Challenges and Elements of Success in Supply Chain Finance
A supply chain finance project is not about providing financing for a single supplier of a large corporate – it is much more sophisticated than that, and the complexity grows as the project scope grows. The sophistication of a mandate also depends on industry and regional variances, as highlighted in the previous article in this series Regional and Industry Differences in Supply Chain Finance.
Supply chain finance is the funding arrangement a bank makes with a primary customer, which might be split up into several units and entities. The complexity of the arrangement grows because is it necessary for the corporate to identify and engage with all the relevant stakeholders within the company and its subsidiaries when adopting a supply chain finance solution. Plus, in order to make a supply chain finance solution successful, selected business partners of the bank’s primary client (i.e. the buying organisation in supplier finance, or the seller in dealer-distribution finance) must adhere to the project in order that it creates the benefits a primary client and the bank are seeking. Hand-in-hand with organisational complexity comes technological complexity, with issues arising around connectivity between the many different entities and the bank.
For many corporates, however, the effort is worth it in terms of automating the financing of the supply chain. Through improving the links between buyers, suppliers and banks in the supply chain, processes are made more efficient and fund visibility is improved. Supply chain finance solutions also help to stabilise relations between the corporate and its suppliers, effectively keeping the supply chain running smoothly, especially when smaller business partners are granted access to funding which otherwise they would not be able to obtain.
Supply chain finance is not the kind of service where there is a single dedicated entry point into the company. This is true whether it is a deal that is located in one country between a company and its suppliers – for instance where a bank finances the suppliers of an automotive or chemical company – or whether it is more complex, such as a multi-country set-up.
In normal lending, a bank usually deals with a finance director or a head of treasury who knows the company’s financing needs. They know that in three months, for example, they’re going to need a certain amount of dollars, euros, etc, and they might even have a view as to which instrument would be the most appropriate in order to fund it. The bank may end up with a couple of its people putting together the solution and pricing model; under ‘normal’ circumstances in traditional lending, corporate teams would also consist of a limited number of people who tend to come from the same area of the business. With most banking products, the ownership within the company is obvious.
Supply chain finance is different because there is a bigger number of parties and potentially a multitude of people who need to be involved in order to get a project off the ground. In a well-governed organisation, a supply chain finance programme may run through as many as five different departments, similar to other complex projects such as business process re-engineering or large IT projects. Many banking products do not need multiple parties to co-ordinate, whereas supply chain finance mandates may take many weeks or months to materialise and need to be vetted by a number of people in the company. If the bank starts to think about this only once it has a mandate, it will probably face bigger challenges in the implementation process. This can be avoided by making sure that all decision makers in the organisation are involved in the project from the beginning.
The ‘buy-in’ begins during the sales process. In theory, although not so often in practice, a supply chain finance discussion between a bank and a corporate may start at the very top of the company with the CEO or CFO. Once a CFO or CEO buys into the supply chain finance concept, this support typically provides a decent amount of ‘tailwind’ for further discussions. While this is an ideal scenario from the bank’s perspective, it is relatively rare. Normally if a bank intends to trigger a dialogue regarding supply chain finance solutions with an existing client or with a prospective client, this is typically kicked off at another level of the company, e.g. with the finance director or with the treasurer.
While the ‘natural’ entry point into a corporate is the finance or treasury department, in order to leverage the supply chain finance idea within a company, the corporate finance and the treasury people will need to draw in their counterparties in the purchasing and resourcing areas. And if a bank wants to include dealer financing on the dealer distribution side of the solution, it also requires the support of relevant sales directors, as these not only control the relationships with the distributors, they also possess the information about risk profiles, current payment terms and collection patterns.
To obtain the relevant information, in some companies, it is appropriate to include the accounting department early on in the dialogue, since much process-related information is vested with the accounting area. Accountants may provide a solution provider with a lot of relevant insight, such as the actual payment terms (which often differ from the negotiated terms); here are a few questions that might be of interest:
In 99% of the conversations that Deutsche Bank staff conduct with clients, finance and treasury people are not in a position to answer all relevant questions. Therefore, we believe it is crucial to draw other stakeholders into the dialogue, even at an early stage of the discussion around a possible solution, not least since we have realised that if these are not part of the conversations early on it is risky to overlook some aspects that might be important for the solution design. Moreover, if ‘process owners’ and ‘business partner interface owners’ are not part of the team from the early phases onwards, it might be much more difficult to obtain their buy-in later.
In our view, the solution provider should address stakeholders from at least three different areas:
Of course, it’s not always possible to get in touch with all relevant stakeholders directly, but the bank needs to make its clients aware of the fact that these are the resources that they need to align in order to support a successful implementation of the project.
At senior levels of an organisation, decision-makers regularly underestimate the challenge of aligning all relevant resources. For example, one customer gave Deutsche Bank a mandate in mid-September and we are now progressing smoothly in the implementation process because we did all the groundwork thoroughly – the four areas are nicely aligned with working groups that work in parallel. But even in that implementation, we had senior people who initially did not want to believe that it can take up to three months to implement this for one division because they didn’t fully appreciate the amount of work that needed to be done.
