U.S. manufacturers are lagging their European counterparts in the adoption of creative approaches to supply-chain finance. But three companies are demonstrating the varied ways in which that tool can be effectively deployed.
The German engineering and technology giant Siemens ventured into the financial arena about 15 years ago, according to Douglas Schoch, vice president of Siemens Financial Services. Speaking at the inaugural Supply Chain Finance Community Forum Americas in Los Angeles, he described how Siemens has embraced supply-chain finance as a means of providing assistance and risk mitigation to its universe of suppliers, customers and channel partners.
More than 2,000 suppliers in the Americas are currently participating in the program, Schoch said. It allows them to sell their receivables into the market and receive immediate payment on invoices, in return for a small financing fee. Siemens, meanwhile, gets the advantages of extended payment terms, allowing it to hold on to working capital for longer periods of time.
The arrangement lets suppliers take advantage of Siemens’ low interest rates because banks are basing their financing decisions on the buyer’s creditworthiness, not that of its vendors. Qualifying invoices are approved within a matter of days. Payment instructions are transmitted through the supply-chain finance platform maintained by Orbian, a now-independent company founded in the late 1990s as a joint venture between SAP and Citibank.
The number of banks in the program has varied over the years. (Seven are participating in the Americas at the moment, according to Schoch.) It depends on a variety of factors, including the current cost of capital, internal expense due to regulation, and banks’ hurdle rate, or minimum acceptable rate of return on investments. Invoices are offered to them daily in bundled form, so that a single consolidated tender might be valued at several million dollars.
Globally, the Siemens supply-chain finance program currently encompasses more than 3,000 suppliers from 31 countries, 105 Siemens entities in 25 countries, 22 funding banks from North American, Europe and Asia, and 16 currencies, Schoch said.
Scientist.com is a business-to-business marketplace that connects buyers and sellers of research services in the life-sciences industry. It operates under a consolidated billing model, whereby vendors provide goods and services to the end client, then bill Scientist.com.
The arrangement lands the company squarely within the province of supply-chain financing. It gives thousands of smaller vendors access to prospective buyers whose high threshold for doing business might otherwise exclude them.
Last spring, Scientist.com launched an early payment program dubbed SciPay. It gives the company’s 2,850 registered suppliers the opportunity to receive payment for authorized transactions in as little as 15 days, in exchange for a discount off their invoices.
Large pharmaceutical companies typically have payment terms of up to 120 days, making it impossible for smaller, cash-strapped suppliers to compete, according to Kristopher Kagan, vice president of finance and human relations with Scientist.com. SciPay was created to remove that barrier.
Under the program, a typical “dynamic” discount might be 2.5 percent for payment within 15 days, against a net 75-day arrangement. Scientist.com automatically approves any invoice under $25,000, Kagan says.
For Scientist.com, the offering creates a new revenue stream, yielding an annualized return of up to 15.2 percent on financed vendor invoices. Vendors benefit from a reduction in correspondence, immediate visibility of invoices, and access to real-time status queries for outstanding invoices and remittances. Using a software platform provided by Kyriba, Scientist.com has been able to reduce per-invoice costs from $50 to less than $5 in three years, according to Kagan.
Thirty vendors signed up in the program’s first month. Kagan says Scientist.com plans to promote SciPay across its entire vendor base, with the goal of capturing 25 percent of spend at a 2-percent discount in the second year. Suppliers can sign up and receive funds within the same day.
PetersenDean claims to be the largest privately held roofing and solar contractor in the U.S. It ventured into supply-chain finance to combat the uncertainties, complexities and delays that are associated with the construction industry, according to Gary Liardon, president and chief operating officer of the consumer division.
The company first entered the world of supply-chain finance to fashion a system of discounts keyed to early payment of invoices. The move was in response to the lengthy payment terms that are typical of big suppliers and manufacturers in the construction sector. PetersenDean had been struggling to close the gap between the time it received payment for services and when it had to pay its own suppliers. It needed a solution other than borrowing the shortfall from banks.
The program proved to be of significant value at a time when traditional lenders were backing away from the industry in the wake of the mortgage crisis of 2008, Liardon said. In addition, the first quarter of 2019 presented a “perfect storm” in the form of heavy rains in Northern California, delaying builders’ ability to complete projects and creating serious cash-flow problems for PetersenDean. As if that weren’t bad enough, the Trump administration imposed tariffs on imports from China, sending buyers scurrying for limited supplies of domestically sourced solar panels.
The supplier financing initiative, employing the platform and services of PrimeRevenue, kept the company out of a “catastrophic” situation in the early part of this year, Liardon said. It was able to leverage long-term relationships with manufacturers for large-scale orders. Through the use of early-payment terms for suppliers, it could purchase large quantities of product, hold it in warehouses for a short time, and reap the benefits of extended terms on its end. What’s more, it didn’t need to finance its recovery on the backs of vendors. “What we found,” said Liardon, “was that suddenly we could lock down a market share.”
Supply-chain finance today takes many forms, including early payment with dynamic discounting, inventory financing, pre-shipment purchase-order financing, and asset-based lending, noted Luca Gelsomino, academic director with Supply Chain Finance Community, sponsor of the Americas forum. But the sector offers plenty of room for growth. Too many companies continue to limit their efforts at protecting working capital to slow-paying suppliers. More creative solutions are needed to benefit both parties, at a time when economic uncertainty promises to put even more pressure on already challenged margins.
Next: The slow-paying dilemma.
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