Supply chain finance is an important but often underrated aspect of supply chain management. At its core, supply chain management is the management of the flow of material / services, data and money through a network of assets from the point of origin to the point of final consumption (and back). Natural disasters, geo-political crisis and financial crisis faced by the world over the past decade have forced companies to move away from only optimizing their supply chains to making them more resilient. For a supply chain to be truly resilient, all risks associated with the asset base managing the flow (i.e. the material & services, data and money) must be negotiated intelligently, keeping in mind that each one represents a point of failure or a point of opportunity.
Industries are habituated to ignore the significance of supply chain financing. While there has been a lot of collaboration between different constituents of supply chains, they usually center on inventory. However inventory and finance are intrinsically linked; increased players in the supply chain machinery is directly proportionate to the increased complexity in the financing of the process. This is especially true in a country like India, where the number of intermediaries, in many cases outnumbering the actual value addition points, poses a complex problem from the paradigm of supply chain finance and more importantly supply chain resiliency.
As with anything in a complex supply chain, the bulk of the power resides in a few constituents (maybe the retailer or the manufacturer depending upon the specifics of the value chain). These companies understandably look out for their own interests especially when it comes to supply chain finance. Though concepts like JIT (just in time) inventory and quick turnaround times from order-to-delivery have reduced inventory levels held drastically, most companies still hold onto the traditional 30-45-60 day of credit terms with their suppliers. This puts incredible financial stress on the supplier which in the worst case manifests in poor quality of supply. In the long run, this increases the total cost of ownership for the company, i.e. investment in more stringent QC processes, returns, disruption to the manufacturing process, supplier switching costs etc. Applying the same principles of collaborative thinking to supply chain finance will not only make the overall chain more resilient but also optimize the flows and pass on efficiencies in the long run to the end consumer.
In today’s business environment where “share holder value” is no longer a buzz word but the focus of every corporate board of directors, it might be wishful thinking to expect companies to share their margins or reduce days of credit to suppliers in the interest of collaboration. This is where a third party financial institution plays an important role. By providing liquidity to the supplier on the basis of the credit umbrella provided by the bigger company, the addition of the third party financial institution creates a win-win across all stakeholders involved. This is even more critical in the case of small and medium sized enterprises, which at this point are forced to spend only a fraction of their efforts on innovation and growth.
While some large corporates do have some form of supplier financing initiatives through tie ups with Banks and NBFCs, in most cases the coverage of the initiatives are limited (to some marquee suppliers) and in a larger amount of cases are a generic form of receivable financing based on existing credit policies of the financial institutions, which are out of sync with business realities. It is imperative for large corporates to have a supplier financing initiative for all their suppliers, especially the SMEs to manage their financial risks. In turn it is imperative for the financial institution to have a tailored product which reflects the operating realities of the industry and also the specificity of the supply chain. Collaboration of all three stakeholders, i.e. the large corporate, SME supplier and financial institution will be critical to ensuring a sustainable supply chain finance program.
We live in an interconnected world; therefore large corporates have the responsibility to ensure that their SME suppliers have access to finance, if they truly want to make their supply chains resilient.
Prashant has 11 years of experience in business strategy and operations, with specific expertise in the areas of project management, supply chain management and business process formulation , across the retail sector, United Nations system & international organizations, telecommunications & high technology, oil & gas and 3rd party logistics. He has successfully managed and delivered projects for clients based out of Europe, the USA, Africa and India.
At Capital Float, Prashant heads Business Development for Supply Chain Financing.