What is needed is a universal supply chain finance approach
The problem with supply chain finance is it’s nearly always too expensive. Is it any wonder that there is such a small uptake? The thing is, it’s either too expensive to implement widely so businesses work only with their biggest suppliers, or at the other end of the supplier spectrum, the finance rates are too expensive for suppliers. The result is, SCF works for a minority of buyer supplier relationships.
Where are the hybrid solutions? Why can we not take a universal approach and capitalize on the relative simplicity of the Dynamic Discounting and the attractive finance rates of the more sophisticated SCF plans?
Here’s the problem. The banks are very good at facilitating commerce – it’s part of their core role in the modern economies. They can put deals together between some of the biggest businesses in the world to optimize financial supply chains even in complex global business environments. And there can be very significant synergy created. Buying organizations can extend payment terms to suppliers – enhancing their DPO and consequently their cash position and at the same time fund prompt payment for suppliers who need not lose out. It has to be said that the banks make a decent turn on these arrangements too so everyone’s a winner. The problem is, there is a huge amount of effort to put these deals in place and it is only worthwhile for the very biggest deals. The win-win isn’t available to the smaller suppliers.
The other end of the supplier spectrum is where the smaller suppliers really need help and where there is an opportunity for buyers to get attractive discounts. Long payment terms are simply not sustainable for the smallest suppliers but in many cases the financing cost for funding prompt payment are too expensive.
Taulia – the dynamic discounting specialists – produced a video putting this dilemma in simple terms. It’s embedded below and I’d encourage you to watch it – not because it’s informative – although it is – but because it is very funny.
Here’s the way I see it. There are two areas of business that SCF touches successfully – the very large deals where it’s worthwhile for the banks to get involved intimately and do what they do well. Then there’s the supplier tail where dynamic discounting and factoring can deliver a win-win. But each of these has issues with cost and this limits their potential.
If hybrid solutions that can take the best of both approaches could be deployed more widely, there is the potential to deliver real improvements in the way supply chains operate, the way industries optimize their working capital and the way whole economies make best use of their resources.
Pete Loughlin can be found on twitter @peteloughlin