A holistic approach for supply chain

Covid-19 resulted turmoil and disruption are going to leave a far deeper impact on supply chains that will last longer than we expect. As a result, financial leverage which the entire supply-chain enjoyed over the years will be a rare privilege from now onwards. Crunch in Working Capital, erratic commodity prices and delayed invoice receivables are compelling supply chain members to relook into their established business terms. 

No matter what the nitty gritty of the brunt is, eventually the viability of the supply chain is at an absolute stake with the highest degree of exposure to end-users. I believe, there is a dire need to change the perspective from “Single Company thinking” to “Business network thinking.” Supply Chain Financing (SCF) is one of such models which serves the purpose of bringing sustainability into Supply Chain operations, seamlessly integrates the key stakeholders and importantly avails the finance with better conditions. 

Under the SCF program, supply chain partner(s) receive finance on improved conditions, which is made possible since the SCF is influenced by end user’s balance sheet and credit rating. Financial rating of end-user is mostly found better than the rest of supply chain partner(s) and being equipped with better resources. Of course, the process needs checks and balances to ensure the liability of partner(s) is not diluted and each member of the chain remains fully pledged to the respective responsibilities towards business. It is usually ensured by respective bank guarantees and performance penalties which under the SCF model also will remain highly relevant. 

Under conventional methodology, the facilitation of finance remains oblivious of the strength of end-user and at the same time, end-user remains completely unaware of the robustness of the credit line availed by supply chain member(s). As a result, members end up spending on financing the operation much higher due to a non-holistic approach- which is added to the cost of doing the work and then the cost is transferred to the end-user. Therefore, due to non-visibility, the end-user also carries the risks which get revealed only when it is too late. It happens very often that an agreement is established with even known partners and during the execution their unstable financial health gets revealed or they even files for bankruptcies. 

Under this model of the SCF, the buyer makes the financial institutions a key stakeholder in the process. Based on numerous factors (primarily the credit rating of the buyer), the cost of financing is determined and cascaded to qualified supply chain partners to avail. Upon the award confirmation from the end-user, the partner receives finance from the financial institutions (instead of end-user paying to partner) in accordance to established terms. Upon the completion of the commitment of works, end-user pays back to financial institution(s).  

This model reduces the cost of raising the capital, facilitates the availability of finance in minimum time, improves the working capital allowing predictability and visibility of the cash-flow. In a case study by a global automotive firm, the company has implemented the SCF program since 2010 for global suppliers and contractors who were conducting business worth more than $150,000 per annum. Each year they invested millions in tooling for product development and industrialisation of the complex components used to manufacture its engines. Under the program suppliers/contractors are giving the access to technology, cost reduction and priority over the other customers and only in 2020, suppliers/contractors have drawn 634M GBP under the program. 

In this case, we have seen that vendors in return have given preferential treatment to customers and operations under SCF as compared to conventional models. The model serves the ultimate goal of ensuring sustainability in supply chain and has also served as means to deliver corporate social responsibilities. 

Several organisations as Petrobras, Rolls Royce, Etihad Airways have implemented the program and brought considerable savings into their operations by increased the visibility and reducing the risk. Programs have been very popular for implementing government lead initiatives for wider industry applications. In the UK, the USA, the Betaalme program in NL, Abu Dhabi Department of Finance, Ministry of Finance Saudi Arabia have all rolled out the program for the benefit of the targeted industry. 

In the economic environment, where the industry by large is still recovering from pandemic aftermaths and confidence remains deficient, it is essential to have holistic approach and mitigate the financial risks in the supply chain for better predictability.