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Comment: Supply chain finance delivering competitive advantage

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Consistent and reliable supply is the lifeblood of any retailer. Events like the expected birth of the royal baby, which has seen companies across a host of retail segments stock up on various lines to take advantage of an expected hike in demand for certain products, offer clear examples of the importance of excellent supplier relationships.

The Centre for Retail Research (CRR) has estimated that the arrival of William and Kate’s first child, expected this month, could boost the UK economy by around £240m, with spending on souvenirs, books and DVDs, and alcohol expected to grow. Many retailers have asked existing and new suppliers to go above usual provisions and ensure they deliver differing products in quantities that enable them to capitalise on this opportunity – a common requirement but one based on reliability.

In challenging economic conditions, with downward pressures on margins and input costs increasing, it’s important that suppliers are able to respond, but the availability of working capital is a common challenge for many. The rise of supply chain finance, particularly in the grocery segment, is a solution which has undergone rapid growth in recent years to cascade funding through the retail supply chain and align it, to the benefit of retailers as well as the suppliers themselves.

A decade ago supermarket buyers kept their supplier relationships close to their chests. Contacts were often protected even from their own finance and treasury departments. This is because buyers were judged principally on margin, so focused on price and quality. Alignment of suppliers to their own departments and across the business was less important provided the numbers stacked up. Cost of funds was low, and cashflow was strong, so engagement with other departments was not a top priority. This naturally led to payment agreements being inconsistent, based on separate negotiations with different suppliers across categories and products.

Suppliers would offer some incentives to secure better terms with retailers in a competitive environment, but there was less pressure on margins and their own cash levels were stronger in what was a better economy.

In supply chain finance (SCF) programmes, companies use uncommitted banking facilities to advance up to the total value of approved invoices to suppliers. 10 years ago the method was experimental in UK retail and difficult to implement given the disconnect between retailers’ own business functions.

Today the economic and socio-political landscape is very different. The cost of borrowing for supermarkets has increased, and there is a huge imperative for retailers to better know their suppliers and the source of products following various food scandals.

Meanwhile, the pressure on suppliers is even greater today. Poor cashflow is stretching their ability to meet orders – often to the limit – with input costs and competition increasing. Some retailers are also rationalising and looking to consolidate their supplier bases.

This alignment of priorities led many retailers to explore using SCF for the first time, with noticeable uptake of the product emerging around three years ago. Now all of the UK’s largest supermarkets have some form of SCF in place. This allows their suppliers to access funds via automated bank systems, enabling them to invest to meet demand and provide better assurances to retailers around delivery.

David Cameron described SCF as ‘win-win’ at a meeting October 2012 at which he implored some of the UK’s largest corporates to use the product in the hope that it will drive growth for them, as well as the country’s mid-sized and small businesses. A number of companies inside and outside of retail have heeded this advice.

Retailers have been able to do this because their finance, treasury and buying departments are working more closely together as the cost of funds has grown and working capital is more strictly controlled. IT is also linking-in during supplier discussions as this department’s role in fulfilment is critical. Larger, more professional accounting teams and systems have the capabilities to approve invoices quickly in order for banks to advance this funding.

Food retailers are also increasingly consolidating their suppliers to realise efficiencies. With SCF, these suppliers can draw down cash for multiple orders under their own programme. Hence, for many suppliers, using SCF can provide a significant competitive advantage and this is expected to drive further growth for the product in the years ahead.

Despite its benefits there are still hurdles for SCF to overcome. Programmes between a single retailer and supplier can take up to 18 months to implement. Banks need to work with all parties from an early stage and understand everyone’s processes intimately to ensure the scheme is fit for purpose.

Meanwhile, cultural barriers also remain. Suppliers need to overcome financial and technological mistrust when embarking on SCF, as many think they will lose out or are unwilling to alter their processes. The cultural upheaval is unquestionably a challenge, but one which can realise important benefits in the medium to long-term.

You only need to pick up a newspaper to be reminded of the financial pressures retailers are under. Some inevitably feel that in challenging times uncommitted capital should be used to provide for their own expansion, rather than support suppliers. Many are under pressure to invest in in-store experience and the front and back end of their online operations to remain competitive.

We expect continued uptake and development to allay many of these concerns and lead to further expansion for the product across retail segments. SCF users become strong advocates of the product in our experience.

The dynamics between retailers and their suppliers have changed and will continue to develop as integration becomes more financially and politically important on both sides. SCF will play a major role in supporting this in the years ahead.

Published on Monday 15 July by Editorial Assistant

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