Supply Chain Finance as the New Standard for Procurement Managers

By: Manpreet Kaur

Supply chain finance is a financial approach focusing on managing working capital and liquidity in a supply chain. It uses different tools and techniques to streamline payment processes between buyers and suppliers, which helps to improve cash flow and collaboration across the entire supply chain ecosystem. Supply chain finance achieves this by providing financing options or facilitating early payment to suppliers.

Supply-chain finance has long existed, but its potential is limited due to its complexity. Four main factors contribute to this complexity: delivery fragmentation, fragmentation of the underlying assets, limited credit and expertise, and geopolitical turmoil. The supply-chain financing industry is restricted by the number of individual banks and non-bank providers who have sufficient risk appetite and know-how, and the lack of a robust secondary market. Many institutions cannot offer the full range of SCF assets due to their limits on exposure or risk, as well as their limited expertise in underwriting and lack of established processes.

What are the challenges that can be faced by procurement managers while setting up a Supply chain finance program?

Resistant to supply chain finance programs:

Encouraging supplier participation in supply chain finance programs can be challenging, as suppliers may view them as added financial burdens or unwarranted intrusions into their business operations. Resistant suppliers may be hesitant due to concerns about the program’s impact on their cash flow or perceived complexities. Convincing them to embrace such initiatives necessitates clear communication on the mutual benefits, emphasizing improved liquidity, streamlined processes, and enhanced collaboration. Building trust and offering transparent insights into the advantages of early payments or financing options can help overcome supplier reservations, fostering a more cooperative and efficient supply chain finance ecosystem.

Program Complexity:

Establishing a supply chain finance program is an intricate undertaking demanding substantial coordination among diverse stakeholders such as procurement, finance, and suppliers. The complexity lies in implementing the necessary technology and processes to facilitate the program effectively. Coordinating these elements seamlessly is a formidable challenge, as it involves aligning disparate functions within an organization and integrating them with external suppliers. The successful deployment of a supply chain finance program hinges on strategic planning, technological integration, and fostering collaboration among stakeholders to ensure a streamlined and efficient financial ecosystem that benefits all participants in the supply chain.

Supplier Onboarding: a time-consuming process:

Onboarding suppliers onto a supply chain finance platform is a time-consuming and resource-intensive process. Suppliers may encounter challenges in meeting eligibility criteria or furnishing requisite documentation. The complexity of supplier integration arises from the need for meticulous verification and compliance checks. These hurdles can result in delays and operational bottlenecks. Addressing these issues demands a strategic approach that balances thorough due diligence with efficiency. Streamlining onboarding procedures, offering support to suppliers navigating eligibility requirements, and leveraging technology for document submission and verification are essential measures to mitigate difficulties and enhance the efficiency of the supplier onboarding process within the supply chain finance platform.

Data and Technology Integration:

The integration of financial platforms with an organization’s existing systems, including Enterprise Resource Planning (ERP) software, poses technical challenges and substantial costs. The intricacies of aligning different systems require meticulous planning and execution. Simultaneously, addressing data security and privacy concerns becomes imperative during the integration process. Safeguarding sensitive financial information and ensuring compliance with privacy regulations add layers of complexity. Successful integration involves navigating these technical and security challenges, demanding a strategic approach that minimizes risks while optimizing the interoperability of financial platforms with existing organizational systems, ultimately contributing to enhanced operational efficiency and data integrity.

Financial risks associated with supply chain finance:

Organizations must meticulously evaluate and control the financial risks inherent in supply chain finance, encompassing the potential for supplier default and currency fluctuations. Effective risk management necessitates the implementation of resilient strategies to mitigate these risks. Vigilant assessment of supplier creditworthiness and the establishment of mechanisms to address default scenarios are critical components. Additionally, organizations should proactively manage currency risks through hedging or other financial instruments. By developing and employing robust risk mitigation strategies, organizations can safeguard their financial stability, fortify resilience in supply chain finance operations, and navigate challenges associated with supplier defaults and currency volatility.

Supplier Diversity: Managing supply chain finance:

Effectively managing supply chain finance across a diverse supplier base, characterized by distinct financial needs and capabilities, poses significant challenges. The varying requirements and expectations among suppliers introduce complexity into the management process. Each supplier may necessitate tailored financial solutions, making it crucial for organizations to adapt their approaches to accommodate this diversity. Addressing the unique financial dynamics of each supplier and establishing flexible frameworks are essential to navigating these challenges successfully. By acknowledging and accommodating the varied needs and expectations within the supplier base, organizations can foster stronger collaboration, optimize financial arrangements, and enhance the overall resilience and efficiency of their supply chain finance strategies.

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Author’s Details

Manpreet Kaur

Assistant Manager Presales – Sourcing and Procurement Intelligence

Manpreet is a presales specialist at Infiniti Research and has expertise in sales, business strategy execution, and innovative solution design. She is actively involved in supporting clients from F&B, CPG, Healthcare, Pharma, Chemicals, BFSI, Oil & Gas and Automotive sectors.