In Part I, we discussed how PrimeRevenue, a provider of Supply Chain Finance solutions that provides supply chain finance solutions to over 12,000 customers, including a large number of Fortune 500 and Global 3000 companies, in 40 countries and that processes Billions of dollars of transactions each year, provides a supply chain financing solution that goes beyond just providing a platform to sell receivables and includes an analytics component that helps a buying organization figure out how to best meet its working capital needs.
In particular, as part of their platform, they provide a module by the name of SCiMap that provides a consolidated and classified analysis of your spend, enriched by insights from PrimeRevenue’s global database, based on detailed and updated market intelligence that allows you to make better buying decisions as well as negotiate optimized payment terms, putting the power to improve your working capital in your hands. It does this by analyzing all of your spend data, presenting you with potential opportunities for payment term extension, and providing you with a what-if analysis platform that allows you to tailor a plan to meet your needs in a manner that is consistent with your level of risk.
The potential opportunities for working capital improvement are summarized on the unique SCiMap dashboard that summarizes:
- Commodity Standard Opportunities
for which commodities are you paying faster than market average?
- Vendor Standard Opportunities
which vendors are you paying faster than your competitors?
- Parent Standard Opportunities
which vendors are you paying faster than the average time in which their parent or sibling organizations are paid?
- Country Standard Opportunities
which vendors are you paying faster than the average DPO for the country?
- Cost Neutral Opportunities
which vendors could be paid later with no impact to their finances? (e.g. they
are cash rich while you are cash poor or they are financing at 90 days and you are
paying at 60 days)
- Discount Opportunities
which vendors could you convert from early payment discount terms (that they are
unable to effectively take advantage of) to standard terms?
- Inventory Turnover Opportunities
which terms could be extended to match inventory days and associated carrying costs?
- Buyer Standard Opportunities
which vendors are you paying faster than your average payment terms?
(note that if your average payment terms are worse than market averages, these may
not be real opportunities)
From this dashboard, that will typically identify hundreds of millions of working capital that could potentially be freed up in a typical multi-billion dollar company within a matter of weeks, a senior Supply Management analyst can dive into each pot of opportunities, identify the commodities and vendor in question, access the credit-rating and average finance rate for each vendor, and determine if the opportunity is real or not. SCiMap can even do program design to help procurement determine what suppliers will be targeted first based on different criteria to maximize the opportunity. From here, the buyer can identify the real opportunities for working capital improvement that will not endanger the vendors or increase the overall supply chain cost to the end consumer. The Supply Management analyst can then create a term extension model that will benefit the organization without hurting the supply chain. Then in SCiMap procurement can report what actually happened in execution to see where the model was successful or had challenges.
This is important because, despite the best efforts of your accounts receivables department, receivables collection will only take an organization so far, which means the organization will have to hang on to cash longer to improve working capital at some point. Inventory optimization will help, but if the Supply Management organization is mature, inventory will have been optimized long ago and there will be no more opportunities to improve working capital. Furthermore, during periods of prolonged recession, you know that Treasury is going to demand term extension as a way to improve the cash position of the company, and you have to be prepared for this because you know better than everyone that you can’t just increase payment terms from 60 to 90 and not negatively impact your supply chain. Not only will some suppliers be unable to bear the term extension, others will take back the benefits that you negotiated in exchange for faster payment. Preferred customer status and order fulfillment during a supply shortage? Forget it! Faster-than-guaranteed response times on service? Dream on! Marketing perks? Ha ha! And let’s not forget the fact that if you are already paying some vendors slower than market average for the commodity, vendor, or country, you might be paying more than you have to and speeding up those payment terms might decrease your overall costs – not having to pay at all improves working capital much more than paying late.
The SCiMap solution, which is unique, is a must-have for any organization that wants to truly optimize it’s working capital in a way that won’t come back to bite it in the @ss at contract renewal time, especially when you consider the fact that PrimeRevenue has analyzed trillions of dollars in spend and will only present you with opportunities for consideration that are real for at least one group of companies in the global supply chain. While all the opportunities may not be real for your organization, you won’t waste time analyzing commodities or vendors that obviously cannot handle a term extension. This gives you the ammunition to push back on Treasury or the C-Suite when they get the hair-brained idea that just because their competitor was able to increase payment terms by 30 days and get away with it that your organization can too.
Working Capital Management is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. (Source: Investopedia)
Working Capital Optimization is optimizing the balance between assets and liabilities, and, since assets can’t generally be acquired or disposed of on a regular, or quick basis, generally focusses on optimizing the ratio of cash-on-hand (and liquid assets that can be converted into cash-on-hand within 90 days) to liabilities. In practice, most organizations attempt to accomplish this by optimizing receivable collection, inventory cycles, and supplier payment terms. In other words, they try to collect receivables faster, reduce inventory cycles, and extend payment terms.
