24 Apr 2013 There’s no such thing as win-win – especially in supply chain finance
When anyone tells you something is a win-win, they’re usually lying. Where there’s a winner there’s always a loser. But sometimes it does look very compelling. Supply Chain Finance (SCF) offers the possibility of a supplier getting paid early, lowering their cost of working capital and at the same time, the buyer gets to extend their DPO. When something looks too good to be true it usually is. There must be a catch. And actually, there is.
This is how Esther Liskamp from Philips described it when she spoke at the Økonomiforum conference on e-invoicing and supply chain finance in Copenhagen last week. When she was first introduced to SCF at Philips, she didn’t believe it. She put it down to Dutch skepticism. There is never a real win-win – someone must be paying she thought. But it has nothing to do with being Dutch – it’s common sense. If one party wins, the other must lose. If they both win, who’s paying? Well supply chain finance does have its loser – it’s the bank.
Think about how any flavour of SCF works. It could be dynamic discounting or it could be a more complex arrangement like reverse factoring or OB10’s Express Payments product. In effect, the small, less credit worthy supplier borrows money at rates their bigger financially stronger customer can command. This borrowing offsets the pain of the customer extending payment terms. So the customer pays later, the supplier gets paid earlier and at a cost that is much lower than they could normally obtain. All of this is possible because the customer agrees to settle an invoice. Everyone’s a winner – except the bank. Because the buyers and sellers are collaborating, the banks can’t charge the high interest rates they would normally charge to the small supplier . Of course, the bank’s losses are offset to a certain extent by lower risks but the fact is, they earn less.
It’s reassuring to me to think of SCF is a win-win-lose. It strengthens my faith in my own common sense. It confirms the intuitive view that there was always something wrong with the banks charging upward of 20% to provide factoring services to weak suppliers while paying a tiny percentage on cash deposits of big suppliers. And it also restores my faith in human nature when I see companies like Philips taking a pragmatic rather than an adversorial approach to their suppliers and delivering benefit to the whole of the supply chain by using SCF.
Pete Loughlin can be found on twitter @peteloughlin