- 19
- JUN
- 2009
Defining Supply Chain Finance (SCF)
Author: Mark Perera - Categories: Working Capital
Over the last 5 months, the Procurement Intelligence Unit team (PIU) have been busy talking to leading consultancies, solution providers, banks and big companies about how procurement can mayor impact on working capital.
We learnt about a number of different initiatives and innovations that could help procurement leaders strengthen their companies’ working capital position, however Supply Chain Finance jumped out as the approach the biggest and more sustainable approach.
So what is Supply Chain Finance? Well that’s was one of the biggest challenges we faced, every person we spoke seemed to have a different definition and understanding. That said we feel after much debate that we have come up with a definition that encapsulates the concept in its true form.
‘Supply chain finance is a buyer-led initiative that facilitates favourable financing for the supplier in order to achieve mutual benefits for both trading partners, through the use of a technology platform and a third-party financial institution or otherwise.’
I look forward hearing your thoughts on this definition and how you perceive Supply Chain Finance as model for free up working capital in big business.
If you would like to access the executive summary of the ‘Supply Chain Finance – The Anti-Crunch’ or enquire about access to the full report and membership to the Procurement Intelligence Unit, please click here
Comments
kari huittinen
Mon 11 Jan 2010 07:34
Is SCF meant mainly for supplier - buyer relationship where the buyer has remarkably better terms for the interest rate of money ?
If both parties have about the same interest rates, where's the beef ?
Mark Perera
Sun 21 Feb 2010 15:46
Where the buyer and supplier have similar cost of cash then the benefits of Supply Chain Finance are based on the better visibility the supplier gets on their invoices in terms of approval and payment dates. One of the case studies within the report had a number suppliers with cheaper cost of cash than the buying organisation and this was the way they sold the programme to these suppliers.
Peter Stenbrink
Mon 22 Feb 2010 13:16
In addition to the value of visibility for the supplier, and in some cases flexibility of when to receive the cash, there is often a financing cost arbitrage even in cases where suppliers have the same or even somewhat better cost of debt. This comes from the fact that SCF typically provides off-balance financing to the suppliers. In theory, the cost of this should be compared to the suppliers' WACC, or in some cases even the discount rate on cash discounts, rather than their cost of debt (interest rate on bank loans). However, the less financial arbitrage, the higher the requirements on a clear strategy and effective communication/argumentation from the buyer's purchasing organization for a successful program.
David Brown
Mon 22 Feb 2010 14:47
A simple definition of the term "Supply Chain Finance" can be descibed as payment, In what form this takes, is a decision for both the buyer and supplier i.e. Post Approval, Pre Approval etc. A prime model used in our every day life that represents a Supply Chain Finance transaction is the use of credit cards. The Buyer purchases his goods and Services on Day 1, the supplier seeks authorisation to accept the P.O. and secures finance to underwrite the transaction [cost in the region of between 1.5% - 4%], generallly settled within 72 hours, after the purchase. The buyer pays in full for the purchase some 58 days after the transaction and therefore preserving cash flow. The prime question here?? Is this early payment or Supply Chain Finance, or both?
JOHN TAABAVI
Sun 21 Aug 2011 18:24
How can i access the complete MODEL on supply chain finance(SCF) for my doctoral students.