Supply Chain Finance, specifically Reverse Factoring, has been around since the late 90's with retailers such as Metro Group (B4B:GR) and Carrefour (CA:FP) as early adopters of an entire new industry in trade finance.
Supply Chain Finance requires three main parties: a buyer organization, its suppliers and a financial institution. Not surprisingly, the onboarding of supplier is still seen as the main factor in program success, mediocrity or failure.
Usually, any difficulties are blamed on, bank KYC (Know Your Customer) requirements, lack of automation or lack of supplier interest. Most complaints are about the supplier’s lack of interest in improving working capital at the discount rate offered by the funder. Nevertheless, research shows that pricing plays a minor factor for suppliers. The financing rate or price is fourth on the list of factors for suppliers when considering whether to join a Supply Chain Finance program or not.
Admittedly, we have made significant advances in technologies that automate supplier outreach, providing scalability. We've also automated the collection of documents and went digital with agreements and electronic signatures adding convenience and speed in Supplier Finance. We even have specialized firms whose sole purpose is to handle supplier onboarding as an outsourced service. All good, but that’s not enough.
So why do we still have a problem with supplier onboarding? The key argument is education. We have failed to convince suppliers that this form of working capital has a positive value equation. They are simply not motivated when trying to bring them onboard.
Recently, I purchased a new home and in the process, applied for a mortgage. I hadn't been through that process in a while and it had changed significantly for the better. All of the documentary collection, signatures, disclosure acknowledgements, etc. are now automated! My broker used DocuSign, an electronic signature solution which was easy and effortless.
Don't get me wrong, the reality of running the gauntlet of activity in collecting tax returns, bank statements, W2's, mortgage deeds, proof of identity and the seemingly 500 other things required to borrow a few bucks still exists. There are additional contracts and documents required, only to culminate in a mountain of forms needing signatures at the closing. However, never did it cross my mind to not go through with this process.
Why did I do it? The fact is that I accept this as “the process”. But more importantly for me, I was motivated to buy the house and needed to accept the onboarding/mortgage process for what it was.
As an industry, while the onboarding and KYC process remains what it is, we must understand what motivates a supplier to accept the buyer's terms to join the Supply Chain Finance program and focus on the perception of value to the supplier. If we cannot articulate, the value for each individual supplier or categorically for a group of suppliers, don't bother trying to onboard them.
I was recently asked to work with a client, a leading commercial bank, which was extremely disappointed with the pace of suppliers electing to join their Reverse Factoring program. The buyer's objective was to increase cash flow through a small term extension but also to generate income by charging the supplier a nominal access fee to the program.
The buyer was unsuccessful, both with supplier onboarding and with generating income. Suppliers claimed that the discount rate was "too high" compared to their other forms of working capital and the fee was not worth the benefit. SCF Strategies helped its client by analyzing in detail the buyer’s spend, profile the suppliers as individual companies and groups of suppliers and plotted them on a nine segment matrix as illustrated below.
The selection and segmentation of the suppliers were done based on the specific goals of the buying organization as well as the characteristic of the individual suppliers. This involved advanced predictive methods to target each supplier and assess the most impactful places to start. By focusing the efforts on the places offering the greatest return, the Supply Chain Finance program offered immediate benefits.
When designing an SCF program using the Nine Segment Matrix, SCF Strategies was able to show to the client that the suppliers they had chosen to approach were plotted in boxes 7-9, representing both low value to suppliers and minimal to low value to the buyer themselves as illustrated by their position in the matrix. We have since switched the focus to suppliers in boxes 1-6. This represents a focus on suppliers that could have a significant impact on the program against the buyer’s objectives, but more importantly, we’d be reaching out to suppliers with a high degree of perceived value for the program offer, thus a high propensity to join. Value isn't always a positive arbitrage between the SCF program rate and the supplier's cost of debt. (more on that in another blog post)
Today, this Supplier Finance program is off to the races despite all the historical excuses associated with complexity to onboarding and daunting KYC.
Do you know how many suppliers you have in your own supply chain that would fit into boxes 1-6? If you don’t, you are missing out on what could be huge benefit in terms of working capital improvement, cost savings or risk removal from within your financial supply chain.
Call us to help you succeed!