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Recent growth of Supply Chain Finance in continental Europe


Supply Chain Finance (SCF) is progressing fast but also outside of the ‘anglo-saxon world’. Let’s observe what Corporates are doing in continental Europe, specifically in France.




As the financial crisis continues to provoke negative effects on continental suppliers, Corporates have had to implement innovative solutions in order to preserve their Supply Chain, and to inject much needed ‘oxygen’ into their suppliers’ depleted finances! What are these solutions and how are they doing it?

A law to reduce payment terms

In the summer of 2008, prior to any warnings of an imminent financial crisis, the French government decided to introduce a law, reducing payment terms to 45 days end of month or 60 days net.
What possessed them to impose this on the private sector?
Suppliers of all kinds often find themselves in a ‘treasury limbo’ and could no longer sustain the 90 days payment terms from their clients – in reality, often paid beyond 100 days - and 45/60 days payment terms with their own suppliers. You do not need to be a mathematician to figure out that the numbers were not working in their favour! Subsequently, the government voted in the law in order to resolve a lengthy history of ‘bad habits’ and stem Corporates’ excessive power over their suppliers!

Many Corporates were (and remain to be) ill prepared, supposing that the law would not be adopted. However, adopted it was and such was/is the impact - many Corporates are currently seeking extra cash (often in billions) to comply with these new earlier payment terms. Others even succeeded in negotiating an extension with the Government in order to comply at a later date!

But with the ‘credit tap’ turned off, suppliers are ‘panicked’ as reduced payment terms (when applied) fail to compensate credit lines or overdraft facilities that continue to vanish overnight - with the added concern of their buyers (the Corporates) struggling to find extra cash in order to make payment!

How did Supply Chain Finance appear as a viable solution?

As many Corporates face interruption in their supply chain, owing to slow supply deliveries and/or supplier receivership, securing the Supply Chain has become an important element of Corporates’ business continuity.

The first tangible step has been to question suppliers regarding their needs. Often slow to respond, dubious of their clients’ motivation (habitually related to obtaining improved terms), many suppliers have resorted to expensive Confidential Factoring, thus enabling them to mask their financial frailty from their Corporate clients. However, Corporates are now endeavouring to build SCF initiatives (at Procurement’s request) to alleviate and stabilise their suppliers’ financial uncertainty.

What technical solution for Corporates to handle Supply Chain Finance?

Corporates are evaluating all current technical solutions (inventory management, e-procurement, EDI, e-invoicing, etc), and are realising that the variety of tools available do not provide a ‘complete solution’ to create a thorough SCF proposition.

Supply Chain finance portals provided by independent operators act as a hub, enabling collaborative, dematerialised and auditable transaction management. Such portals complement existing technical solutions and provide visibility to suppliers, enabling them to forecast, be informed of disputes and manage early payment requests. Furthermore, it enables financial institutions to participate and address partly or totally early payment demands. To that end, Corporates can repay banks on invoice due dates and still provide a crucial facility to their suppliers.

In implementing a SCF solution, many Corporates are aware of the advantages of hosting and controlling their chosen Supply Chain portal. Indeed, this enables them to select participants from their suppliers to banks. Banks wishing to partake are effectively being offered new business, leaving the suppliers the opportunity to demand a financial contribution, which in turn helps to cover technical costs. Hence, such programmes offer substantial mutual benefits for all three parties involved (Corporates, suppliers and banks) at a low cost.

Banks and SCF in France

As a result of their reticence and although some US, UK and Spanish banks are actively involved in SCF, banks are finding it difficult to handle the French market due to the very specific criteria obligations practised by French Corporates. To this end, banks are witnessing the transition from ‘bank to Corporate control’ of SCF initiatives.

Banks often prefer to reserve their commercial finance for lesser volume products such as Factoring, offering them a higher return. Naturally, Corporates want to see their suppliers ‘freed’ from the constraints that Factoring solutions imply and that they (the Corporates) have no control over. Additionally, Factoring utilizes and exhausts credit lines that could otherwise be employed by Corporates!

Furthermore, those banks that posses a technical solution to SCF, only address ‘the transaction’ when it has become a validated debt, ignoring solutions pertinent to the initial stages of ‘the transaction’ (PO, delivery, invoicing, dispute managagement, validation). Consequently, such programmes do not currently proffer a thorough solution to SCF that fully benefits Corporates and suppliers. Also, such programmes involve a single bank regardless of the size of their client’s portfolio, thus limiting the ability ‘to serve’ the client’s full supplier base (indeed, however big or small the supplier, they are always crucial to the supply chain and require on-time payment).

Finally and most importantly, remains the challenge between the banks and the Corporates as to handle contractual collateral for SCF programmes. Corporates evidently do not want such programmes to be transcribed into financial debt, but to remain as operational debt.

Where is the market moving to?

Aside other large European markets (UK, GE, SP), SCF is continuing to flourish in France, serving its numerous large Corporations and their associated network of cash hungry suppliers. The current situation is urging Corporates to not only keep abreast of such initiatives, but also to drive them and provide assistance to their suffering supplier network.

To this end, certain Corporates are collaborating with their competitors to organise joint programmes for common suppliers. For Corporates, SCF is indeed the opportunity to bring together ‘players’ from logistics to procurement, accounts payable and treasury; departments often not working together. Moreover, Corporates taking control of such SCF solutions have the opportunity to rid themselves of the negative image often associated with the ‘crushing handling’ of their suppliers. In providing them with flexible, collaborative solutions as well as competitive credit terms, suppliers are also relieved of the significant costs involved with Confidential Factoring and overdraft costs in particular.

Ultimately, such initiatives are a new way to do business. Notably, relationships between Corporates and suppliers are improved, as suppliers are no longer considered as vendors, but partners of a crucial supply chain – links (or LinX…) that form a chain, protecting the weakest should prevent the devastating impact that such disruption has on companies’ revenues.

About Corporate LinX

Created in 2008, with the objective to assist Corporations reduce their operational costs, whilst optimizing their Working Capital performance, in the management of their Supply Chain and their relationship with suppliers.
Via its own technology; the Corporate LinX eXchange (CLeX) transactional portal' allows for optimal cost reduction and working capital between Buyer organisations and their suppliers.
With the dematerialisation and collaborative processing of all Purchase-to-pay data through CleX, benefits include the possibility for suppliers to achieve early payment against discounts, with the participation of financial organisations to ensure flexible settlement terms. Complementing Corporate LinX's technology, is the company's approach to servicing clients - offering a 3-step approach; evaluation, implementation and ongoing assistance.
Whilst Corporate LinX provides the highest level of service, the SaaS managed from the IBM infrastructure permits rapid and cost effective implementation, offering organisations of all types and sizes to achieve their financial objectives through improved procurement terms and cash flow availability. Corporate LinX is present in France and in the UK
For further information: www.corporatelinx.com

Jeudi 28 Janvier 2010
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DISCUSS / DISCUTER

1.Posté par Alisha le 10/02/2010 10:19 | Alerter
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I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Alisha

http://pay-dayadvance.net

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