These are all valid ways to optimize working capital, but if they are not undertaken correctly, supply chain costs will rise. If you force your customer to pay before they can afford to and the customer has to borrow to do so, that’s going to increase their cost to service their customer, and if their customer can’t pay, they are going to come after you for price reductions at contract renewal time, and that’s not good for anyone. If you try to reduce inventory turn-over too aggressively, you will end up doing a lot of expediting or LTL shipments, which will reduce overall acquisition costs in the long run. And if you extend payment terms beyond which your suppliers can afford, at the very least you risk increasing your costs substantially as they will have to borrow at high financing rates and pass that cost onto you and you may even risk their financial solvency.
So how do you optimize each of these areas?
- Receivables Collection
Go after slow customers, but focus on those with the most ability to pay first. For public companies, use publicly available financials to figure out who is cash rich. For private companies, use credit rating data, such as that provided by services like D&B.
- Inventory Cycles
Optimize inventory (carrying) costs versus logistics costs versus potential loss from stock-outs and determine the optimal inventory cycle for each commodity.
- Payment Terms Extension
As per Tuesday’s post, figure out which suppliers can afford payment extensions such that they would suffer no negative impact or where the overall supply chain cost that would be borne by the end consumer is lessened and extend the terms.
PrimeRevenue is a provider of Supply Chain Finance solutions that provides supply chain finance solutions to over 12,000 customers in 40 countries and that processes Billions of dollars of transactions each year. Like other providers of supply chain finance solutions, they provide a platform that helps suppliers access financing for their receivables when they need it. With over 40 leading financial institutions on their platform, it is a platform that every buyer and supplier should consider for their finance needs. But that’s not why we’re covering PrimeRevenue today. We’re covering PrimeRevenue because they go beyond just providing a funding platform to meet your cash needs – they also provide an analysis platform to help you figure out how best to meet your cash needs.
In particular, they provide a solution by the name of SciMap that provides a consolidated and classified analysis of your spend, enriched by insights from PrimeRevenue’s global database, based on detailed and updated market intelligence. This allows you to make better buying decisions as well as negotiate optimized payment terms, putting the power to improve your working capital in your hands.
In particular, this platform provides you information on:
- average payment time for the commodities you buy,
- average financing terms for suppliers with similar credit ratings, and
- average financing terms for companies with a similar credit rating to you.
Based on this you can figure out
- whether you are paying faster or slower than the market average,
- what financing your supplier is able to get, and
- what financing you are able to get
and then you can figure out whether you should be looking to
- extend or reduce payment terms, depending on whether
- the supplier can get better financing or
- you can get better financing.
Then, if it is the case that the supplier can afford to be paid later and paying earlier threatens to increase the overall supply chain cost, then you have a valid reason to negotiate with (or, if necessary, mandate to) the supplier for a later payment, helping it to obtain the lower financing you know it can obtain if necessary.
When it comes to supply chain finance and working capital analysis, the PrimeRevenue SCiMap solution is unique in the supply chain finance space and a solution you should really be looking at if you want to get your supply chain working capital optimized.
paying late is actually the right thing to do.
SI has said since day one that you should never pay a supplier late, and it still believes this, but the reality is that sometimes late is not late. So when is late not late? Simply put, when paying the supplier late hurts the supplier less than it hurts you.
The whole point of paying suppliers on time is to not only keep them financially sound, but to reduce the cost of your end-to-end supply chain. If your supplier depends on your business and needs that cash to buy raw materials, pay its workers, and fund its overhead costs, and it has to wait for that cash, then it has to borrow money to buy those raw materials, pay its workers, and fund its overhead costs. And if it’s cash strapped, chances are it’s not going to get a good rate. Furthermore, if it’s small, or doesn’t have an A credit rating, it’s not only going to get a bad rate, it’s at risk of getting a very bad rate. Some suppliers often have to borrow at 20% to 40% to stay in business while they wait for your payment, which sometimes doesn’t come until 120 days after the product has been provided to you. If such product takes 60 days to make and ship to you, that’s 180 days the supplier is waiting for payment and the cost has been effectively increased 10% to 20%. And who do you think is paying for that? You are!
However, sometimes we have the opposite situation – a buyer who is strapped for cash waiting to get the next product to its customers and a large supplier, who does business for a lot of large companies, that is in a relatively cash rich situation. In this situation, the buyer might be forced to borrow cash at a relatively high rate of interest, which could easily be 12% to 18%, while the supplier could go another 60 days without payment with no adverse effect. Paying the supplier on-time in this situation is ultimately as damaging to the supply chain as a whole as paying a cash-strapped supplier late. Anything that increases the cost ultimately increases the price to the end consumer. And anything that increases the price risks decreasing the customer base, and the overall revenue that keeps the supply chain going.
So, if you do have the opposite situation, despite the supplier’s grumbling, you should pay late. But ONLY if you have this situation, which, generally speaking, occurs less than 10% of the time. So how do you know if you have this situation?
Come back tomorrow to find out.