Reducing a Supplier’s Cost of Capital in the Supply Chain

We recently began to cover some of the highlights from the Spend Matters/ISM study, Reducing Costs By Optimizing the Financial Supply Chain, based on a survey of more than 300 CPOs, VPs and other procurement executives and managers. The report, authored by Pierre Mitchell, chief research officer for Spend Matters, and Paul Lee, director of research at ISM, considers the very real challenge, often not confronted directly by procurement, of balancing working capital cost and availability throughout the supply chain.

As we continue excerpting some of the highlights and observations from the study, Pierre and Paul observe the fundamental crux of the challenge when they note that:

“Procuring goods and services as cheaply as possible is critical to an organization’s profitability. However, few corporations truly understand the impact the supply chain has on the price of goods and the predatory financial landscape many small businesses are faced with. Large, investment-grade firms have been enjoying low- cost access to capital, but small business suppliers have been faced with higher rates than ever before.

A reduction of borrowing costs across the supply chain would allow key suppliers to lower their costs and, ultimately, pass this savings along to buyers.

For example, a supplier with a cost of capital of 12% holding four months of inventory pays 4% in capital costs on the goods they sell. This 4% is included in the total cost to produce and is therefore reflected in the price the buyer pays.

Unfortunately, too few buying organizations actively help their suppliers reduce their cost of capital—and many do not think about a supplier’s inventory carrying costs in their own total cost models.”

How does this translate into actual behaviors? Stay tuned as our analysis continues.

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