Supply Chain Finance – Building Stronger Relationships Between Buyers and Suppliers
Running a business is similar to piloting an airplane; a loss of fuel will bring it down. Airplanes need fuel for power, a business requires the fuel of working capital to operate. Without enough working capital, business operations sputter and an ultimately crash.
Given the interdependence in the supply chain, there is a systemic risk when one party experiences cash-flow problems. For instance, if a buyer goes bankrupt, the suppliers are likely to lose money and potentially much more if products or services were provided but payment is never received.
Likewise, a disruption occurs when a buyer loses a key supplier. Short-term business costs increase, and productivity declines as new suppliers are sourced and integrated into the supply chain. Buyers looking to eliminate risk and minimize costs must be ready to develop better relationships with their suppliers by shielding them from working capital problems.
Supplier Relationship Management Is Key
Better relationships with suppliers are the bread and butter of effective supply chain management. Supplier relationship management (SRM) calls for buyers to explore the various ways they can derive maximum value from collaboration with the suppliers.
One way to ensure this is to make early payments. When a buyer deliberately delays payables in a bid to improve their finances, they are risking driving the suppliers out of business, or to buyers with better payment terms.
The Walmart Way
Walmart is an excellent example of a global organization that uses supplier-relationship management to increase profitability. With a business mantra of ‘Everyday Low Prices’ the retailer leverages on healthy supplier relationships to negotiate prices and hence pass the benefits to customers in the form of low product prices.
In 2015, Walmart introduced a supply chain finance program. Initially, some long-time suppliers were uncomfortable or even upset with the program. However, the benefits of improved cash flow soon won these suppliers over. The legacy suppliers recognized that their business with Walmart was evolving and there were advantages to the new program.
The success of Walmart’s program has enabled them to keep overall costs low, which they pass onto their retail customers. Walmart remains the dream buyer for many small and medium enterprises. The company attracts a considerable number of suppliers and is known to retain its best for long periods of time.
Understanding Supply Chain Finance
Supply chain finance (SCF) refers to a program that aims to build supplier-buyer relationships by offering and participating a mutually beneficial early payment plan. In supply chain finance, a buyer offers early payment on invoices, in exchange for a discount from the supplier.
With supply chain finance, buyers often use a 3rd party financing organization to manage the payments. This allows the buyer to optimize their working capital while paying the suppliers faster. Suppliers are very eager to accelerate their cash flow, and participation in supply chain finance programs is generally high. The result is better working capital, improved relationships between parties, and a stronger supply chain.
Supply Chain Finance Ensures Quality Products and Service
The goal of developing better supplier relations through SCF is not only to minimize business risks and reduce costs, but also to ensure that high-quality goods are delivered. When a buyer has the supplier’s best interest at heart, the kindness is likely to be reciprocated through high-quality products.
Every supplier dreams of selling to an established, long-term buyer. When the opportunity comes, no supplier will risk destroying it through poor quality products or service. If suppliers have consistent, dependable working capital, they can focus more on improving service or the quality of their products. That’s the power of supply chain finance.
The best way that buyers can build quality relationships with their suppliers is by offering them tools to manage their working capital. Supply chain finance is one of the best tools buyers can use to ensure supplier working capital needs have been met, and improve their bottom line.