Financial innovation for supply chains

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innovation_hero.pngOne of the biggest challenges supplier company executives face today is efficiently managing working capital. Growing suppliers consume large amounts of working capital in the form of inventory and trade receivables, which puts strain on ready-money resources. This could have a negative effect on production, order fulfilment and ultimately the relationships between procurement professionals and suppliers, says Emuel Schoeman, director of supply chain finance organisation Propell, in this month’s SmartProcurement.


There are three basic ways to optimise working capital and free up cash in a business without incurring more debt:

• decrease inventory levels through faster inventory turnover or just-in-time inventory strategies;
• decrease trade receivables through invoice discounting; or
• increase trade payables by extending payment terms to suppliers.


Smaller suppliers that carry very little inventory or which have very little negotiating power to extend payment terms to suppliers generally make use of invoice discounting. However, “Invoice discounting, as a method of financing, is a time-consuming process and often extremely expensive, especially for smaller businesses,” says Schoeman.


Large, progressive organisations around the world have recognised the importance of supporting their suppliers financially, especially strategic suppliers, to avoid a breakdown in the supply chain that could be disastrous for their own businesses. To that end many leading, global organisations have implemented supply chain finance programmes to support suppliers and strengthen their supply chains.


“A supply chain finance programme gives suppliers the ability to sell approved invoices at competitive discount rates based on the creditworthiness of the buyer. This could be a huge financial benefit for suppliers,” notes Schoeman.


In practice, as soon as a buyer approves a supplier’s invoice for payment, it is loaded onto an online, cloud-based platform. Suppliers then have the option to sell these invoices to a number of pre-approved financial institutions at highly competitive finance rates. Suppliers now have visibility into their trade receivables and access to 48-hour financing from various financial institutions.


The end result of supply chain finance is suppliers who are paid earlier at a competitive discount rate, resulting in a cash injection and an immediate reduction in their trade receivables. Furthermore, supply chain finance could be used by the buyer to negotiate extended payment terms or additional discounts from the supplier. Both parties immediately release cash tied up in working capital. Truly a win-win situation.


Propell has a 15-year track record in South Africa and has partnered with PrimeRevenue, the world’s largest multi-bank supply chain finance business, with participation from various local banks and 40 international banks, to provide supply chain finance programmes to African companies and their global supply chains. PrimeRevenue currently provides supply chain finance solutions to a number of Global Fortune 2000 companies. Over the last 10 years they have freed up billions of dollars of cash for buyers and suppliers through an electronic cloud-based interchangeable platform called OpenSCi.


To learn more about how Propell can help your business, contact Emuel Schoeman on Emuel@propell.co.za.
 

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