These are perilous times for all supply-chain partners, but especially for smaller suppliers who lack ready access to working capital, and are existing on extremely thin margins in a severe economic downturn. Making matters worse is the tendency of some buyers to stretch out payment terms. As a result, there is growing interest in supply-chain finance programs. In this conversation with SupplyChainBrain Editor-in-Chief Bob Bowman, Maureen Sullivan, head of supply chain finance with MUFG, explains what forms those options are taking.
SCB: Do you see an uptake in companies today selling their receivables — and if so, why?
Sullivan: The first question is, what sort of liquidity challenges are suppliers facing today? Many are challenged in meeting payroll and other operating expenses, given reduced production or delayed payments. And while government programs have provided some relief, there are restrictions on how the proceeds of these credit facilities can be used. At the same time, tightening of credit markets results in companies experiencing higher financing costs and more stringent borrowing structures, all of which are creating a shortfall in cash for suppliers to meet working-capital requirements. So suppliers’ access to cash has tightened with restricted credit facilities.
An alternative liquidity source is the sale of receivables, rather than waiting until the underlying invoice is paid by the supplier’s counterparty and cash is received. Companies are enrolling in supply-chain finance programs, which enable them to sell the receivables to a bank in exchange for immediate cash, a method that shortens their cash-conversion cycle.
SCB: Isn’t it also a trend that payment terms are being stretched out?
Sullivan: It is true that buyers are trying to negotiate extended terms. But again, if you look at what's critical to a buyer and their whole production cycle, it’s ensuring that they have the critical supplies. So if a supplier is in trouble or needs liquidity, an alternative would be for the buyer to use their own cash. I don't believe that's an efficient use of their cash, but it's a way to protect the stability of their supply chain.
SCB: Are there any particular industries in which the practice of selling receivables is especially popular right now?
Sullivan: I would say it's across the board. We work with buyers and suppliers across general industries through technology and healthcare. We've seen some of our healthcare clients wanting to broaden the reach of the supply-chain finance program, especially to smaller suppliers who are probably struggling the most with liquidity. So they're expanding it beyond their typical strategic supplier base.
SCB: Is there a correlation in company size of either the buyer or supplier that makes this an especially popular practice right now?
Sullivan: Candidly, it’s across the board.
SCB: Where does the bank make its money on such transactions?
Sullivan: The bank is serving as a facilitator for the liquidity that's needed within the supply-chain cycle. We will offer an early payment to a supplier so they can receive that cash and deploy it for other operating purposes while waiting to get repaid by the buyer. There will typically be a financing charge associated with that.
SCB: Are interest rates a factor in the popularity of this practice, being especially low in the last few years? Does that have any impact on the degree to which it is being embraced?
Sullivan: Generally speaking, supply-chain finance programs have grown in popularity since the 2008 financial crisis, primarily predicated on the importance of ensuring suppliers' stability and the opportunity to optimize working capital for both buyer and supplier. Lower interest rates probably have a minimal impact. It's more around working capital optimization as the driver to the popularity of supply-chain finance over the last 10 to 12 years.
SCB: Do you believe this problem is going to become even more acute for suppliers, now that we’re in a recession or uncertain duration?
Sullivan: Yes. Again, we're seeing higher demand from both our supplier and buyer customers to find ways to expedite the receipt of cash in a cost-effective manner.
SCB: How can buyers hedge against supply-chain disruptions in this particular environment?
Sullivan: Certainly, in terms of sourcing behavior, I think there will probably be some new disciplines that evolve as a result of COVID-19. That has been evolving prior to the pandemic due to heightened trade tensions across the globe. However, I think COVID-19 might be expediting the need to adjust strategy.
It's crucial in supply-chain management to diversify your source of supply, so that when one supplier is impacted, you can turn to another. In addition to developing alternative supply outlets, companies are looking at building safety stock, or supply sources that are closer to home. However, cost will remain a significant driver, as companies continue to march to the mantra of having the right product at the right place at the right price.
SCB: Do you see a reversal of the trend toward just-in-time deliveries and minimization of safety stock? Are we seeing a turnaround in that philosophy?
Sullivan: I think it's a little too soon for us to have a good line of sight of the impact of deepening sourcing strategies, including the cost of holding additional safety stock. It's definitely going to have an impact on company financials, with inventory holds increasing over time. We think it's a trend that will surface, but the real implication that it may have on a company's financial performance remains to be seen.
SCB: Are there any other creative supply-chain financing solutions out there that can be deployed by buyers or suppliers, in order to protect against the current situation, and going forward as well?
Sullivan: I do think there’s still a lot of upside for companies to embrace the power of supply-chain finance programs. As we go through the next iteration of what this economic cycle is going to look like, suppliers and buyers alike will continue to focus in on the importance of working capital optimization.
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