Supply Chain Finance programs aren’t only about the numbers

By Larissa Svabova May 12, 2016

Some say with 10,000 hours of dedication to a subject you become a master, but though I have twice that, Supply Chain Finance program development continues to provide interesting and fun challenges to solve. For the past decade, I have implemented more than 50 SCF programs, and no two were alike: some were very successful programs; a few were less successful programs; but also, quite a few were disappointing– where the working capital gains realized were only a fraction of the real potential of the programs. Sadly, I have also witnessed completely failed SCF initiatives.  

Recently I joined the team at Kyriba. With its cloud treasury management solution and deep integration of SCF modules, Kyriba has created a new nexus between treasury and procurement that is exciting. The native Kyriba solution offers an ideal framework for the implementation of a robust SCF solution. Indeed, combined with a Treasury Management System that provides (upstream) real time status on cash availability, and (downstream) the advantages of a payment factory, the SCF solution impact will be even more powerful. More financial professionals are realizing how technology can empower their contribution to their company, and generate capital to fund new programs.  

While we are seeing new initiatives to increase working capital, the long term gains aren’t always about the numbers. I’ve seen many excellent programs come together with an engaged leader and cross-functional teams working for a common goal, but the common question I answer is this: “why do so many SCF programs fail to produce the desired results, even though the investment to launch a program is high?”

Suggested reading: Making the Business Case to Implement Supply Chain Finance

There is no single reason for program failures. However, after implementing many dozens of programs, I’ve seen patterns emerge. So, to help treasury and procurement professionals who are considering how to develop a SCF program that will work, here are a few reasons why programs start to unravel:

  1. The misalignment between corporate goals and individual incentives
  2. The underestimation of the Buyer negotiation culture
  3. Failure comes from over emphasizing the importance of the program rate

The misalignment between corporate goals and individual incentives is frequently overlooked. For the procurement team, it is essential to ensure that the bonus/commission structure is in line with the company interest. Indeed, if the procurement team’s goal is based on price reduction while the company is launching a Working Capital Improvement initiative based on DPO extension, the chances that the program develops well are extremely limited.

I could easily add to the short list the lack of resources across the organization, but that is all too often the excuse when a deeper issue is in play that no one wants to address. The Buyer negotiation culture is a powerful factor in the success of a program. Because in order to create change, change has to happen. How that happens depends on whether or not the culture is aggressive or passive. If the SCF program requires a term extension of 30 days to meet the objectives, you can imagine that an aggressive culture would quickly implement—potentially at the expense of maintaining a good buyer – seller relationship, and a passive one may take too much time, and never see the gain.

Another typical mistake is to think that the program rate is the unique and most important driver for suppliers to adopt and take advantage of a Supply Chain Finance solution. As a result, the decision to join a program is reduced to a bottom-line analysis, which excludes important questions about who should be involved in order to ensure the success of the program after it’s launched. In my experience, the program rate is nowhere near the top of the list of factors that drive the supplier to sell its receivables! Indeed, a supplier may sell its receivables to lower their exposure to a financially weak customer, or may inject the extra cash received from financing its receivables into its own supply chain by earning a discount for paying its own suppliers early.

In summary, overlooking critical elements of building a supply chain program or taking shortcuts may lead to an improper assessment of what really matters in order to achieve real results. The good news, however, is that there is a common trait that all successful programs have: engagement of the organization as a whole, from the CEO, CFO, CPO down to the execution level. A true alignment within the organization is crucial to the successful development and launch of a Supply Chain Finance initiative.

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