, Suppliers may have to renegotiate terms with their existing bankers given their receivables are used as collateral. It is far more beneficial for suppliers to negotiate on the entirety of their collective Business and Customer base than working with single customer funding options.   Who wants to open a can of worm with their bankers these days?
  • Suppliers must negotiate a Receivable Purchase Agreements with the funding provider which adds legal costs.
  • And finally, the Carrot of accessing Big Lots Libor arranged financing may or may not be attractive to Big Lots Suppliers.  In Big Lots case, S&P has their credit rated at BBB-, one step above junk status , so the money offered to their supply base may not be all that attractive given the cost of capital for near or non Investment grade corporates due to Basel 2/3

So clearly the reason for a supplier to do business with Big Lots is good margin sales, period. Big Lots offer to help finance their suppliers receivables is a liquidity option, and that is great, but it’s just that, an option.

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