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Supply Chain Finance : recipe for a Financial Layer Cake

Supply Chain Finance (SCF) is evolving fast and if it has remained hidden for too long in the kitchen cupboard, it now exists in numerous ‘flavours’. Best compared to a ‘Layer Cake’, SCF requires patience and talent to guarantee successful delivery and usage. Thanks to dedicated and expert service providers, the ‘Layer Cake’ is easier to bake. Miam, miam!

Supply Chain Finance : recipe for a Financial Layer Cake
Supply Chain Finance and Reverse Factoring is a bit like comparing well balanced ‘nouvelle cuisine’ with ‘traditional stew’; heavy on the stomach and rapidly abandoned for lighter dishes.

In modern SCF programmes, the Corporate needs to act much like ‘Le Chef’ and is demanding that everyone sit around the table to devise the best ‘menu’. As there is indeed a ‘menu’ to manage and, there should be no corners cut in the wish to get to ‘desert’. Before opening discussions to all participants, the Corporate ‘Chef’ requires its own organisation (procurement, accts payable, treasury) uniting efforts to achieve a ‘palatable’ result.

Let’s admit that SCF can be a ‘Layer Cake’ lacking in ‘sugar & spice’ and becoming rather ‘bitter’ if the necessary preparations are not respected and, like a like a ‘Soufflé’, deflate rapidly alongside ‘the guests’’ appetite.
Preparation is indeed key, as only quality ‘ingredients’ can be used for a successful ‘recipe’. Legal frameworks, technology and a supplier roll out plan are the key to guarantee 3 Michelin stars.

The Corporate ‘Chef’ should test his ingredients with expert service providers and avoid immediately inviting its largest bank for lunch. As a protective measure, the bank would inevitably order all items on the menu with eyes too big for their stomachs, biting off more that they can really chew. What the Corporate must avoid is a SCF programme built for him, but leaving him with a substantial bill to pay then having to wash the dishes. Most often, Corporates only consider tasting SCF if the programme remains as supplier debt. Quickly ‘whipped’ SCF programmes with standard terms & conditions will no doubt be salt to the wounds for those worried auditors, who would swiftly turn the ‘great dish’ into financial debt.

A SCF expert will provide quality SCF ingredients but will also ensure that the varying layers of the cake can appeal to the ‘appetite’ of all different categories of suppliers. Three essential tiers can be applied based on suppliers’ financial needs:
- SCF ‘push’ or fast food for suppliers requiring permanent early payment thus warranting low financial cost
- SCF ‘pull’ or à la carte for suppliers wishing to select the number of invoices to be paid early
- SCF ‘auctioning’ for the finest ‘gourmets’, wishing to provide indications of how much he is interested to pay for early payment.

These three modes are providing Corporates with additional independence from banks in controlling all aspects of the funding and potentially keep a lid on costs applied to their suppliers.

Auctioning suppliers’ receivables, is a ‘fresh from the market’ category. This mode allows the Corporate to propose suppliers’ receivables to a much wider array of financiers. Again, the implication of the Corporate in this gastronomic ‘lunch à trois’ needs to be carefully weighed, so not to risk any shift of supplier debt into financial debt in order to avoid the feeling of unpleasant hangover…

To attract ‘dinners’, the ‘menu’ can also propose funding on different steps of the transaction. Partial financing for PO with trusted and strategic suppliers, financing on received but not yet validated invoices and financing on validated invoices. Again, a unique ‘menu’ will not fulfil the ‘dietary requirements’ of all suppliers so choice is paramount.

A ‘well oiled’ technology will allow for multi-currency, multi-languages, multi-banks management. Corporates should control the technology and the access to it. Importantly, modern SCF platforms would be ‘peppered’ with ‘appetising’ functionalities offering early visibility to suppliers but also PO management, e-invoicing, collaborative dispute resolution, remittance advice, etc all proposed like options.

With the expansion of SaaS, the technology does not necessarily need to be purchased but can be subscribed to, leaving all technical hurdles to be managed by service providers.

Service providers can also participate actively in the supplier recruitment phase (marketing, technical, contract distribution and collection).

A multi-dimensional SCF ‘Layer Cake’ can tempt all types of suppliers into taking a ‘bite’ at the programme and decide whether to have ‘seconds’ servings’ or not. Whilst participation should be free for suppliers and as few obligations as possible, the Corporate should make it clear to the supplier that there is no such thing as a ‘free lunch’. The Corporate can only demonstrate that pre-financing costs are kept to a minimum for the supplier benefit.

What is the point to all this?
Corporates can enjoy the different layers of their ‘cake’;
Layer 1: dematerialised transactions provide lower costs,
Layer 2: automated processes allow for faster invoice validation,
Layer 3: the SCF platform becomes a focal point for the supplier enjoying online access to the status of its transactions, a significant relief for accts payable,
La ‘crème de la crème’ remains the opportunity of revenue for the Corporate that can be adjusted on categories of transactions, suppliers, etc.

But, thanks to the SCF programme, the ‘cherry on the cake’ is the enhanced Buyer and Supplier relationship; tangible proof that Supply Chains are evolving.

The announcement of a Reverse Factoring programme within Supply Chains used to sound, for suppliers, like Corporates sharpening their knifes (again). With ‘pick & mix’ SCF programmes, suppliers can enjoy numerous benefits based on service, early visibility, online dispute management and … very ‘appetising’ costs against early payment.

The more Corporates and suppliers take ‘bite’ at SCF programmes, the more their ‘palate’ discover the host of ‘flavours’ available to them.

There is not ‘secret recipe’ for SCF, but efforts are rewarded. As always, the ‘proof is in the pudding’, so try it.

Bon appétit!

Fabien Jacquot
+33 1 64 45 74 51

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Jeudi 24 Février 2011

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