SUPPLY CHAIN FINANCE A Buyer-Centric Supplier Payables Financing Initiative
Abstract: With an increased importance of working capital management and supply chain risks, supply chain finance has gained an increasing interest from organizations across the world. A buyer-centric supply chain finance solution can create a ‘win-win’ situation for buyers and suppliers, by allowing buyers to extend payment terms and suppliers to get payments in advance. This allows both buyers and suppliers to free working capital, and potentially provides financing at favorable rate for suppliers. It is shown that supply chain finance can increase the economic value added by buying companies adopting supply chain finance, illustrated by the EVA measurement. Supply chain finance is by no means a ‘fit-all’ solution that enables every firm to release working capital with low costs and few risks. However, for companies with adequate supplier bases, supply chain finance can be a relative ‘simple’ way of improving working capital, releasing cash and decrease supply chain risks. For a successful supply chain finance initiative, three crucial critical supply chain finance project factors have been identified, namely: (1) The right banking and platform provider partner(s); (2) Internal sponsorship and top-management support; and (3) Degree of automation and order-to-pay process alignment. It is difficult to find generic and objective criteria to tell whether supply chain finance is suitable for a focal firm. Differences in motivation, numerous potential benefits, differences in need for process changes, and the difficulty with defining supplier relations makes every SCF case different. Whether SCF is suitable for a buying firm is heavily dependent on their specific situation, with the most obvious factors being the credit rating in relation to suppliers (making credit arbitrage plausible) and that supplier spend is substantial enough and reoccurring (to yield a large pay-off from increased terms). This thesis provides a framework for a supply chain finance project. The framework suggested divide a supply chain finance project into three phases: Initiation, Evaluation and Action. The initiation phase highlight the importance of a thoughtful and relevant motivation. In the evaluation phase a thorough pre-study is recommended and the relevant aspects that should be considered and analyzed before making a supply chain finance decision are elaborates on. Furthermore, the strategy for the supply chain finance initiative should be defined at this stage. The last phase, action, concern the implementation and supply chain finance program management. The purpose of the framework is to act as a guideline, and not to be followed exactly. Ultimately, the focal firm need to evaluate its expected benefits with the expected costs and risk, in order to make a supply chain finance decision.
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