Supply Chain Finance for Your Organization

In logistics chains, goods are exchanged between supply chain partners and financial transactions are conducted. While considerable attention is paid to optimizing logistics processes, the optimization of financial transactions within these logistics chains often lags behind. 

Supply Chain Finance, also known as chain financing, is a general term for various forms of financing between companies within the supply chain. In general, Supply Chain Finance focuses on optimizing the financing of goods flows between companies and integrating financial processes among customers, suppliers, and logistics and financial service providers.

Purpose of Supply Chain Finance

The goal of Supply Chain Finance is to improve financial performance and reduce risks among at least two supply chain partners. This can be achieved through a combination of mutual agreements regarding payment terms and credit arrangements for suppliers and customers.

To achieve this goal, three key themes can be identified:

• Reducing financial risks in logistics chains to increase effectiveness.
• Increasing the efficiency of logistics chains by improving financial performance.
• Optimal processing of financial transactions, preventing delays and misrouting.

Supply Chain Finance in the Netherlands 

The logistics sector is one of the sectors in which the Netherlands excels and is a global leader. In 2010, the government launched a ‘Top Sectors’ policy that included a Supply Chain Finance program to ensure the Netherlands maintains a leading position in Europe in this field as well.

This is achieved through the implementation of various innovation projects, as well as through the establishment of the Supply Chain Finance Community. Professionals in supply chain finance can meet and exchange knowledge within this community. 

One of the innovative projects that has been launched is the development of a proof of concept for a central payment platform by American Express, ABN AMRO, and Deutsche Bank. The goal is to expand trading opportunities for small and medium-sized enterprises and lower the barrier for financiers to fund transactions. In this platform, financial processing is directly integrated with logistics processing.

Supply Chain Finance in Practice 

For example, by using this innovative platform, a pig farm is not paid only upon delivery (at the end of the growth cycle), but the buyer provides periodic (advance) financing. As a result, the pig breeder’s total working capital requirements are reduced. Both the supplier and the buyer benefit from these lower costs and greater transparency. 

A more direct form of supply chain finance is ‘reverse factoring.’ A major difference between reverse factoring and existing financing structures is the risk aspect. In the case of traditional financing arrangements, a financial institution takes over (part of) the supplier’s accounts receivable portfolio. The credit risk in this case is determined based on the supplier’s financial health.

Reverse factoring, on the other hand, is initiated by the customer. This is usually a large company with a high credit rating. The credit risk is then based primarily on the customer’s creditworthiness. Both customers and suppliers benefit from this. Customers have the option to extend payment terms, and suppliers see an improvement in cash flow and, consequently, lower financing costs. 

Supply Chain Finance takes various forms, and research by Michiel Steemans of Nyenrode Business University shows that it is important for the chosen form to be a good fit for the company and its customers. He also sees an interesting development for logistics service providers. They are set to play an increasingly crucial role in the supply chain because they have access to the information that makes financial transactions possible. After all, they know exactly where goods are located. The use of blockchain may also play a role in this. 

Steemans argues that Supply Chain Finance can also serve as a foundation for the circular economy, in which ownership structures change, cash flows take on a different pattern, and goods must be returned to the production process. Steemans’ research is based on three perspectives: direct suppliers, intermediaries (suppliers of suppliers), and multinationals. As the examples provided illustrate, the creditworthiness of these parties is of great importance for the most optimal solution.

The Future of Supply Chain Finance

PricewaterhouseCoopers (hereinafter PwC) also sees a future for Supply Chain Finance. They launched the Supply Chain Finance Barometer as a result of a joint study conducted by PwC and the Supply Chain Finance Community. The report provides insight into the current state of Supply Chain Finance and the level of knowledge surrounding it, as well as the reasons for implementation and the success factors of the various programs.

With this barometer, PwC aims to alleviate the fear of the unknown among companies that do not yet offer supply chain finance. “If they see that the majority of large European companies use supply chain finance, that should certainly instill confidence.”

The joint study shows that the participating companies consider most of the programs to be a success. So far, companies have often offered Supply Chain Finance only to their largest suppliers. This usually involves fewer than 100 suppliers, even though these companies often have thousands of suppliers.

The reason for this is that, so far, they have only considered Supply Chain Finance worthwhile for strategic and large suppliers from whom they regularly receive invoices. It would be great if this were to change, because SCF truly creates a win-win situation for both the buyer and the supplier.