Cash & Liquidity ManagementCash ManagementRetail Sector: An Action Plan for Purchasing and Supply Chain Efficiency

Retail Sector: An Action Plan for Purchasing and Supply Chain Efficiency

Growth in the US retail sector has been slowing over the past two years as economic pressures have dampened consumer spending. The uncertainty provided by the US presidential election and worries over job security have not helped spending either as consumers have decided to save their money, pay off household debt and cut back on discretionary spending.

Figure 1: US Retail Sales by Category 2005-2011


Source: US Census Bureau and Wells Fargo Securities

The situation is even more challenging in Europe, with consumers cutting back on spending in the face of significant uncertainty. These two markets combined represent over two-thirds of the top global retailers and have been experiencing a new wave of consolidation through bankruptcies and increased merger and acquisition (M&A) activity. These challenging market conditions have increased pressure on the sector’s treasury teams to develop strategies that reduce cost, improve efficiency and optimise working capital. With imports playing a significant role within retail, this focus has resulted in an accelerated transformation of import trade payments and trade finance. The changes represent tremendous opportunities to achieve organisational goals, but also introduce additional challenges and considerations that must be evaluated.

Unlocking Liquidity and Lowering Cost in the Supply Chain 

Corporate treasury teams have aggressively moved forward with strategies to replace import letters of credit (L/Cs) with lower cost trade payment options, such as private label L/Cs, documentary collections, and open account business. After a slight reversal during the financial crisis in 2008-09, this trend has continued.

In a recent survey by Wells Fargo’s Trade Advisory Council (TAC) from a select group of some of the world’s largest retailers, respondents indicated that approximately 70% of their trade payments were currently on open account terms. About one third of those companies indicated that they planned to increase that percentage in 2013. Additionally, many of these companies are simultaneously extending their payment terms in order to positively affect their cash conversion cycle by extending days payable outstanding (DPO). The average payment terms of surveyed companies grew from 30 days in 2011 to 32 days in 2012, with 45% of importers indicating an average to somewhat high chance of extending terms in the next two years (see Figure 2).

Figure 2: Retail Companies’ Expectations of Extending Payment Terms in the Next Two Years


Source: Wells Fargo 2012 TAC Business Survey

Supporting the Supply Chain 

The implementation of open account and terms extensions can significantly reduce costs and improve working capital. However, as part of the evaluation process companies should consider the potential strains on the supply chain and the increased workload that internal resources may shoulder as a result.

Figure 3: How Large Importers Process International Open Account Transactions 


Source: Wells Fargo 2012 TAC Business Survey

The transition to open account from L/Cs is attractive to purchasing departments as the decreased costs for vendors can be used in price negotiations, but may also increase operational overhead and risk for treasury and accounts payable (A/P) departments. Open account can generate a higher volume of smaller transactions than under L/C terms, and often results in a shift of the trade processing and reconciliation functions from a bank partner to the importer. This can lead to a significant increase in the staff time to manage documents, reconcile trade payments and manage overseas vendor issues. While some of the largest retail companies have invested heavily in automation to mitigate these operational impacts, only 18% of the largest retailers surveyed have been successful. A further 37% have partially automated the process, but still continue to do a significant amount of manual processing. For these companies, and those in treasury and A/P, the decision often comes down to these options:

  • Investing in extensive IT automation upgrades to increase efficiency.
  • Maintaining the status quo manual/automated hybrid process.
  • Leveraging a partner to provide technology and services.

Some leading retail companies have been able to make the shift to open account through strategic outsourcing and leveraging the core competencies and technology platforms of supply partners. Wells Fargo client Cabela’s, a specialty retailer and mail order catalogue company in the sporting goods sector, successfully transitioned the majority of their vendors to open account from L/C purchases without a significant increase in staff time or any disruption for vendors.

“We were able to implement open account for our international payables, along with an extension in our payment terms, without major changes for Cabela’s or our vendors,” says Jodene Hardy, Cabela’s global cash manager. “Along with our other strategic supply chain partners, our strategy is to leverage Wells’ expertise and technical capabilities to continuously improve our supply chain. Our partnership has enabled us to focus on our core business while reducing costs, strengthening vendor relationships, and increasing working capital.”

