Tuesday, September 26, 2017

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 a

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