Financing the Chain

As new services come to market, finance executives are taking a second look at supply-chain finance.

A Slow Start

Big Lots has come relatively early to the supply-chain finance game. Just 13 percent of companies are actively employing supply-chain finance techniques, according to a recent Aberdeen study. While the concept has been discussed for years, buyers often approached it by pushing for longer payment terms, which many suppliers were unable to offer without putting their own finances at risk (and ultimately jeopardizing their ability to meet the buyer’s needs).

“There is a disconnect between the actions of buyers and suppliers and their respective goals,” says Viktoriya Sadlovska, supply-chain finance research analyst with Aberdeen. “The top pressure for buyers is to lower their cost of goods. And suppliers are resisting lowering costs.”

Supply-chain finance vendors say their systems can reduce the friction between buyers and suppliers, but most companies haven’t gotten the message yet. “The transformation of the physical supply chain has been fairly dramatic over the past 20 years as companies have moved to sourcing overseas, but finance solutions haven’t changed at all,” asserts PrimeRevenue CEO Joe Juliano. In contrast to “all of the work that companies have put into low-cost-country sourcing and optimizing manufacturing and putting in all the technology to forecast demand,” most supply chains still rely on time-consuming and costly financing methods that can add up to 4 percent of the cost of goods, he says. For a supplier in China, the time between receiving an order and receiving payment for a finished product can be as long as five months, notes Juliano.

But finance may be poised to catch up. Technology has evolved to the point where both ends of the supply chain have greater visibility into the process. “In order to effectively extend a buyer’s credit rating to suppliers, banks need to have supply-chain data about when goods are being shipped so that they can assess the risk. Thanks to more electronic commerce, now we have a lot more information,” says Enslow. “I don’t think companies could have done this effectively in the 1990s.”

Like his counterpart at Big Lots, Richard Learmont, treasurer at UK grocery-chain Sainsbury’s, says his company had been looking to improve its supply-chain finance techniques for some time and had evaluated numerous products. “We’ve been good at taking cost out of the supply chain in the physical sense, but there has always been this financial inefficiency. Our view and our suppliers’ view of working capital have been at odds,” says Learmont. “But none of the [vendors] that we saw really had anything credible in the market or had the technology to back up their ideas.”

Ken Roche, chief executive at Orbian, another third-party supply-chain-finance-system provider, says his company has been developing its platform, which is based on SAP, for years. The company started as a joint venture between SAP and Citibank and has since spun out on its own, touting its ease of integration with SAP as a key differentiator. Roche acknowledges that “the education process has been slow. People haven’t really been aware of these kinds of products, because the focus has been on other areas of efficiency.”

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