Relationship Management in the Supply Chain Finance (SCF) Domain:
Relationship Management in the Supply Chain Finance (SCF) Domain: Whilst it is critical for all companies to reduce their net working capital requirements to ensure sufficient liquidity in their business, it is also critical that they do so in a joined up way and not in isolated actions that put their supply chain at risk.
Unfortunately, too many companies still fall into the trap of leaving suppliers to manage themselves; these companies not only fail to capture the negotiated benefits from a contract they also put their organizations at considerable risk. “You get the suppliers you deserve” is a maxim the writer has operated by throughout a long career in procurement and it has become particularly poignant in today’s climate.
So how can buyers and suppliers work together to protect their organizations and their own professional reputations?
1. Closer Collaboration Needed Between Buyers and Suppliers:
Instead of the traditional ‘tug of war’, buyers and their suppliers should collaborate by using SCF techniques that improve cash flow and release working capital to the mutual benefit of both parties:
- Buying organizations should increase their efforts to improve inefficient processing system capabilities and communications regarding invoice payments to make payment timing more visible and consistent in order to help suppliers better forecast cash flows.
- Recognize when buyers pay small suppliers late, causing them to delay payments to their creditors, this is likely to result in higher costs for their business credit and ultimately ends up in their cost of sales.
- Negotiated early payment discount programs can help both buyers and sellers.
- Suppliers should be more proactive in clearly communicating to buyers the possibilities of lowering selling prices if buyers agree to improve particular components of their current SCF arrangement. This could include adopting a common visibility enhancing technology platform, or asking the buyer to take on responsibility for buying critical goods and services needed by the supplier.
- Many suppliers have difficulty accessing financing at acceptable terms. So start talking with potential SCF providers about less-expensive financing options. This enables suppliers to maintain liquidity for daily operations by negotiating bridging financing against their accounts receivable, i.e. their unpaid invoices.
2. Become a customer of choice to your suppliers:
The quality of your supplier relationships can become a competitive advantage that directly impacts your top and bottom lines through preferential access to innovative ideas and resources. See previous post building-the-foundation-for-preferential-supplier-treatment.
Conduct systematic financial health checks on your suppliers:
After identifying the critical few suppliers to your business, conduct diligent and frequent reviews.
Diversify your supply base:
If necessary, after proper risk evaluation, introduce additional suppliers instead of relying on a sole source, whether that is a supplier or a low cost country. Don’t just rely on buying only from low cost countries.
The core objective is to minimize the net working capital required to ensure sufficient liquidity in the supply chain. Through collaboration and deciding who can best manage risk and provide lower financing cost buyers and sellers can do this in a joined up way that does not put their supply chain at risk.
Considering that Supply chain finance management can provide higher returns to shareholders it is surprising that there are still so few organizations capitalizing on it.