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Supply Chain Finance
Master the essentials to maximize the benefits

By Karan Lal

With well-established technology to support it, use of supply chain finance (SCF) continues to grow. Yet, a
successful SCF arrangement depends on much more than technology. This article highlights five factors – from
efficient onboarding processes to sustaining a healthy SCF arrangement – essential for success.

SCF, also known as “reverse factoring,” began gaining traction in the early 2000s. It
continued to expand later in the decade as banks sought to diversify their service
offerings. This was in part also influenced through government pressure to make
cash available along the supply chain. This uptick in the use of SCF arrangements, in
turn, motivated technology firms to enter the market, providing tools for aggregating,
packaging and using various information generated during supply chain activities to
manage risk. Now, with well-established technology capabilities to support it, SCF is
increasingly a common component of cash optimization.

How supply chain finance works

Many large corporations with complex and globally dispersed supply chain structures are
looking for ways to better manage their cash outlay cycle. SCF is an arrangement used to
optimize working capital while maintaining a healthy supply chain.

The concept works like this (Fig. 1): A supplier submits an invoice to the buyer following
normal protocol. The buyer approves the invoice and uploads it into the SCF platform,
where the supplier selects whether to designate the invoice for early payment. If early
payment is chosen, the invoice is then sold to the assigned funder(s), typically a bank or
other financial institution, at a discount. The funder receives and processes the request
and provides early payment to the supplier. The amount of the invoice, less a financing
fee or discount, is transferred electronically to the supplier’s bank account. Once the
invoice has matured to its original payment date, the buyer pays the funder (or the
supplier, if the invoice was not sold).

FIG. 1 Key supply chain finance process steps

1 2
Supplier sends
invoice to the buyer
following delivery
of product/service.
3 4 Funder bridges 5
financing gap
between early Upon due date/
Following buyer's Through Supply Funder processes early
payment of maturity of invoice,
approval of invoice, Chain Finance payment request and
invoice and buyer is instructed
upload into Supply Platform, supplier sends funds to supplier's
actual due date to pay funder.
Chain Finance selects invoice(s) bank account (less any
of invoice.
Platform. for early payment. financing fee/discounts)

© 2018 The Hackett Group, Inc. All Rights Reserved. Supply Chain Finance I The Hackett Group I 1
 In this scenario, invoice liability falls to the buyer rather than the supplier. The bank
assesses the buyer’s (not the supplier’s) creditworthiness and interest rate. This
decreases the bank’s risk in cases where the supplier’s creditworthiness may not be as
strong as the buyer’s creditworthiness.

Five essential factors for establishing successful SCF arrangements

The SCF technology platform provides an integrated tool for handling the end-to-end
process for all parties, including buyer, supplier and funder. While this technology
platform is essential to a successful SCF arrangement, there are other factors that are
equally important. Insufficient attention to these areas can lead to a shaky start and also
limit the potential to realize and sustain the benefits of this strategy.

1. Clear understanding of your supply chain complexity and global reach. Using
transactional-level data analysis tools can identify working capital optimization
opportunities, such as rationalizing supplier contracts and opening prospects for global
supplier agreements. Such analysis can also help define key requirements for SCF
transactions. For example, the volume of cross-border transactions tends to become
an important talking point during the selection process because some providers have
better global reach and capacity for foreign currency transactions.
2. Efficient processes for receiving, booking and approving invoices. As most
common SCF arrangements are typically based on approved invoices, SCF technology
platforms rely heavily on mature, end-to-end invoice approval processes that can turn
around invoices within a reasonable time frame. It is important, therefore, to optimize
processes for receiving, booking and approving invoices because delays can have a
significant impact on the overall working capital benefits. Companies that gain the
most benefit from supply chain financing focus their attention on process optimization
and automation first to ensure they have addressed inefficiencies before entering a
SCF arrangement. Assessing the invoice receipt and payment approval processes at
the transactional level can help you identify and correct process inefficiencies before
establishing a SCF program.
3. Optimized payment terms. Establishing a SCF arrangement offers the buyer
a good opportunity to negotiate enhanced payment terms in return for using its
creditworthiness to access less expensive supplier financing. Benchmarking your
payment terms provides insight relevant to these discussions. Although regular
payment terms benchmarking is prudent in any scenario – doing so in conjunction with
SCF can magnify working capital benefits.
4. Supplier segmentation. A thorough and properly executed supplier segmentation
(Fig. 2 on page 3) exercise provides critical input for developing a strategic plan
and road map for rolling out supply chain financing to your suppliers. For example,
understanding the creditworthiness/rating of specific supplier segments is vital
to assessing their likelihood and appetite for SCF adoption. An added layer to
segmentation is the focus on value, sensitivity, leverage and tactical importance of the
supplier. This insight can help you define segment-specific negotiation strategies. A
supplier segmentation exercise can also identify suitable suppliers for piloting SCF and
fine-tuning your approach prior to a broader rollout.
5. Credit rating maintenance. One key benefit of supply chain financing is the
opportunity for suppliers to leverage the buyers’ creditworthiness to obtain less
expensive rates for early-payment financing. Debt levels, therefore, become a vital
metric that third-party credit agencies use to define and assign credit ratings. Having
strong and consistent working capital performance will help stabilize and better control
short-term debt requirements.

© 2018 The Hackett Group, Inc. All Rights Reserved. Supply Chain Finance I The Hackett Group I 2
 FIG. 2 Supplier segmentation in planning and introducing SCF arrangements

e
im
Prime rating Prime rating Pr ng
i
at
it r
Type of supplier red
C

High value
e
p rim
Subprime Subprime ub
rating rating S

Bottleneck Routine

High value

High value
• Complex specifications • Many existing

Supplier spend value in $

• Few alternate products sources
• Few qualified suppliers • Generic items for
• New technology/ everyday use
process

Subprime Subprime

Strategic Leverage

Low value
Low value

Low value
• Strategic to profitability • High-expenditure area
and operations • Many existing
• Few qualified suppliers alternates/sources
• Large expenditures • Readily available
• Design to quality • Commercial involve
critical ment can significantly
• Complex specifications impact price

Days sales outstanding, days payable outstanding and days inventory outstanding,
therefore, become useful metrics for monitoring the overall cash conversion cycle and
total working capital performance, and for optimizing working capital processes – factors
that help businesses become more resilient in times of economic uncertainty.

Set up for success

SCF is an increasingly popular approach toward optimizing working capital. Robotic
process automation and blockchain technologies will also play more of a part. However,
while third-party technology providers and technologies can facilitate day-to-day
execution without the right supporting processes, you will find it difficult to realize the
true potential of this strategy. Attention to the five steps outlined will help position your
program for a successful start and, more significantly, sustained benefits over time.

About the author

Karan Lal
Senior Consultant

Karan Lal is an experienced working capital consultant at The Hackett

Group. Based in the London office, he specializes in delivering
assessments and implementation solutions for large-scale and complex
opportunities throughout the customer-to-cash process. Karan is also a
partially qualified ACCA accountant, adding his expertise in balance sheet
and profit and loss analysis to working capital management projects. He is
fluent in English, German and Punjabi.

© 2018 The Hackett Group, Inc. All Rights Reserved. Supply Chain Finance I The Hackett Group I 3
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© 2018 The Hackett Group, Inc. All Rights Reserved. Supply Chain Finance I The Hackett Group I 4