To be successful, a buyer-driven supply chain finance (a.k.a approved invoice finance) program needs to be something that you do with your suppliers, not to them. That’s one of the big takeaways for me from this week’s Finance, Credit, and International Business Association (FCIB) annual conference in Miami. Their membership’s focus is on international credit management. In other words, they are the folks on the receiving end of SCF proposals from their customers. As you might expect, their perspective on, and analysis of, these programs is a bit different than that of their buy-side counterparts looking at SCF (and discounting!) as a strategic working capital initiative.
The Perils of Inauthenticity
We all know that for buyers, supply chain finance programs can help maintain or bolster DPO, increasing the amount of working capital you have available for alternative investment in innovation, expansion, acquisition, and a host of other initiatives. Ultimately, though, your success is inextricably tied to (and potentially limited by) the extent to which you can convince your suppliers to come on board. An important piece of feedback from FCIB’s audience was that they value an honest explanation of your program’s goals. Touting the great benefits of accelerated payment while omitting or downplaying the role of payment terms extension simply buries the lede — it doesn’t fool anyone and ends up calling into question your real objectives. In other words, it can do more harm than good.
For one audience member in particular, the way that a program was presented altered their analysis entirely. They received an offer that was an all-or-nothing, take-it-or-leave-it proposition. There was no “Pay Me Now” type of supplier choice giving them the power to evaluate potential early payments on a per-transaction basis. As mentioned above, this was a prime example of an SCF program being done ‘to them.’ Because of this adversarial approach, their evaluation didn’t focus on effective APRs and on assessing whether the accelerated funds came at a competitive rate relative to their other funding sources. Rather, it was the simple matter of “Can we afford to say no?” Since they could, they did.
Designing an Honest Message
Despite the negative experiences that poorly-executed programs can create, they should not overshadow the wonderful bi-lateral opportunities offered by well-designed initiatives. To ensure that you’re on the right side of this split, here are a few nuggets of wisdom to keep in mind:
- Explain Your Terms Extension Logic. If the majority of your competitors pay in 45 days and you’re at 25, that can create a very real competitive disadvantage. They’re in a position to have superior working capital funding to beat you when it comes to PP&E investments, geographic expansion, R&D, etc. That hampers your growth prospects, and may negatively impact your ability to grow (or even maintain) your current purchase volumes with suppliers.
- Offer a Choice. No one appreciates being strong-armed, especially while being told how great an opportunity it is for them. If your program truly does (and it should) offer a real financial benefit to your suppliers, let them opt in when it makes sense for them. If their funding rates are consistently high, they’ll naturally tend towards accepting accelerated payments on a large percentage of transactions. If their needs are only periodic (say, for quarterly or annual window-dressing prior to SEC filings), let them opt in periodically. Attempting to force their hands may result in short-term wins, but it is not the answer for long-term collaborative health.
- Understand the Labor Impact. Most of these programs are closely linked with automation and electronification initiatives as well. The idea is that enabling electronic submission of POs, invoices, and payments will help streamline processes on both sides, opening up early payment opportunities and decreasing labor requirements. Just understand that while your program may provide one portal for all of your suppliers, it is very likely only one of many that they need to navigate. As the number of different systems they need to manager increases, so too do the training requirements. When designing programs, keep an eye on how you can provide information and resources to your suppliers to make the transition as easy as possible for them. If you don’t, they’ll have another cost component to add to their benefits analysis of what it really means to say ‘yes.’
Those are just a few tips that can help address some of the major objections that come up on the supplier side of these program invitations. What is really at the heart of them is honesty: presenting your case honestly and making an honest assessment of the likely impact on your suppliers. That’s the view of SCF that interprets the phrase as focusing on providing financing and liquidity to your supply chains. It’s a forward-looking approach to has a long-term goal of stability and growth for buyers and their supplier partners.
If you’re the dominant force in your industry, have an overabundance of market power, and take an aggressive stance, then your take on supply chain finance is more of using the supply chain to generate financial benefit for your operations. There’s nothing inherently wrong with that. It is, after all, the lifeblood of the capitalist system. Your suppliers should be competing for your business and directing your purchases towards those who are willing to make the most attractive offers is a perfectly rational decision.
Your mailbox might just be a little less full during the next holiday season.
Until next time,