A further consequence of the shift to open account and extended terms is that under the traditional L/C model, suppliers could use the L/C to mitigate payment risk and as a source of supply chain finance (SCF) by presenting the instrument to their bank to obtain packing credit. Many suppliers are small and medium-sized enterprises (SMEs) that may have difficulty obtaining pre-shipment financing in a challenging economic environment. The extension of terms can add to this pressure, with weaker suppliers reluctant to express the need for buyer support out of concern of revealing their weakness. A potential unintended consequence may be an increase in the cost of goods for the buyer, or in the worst case, a supply chain disruption resulting from the supplier’s inability to access trade finance.

A potential solution for these issues may be a buyer-supported supplier finance programme. Through credit arbitrage, the retailer can receive all of the working capital benefits of extending DPO, while offering the supplier financing at a much lower rate than they could receive in their own region.

Figure 4: Corporate Importers’ Use of Supplier Finance


Source: Wells Fargo TAC 

When implementing this supplier finance strategy, companies should:

  • Invest in core competencies, which for most retailers means brand management, sourcing, strong vendor relationships, and building a lean, responsive supply chain. Generally, this would not involve non-core functions like paper document management, payment matching and reconciliation, and A/P system data entry.
  • Select a strong partner with global capabilities and options. Payment flexibility is important when market conditions and sourcing locations shift. Partners should support a full range of trade payment options (import L/Cs, private label L/Cs, open account, etc) and supplier financing solutions as needs change.
  • Conduct a supplier segmentation and analysis in order to develop a plan for a supply chain transition that will achieve an overall reduction in costs and improved working capital on a sustainable basis.
  • Consider the supplier location as regulatory issues and restrictions may impact the design of any international programmes.
  • Leverage the ability of partners, including technological and in-market supplier support, as a way to accelerate the programme and to begin accruing the benefits.

Non-core Functions: Candidates for Outsourcing

Importing internationally and managing international payables has become increasingly complex. Companies should consider the impact that this transition in trade payments will have on their respective A/P teams. The document imaging, processing, and matching undertaken by the bank under an L/C may still be necessary in some form under an open account payment approval process. Additionally, supplier questions regarding transactions that had been previously fielded by the advising or issuing bank under an L/C will now be directed into the buyer.

Ensuring that suppliers conform to purchase order requirements will also become more challenging with growth. As a result, A/P may be required to add staff, adjust hours to accommodate non-supplier inquiries, invest in new technology, and re-engineer existing risk control processes around the payment process. All of these functions are non-core functions that have little to do with driving revenue growth.

Treasury must evaluate the challenges and requirements that new payment processes will impose. Some questions that should be asked in the course of this review:

  • Should I outsource or insource open account processing?
  • Are potential resources better deployed in revenue-generating activities?
  • Is processing paper documents a core competency of my A/P team?
  • How do we scale as we grow?
  • How can we become more efficient and reduce costs?
  • Do we have the resources to invest in new technology?
  • How do we manage the regulatory risks of managing documents ourselves?

For the 82% of retailers surveyed who have not invested heavily in international trade automation, the answers to these questions may lead them to a decision to select a partner to shoulder some of the non-value added functions. Resources can then be deployed to internal programmes that provide more meaningful financial benefits. Trade banks are uniquely positioned to play this dual role. They are well suited to perform the payment document management function, while also supporting the credit and trade finance needs of the company. The right trade bank as a global partner can also provide the international reach and experience necessary to work with a company’s trading partners in implementing new programmes and resolving issues. Banks have also invested heavily in their trade finance platforms and integration gateways, securely supporting customers’ data requirements through direct system integrations.


With forecasts for consumer demand remaining lacklustre, retailers are taking action to lower costs and improve working capital. Fortunately, with the broader acceptance of open account terms, advances in technology, and adoption of new programmes such as supplier finance, retailers can structure their financial supply chain in a way that allows them to focus on their core business, while still maintaining high levels of operational efficiency and control. Often the solution includes using partners such as banks for outsourcing and trade finance services.

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