Another example of getting buy-in is when a bank discusses a solution with someone in the finance treasury area of the holding company and then the solution is leveraged at a lower level in the organisation. In such a scenario, with the go-ahead of the central functions on the client side, the provider should go get in touch with the operational units to discuss the solution with the different stakeholders. Deutsche Bank has recently been involved in a deal where the holding company vetted the solution and then handed it over to one of their subsidiaries. Even before receiving the mandate, Deutsche Bank had to make a second pitch. Although it was approved and vetted by the people in the head office, we needed to get buy-in from the people in the division in order to roll it out.
Ultimately, in order to get buy-in, there must be an incentive for everyone in the programme. Drilling down to look at the benefits for individuals involved in the project, the picture might be different for different departments. In finance and purchasing, if the suppliers agree a nominal price reduction in exchange for the participation in the programme, then the purchasing person is satisfied because the nominal price reduction will positively impact the achievement of the department’s objectives.
If, however, a supply chain finance programme for selected suppliers is implemented in the context of an extension of payment terms, which is a working capital objective, the attribution of the benefits for our client are less clear. Sometimes this might be part of the objectives of the purchasing department, yet in some companies working capital improvement is primarily seen as the remit of the finance or treasury department. If the finance department, for example, has an objective that was laid out by the CFO to reduce their working capital by 5% by the end of the year, this constitutes a very strong incentive to push for an extension of terms, effectively making nominal pricing reductions irrelevant to the treasury or finance people in this specific context.
There is another type of commercial activity embedded in supply chain finance: selling the solution to the corporate’s business customers. Initially, there is the primary corporate, where it can take as long as six months to get everyone convinced and aligned, to get the mandate and sign a contract. Once that is done, both the bank and the corporate must jointly go out to sell that solution to the corporate’s business partners. At Deutsche Bank, we call this process the ‘commercial on-boarding’ of the business partner. In the supplier finance area, it basically means that a bank sits together with its primary customer and establishes a strategy on how to approach the corporate’s suppliers.
Deutsche Bank typically sits down together with the corporate client and segments its business partners in terms of their importance, the volumes they can bring to the table and the likelihood that they will accept the solution enthusiastically. Then we arrange face-to-face meetings with the most interesting – and potentially most lucrative – partners. However, if we have a client that has hundreds of suppliers and many of them are very small, then obviously we must use a different approach to ensure an efficient on-boarding process because we can’t meet up with all of them due to the cost involved. A balance has to be struck between making it cost effective for the bank and servicing the needs of the corporate client.
This doesn’t mean that these services aren’t available to smaller business partners, but there are other ways to reach out to them. For instance, they can be informed about the solution by way of mailing, whether by physical mail or email. Contrastingly, at the top end of the portfolio, we set up face-to-face meetings and/or webinars where Deutsche Bank’s primary customer, typically people from finance and purchasing when it’s a supplier finance transaction, sit together with their supplier in order to explain the solution and get the supplier to participate in the programme.
Supply chain finance projects have to deal with similar challenges, in terms of the technical set-up, as a typical payment factory deal. Obviously, the bank needs an electronic solution because the primary customer will provide it with data either about their receivables or payables, depending on the side of the business. The technology issue centres on connectivity – how does the bank link up the customer systems with its systems? This doesn’t have to be complicated but often it’s challenging because most corporates are wary about spending too much money on anything that appears to be proprietary.
This is very similar to the payment factory set-up where the client has an enterprise resource planning (ERP) system and the data that it needs is in the system but it doesn’t have a plain vanilla or standard interface. A bank has certain expectations as to what kind of data the client will provide in order to facilitate the financing of the business partners, but it can’t dictate to the corporate how they must send the information. A corporate also has complex systems; it may have three different ERP systems, different releases and different standards all being used at the same time.
With the right level of management attention and resource allocation, the IT piece shouldn’t be the most frightening if you have good people on both sides of the equation – at the bank and the corporate. It’s not a plug and play solution that is implemented within a few days, but at the same time it’s not rocket science either. People with good ERP and IT knowledge have to talk to each other because, without this technical piece, the solution just doesn’t work.
Fundamentally, the bank has to have a clear vision of what the corporate client wants to achieve – it needs to understand their business logic, which can be industry-specific. The company might have two or three objectives, such as working capital and cost reduction, as well as improving the relationship with certain key business partners or maintaining those key business partners by offering them something that others don’t.
In order for the supply chain finance project to be a success, a corporate, with its bank’s assistance, needs to get the major stakeholders on board, whether that is within the many different entities of the corporate or in its suppliers’ organisations. Without this buy-in, the project will not deliver the benefits to treasury operations that are needed in today’s economic climate.
Project managers have an important role to play in implementing a supply chain finance project. They should typically have a good and solid technical background, however a ‘narrow’ technical / IT background does not suffice. Successful implementation managers must have excellent project management skills, as they are in charge of fairly complex projects and must ensure that all the different elements are properly aligned. Last but not least, since supply chain finance implementation managers are also ‘people-facing’, their soft skills are at least as relevant as their technical and project management know-how.
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