IN ASSOCIATION WITH

INSIGHT MANAGEMENT Are you ready? Cash value

Cash-hungry corporations need a working capital strategy that adds value to the whole supply chain, says Andrew Sawers

Time is money, so the cliché goes. But in the optimisation platform provider Taulia. “In context of modern supply chains we should order to finance those projects, to invest finesse that to “timing is money”. The gap in the infrastructure, access to cash is between when cash is received and when cash paramount. It has become the priority of the is dispersed is the factor that determines how CFO, sometimes the CEO or even the board to much money an organisation has at its disposal have very detailed and broad working capital at any moment in time – or, indeed, whether it management goals and initiatives.” needs additional financial resources. Companies may be investing in technology, The physical supply chain is often a or , or research beautifully orchestrated stream of products and development, or meeting shareholders’ being carried through super-efficient dividend expectations, or they may need manufacturing processes and Just In Time cash to pay down debt and rebuild their logistics. But the financial supply chain – balance sheets before interest rates rise. the flow of money going in the opposite “There are a lot of different reasons why direction – is often much less coordinated companies need cash,” says Bru. “But the and subject to inadvertent blockages and one thing they all need is a working capital even deliberate delays, adding unnecessary management strategy.” costs and increasing sustainability risks. Cash tied up in sales on credit or inventory All this is happening at a time when that has yet to be sold increases the level of organisations of all kinds are facing an ever- working capital in a business, but is offset by greater need for cash. “A lot of companies the value of purchases from suppliers who are are going through a huge amount of change, not yet paid. Basic arithmetic says quicker especially to embrace digital transformation,” collection of receivables from customers and says Cedric Bru, CEO of working capital slower payment of suppliers reduces working

PROCUREMENT LEADERS INSIGHT | 1 capital, freeing up cash. Timing faced by small and medium-sized is money. enterprises (SMEs) means such But used in such a rudimentary way, practices are actively discouraged, such basic arithmetic ignores one or even forbidden. European Union extremely important fact. “Working payment legislation and voluntary capital management strategies are codes of practice, such as the UK’s equally important for the suppliers to Prompt Payment Code or betaalme.nu large corporations,” Bru says. (‘Pay me now’) in the Netherlands, Traditionally, therefore, supply provide clear frameworks for large chain finance programmes that use companies to pay their smaller third-party funding, such as reverse suppliers. The UK’s ‘duty to disclose’ , have been facilitated by rules require British companies to companies as a means of making publicly file detailed data and other longer payment terms more palatable information about their payment for their suppliers (see box, Early practices, with a view to greater payment 101, page 3). transparency being a means to But more large organisations now encourage a change in behaviour. see this as a simplistic approach – one “At Vodafone we have policies that that fails to recognise ‘the art of the mean we can’t have our payment terms possible’. longer than a certain duration with One such large corporation is small vendors. If the company is a Vodafone, where Graeme Reynolds startup, it’s even lower,” Reynolds says. is the principal finance manager, “It’s a lot more focused on treating decision support, for the procurement supplier companies ethically.” organisation. “What’s really interesting about is that CUSTOMERS OF CHOICE everyone treats it as being just about Ethical treatment of suppliers provides cash,” Reynolds says. “Sure, cash is the value that comes from good important. But there is a whole range of corporate social responsibility – and other strategic reasons why we use it.” helps businesses avoid reputation Most, if not all, of the strategic damage. But real value can be added, reasons to which Reynolds refers have Reynolds says, by being a customer of to do with deriving extra value from choice. “If you’re a small company and across the whole of the supply chain. you can trade with, say, Vodafone and The first relates to the way the political get cash through an SCF programme environment has shifted over the last within 48 hours, that makes it much decade or so. “Back then,” he says, “you easier to do business with us than could push vendors as far as you could another telecom that pays in 90 days. on payment terms without any real So it’s about how we differentiate reputational damage. Large corporates ourselves as customers: anything were pushing their capital funding we can do that makes it easier or requirement onto their vendors.” preferential to do business with us Greater political, media and social gives us a competitive advantage in awareness of the finance challenges terms of access to innovation.”

“Anything we can do that helps suppliers get through liquidity issues makes our supply chain more robust”

PROCUREMENT LEADERS INSIGHT | 2 EARLY PAYMENT 101

Supply chain finance facilities that enable Third party-funded programmes use the supply chain to access cash at favourable funding provided either by a or via an rates – while at the same time the buying intermediary such as Taulia partner Greensill organisation optimises its own cash position – Capital. Typically, the buying organisation generally fall into one of two categories. has a better credit rating than the supplier. In Self-funded programmes use the effect, therefore, a finance provider can buy a buyer’s own cash, offering early payment in supplier’s invoice, confident it will be paid on return for discounts on the purchase price. the previously agreed payment terms by the The size of the discount is generally related buying organisation. The finance provider, to an agreed interest rate and the number therefore, has a lower risk than if it were to of days early that the supplier is accepting advance a loan to the supplier and expect to payment. The reduced purchasing cost is be repaid by the supplier. So now, with supply effectively a risk-free return earned on the chain finance, it can make funding available buyer’s cash and would typically be greater to the supplier at a lower cost than the than the company could get by investing supplier could get from its own bank. These in financial markets. These programmes facilities are often called ‘reverse factoring’ are usually referred to as ‘dynamic arrangements, although they are often discounting’. generically referred to as ‘supply chain finance’.

Reynolds says innovation comes and that makes our supply chain from two sources. “It comes from big more robust,” he says. “Even a small multinationals, but they’re selling to supplier, such as a manufacturer of everybody, so that doesn’t give you aerials, can have a disproportionate real competitive advantage. But with effect in terms of business continuity SMEs, if you can sign an exclusive if they go bust, so there’s a role for arrangement with them, you get access SCF in giving them access to funding to their products and this transforms that can help them through short- your competitive position. To do that, term shocks.” you have to become first choice in Andrew Wilson arrived at their beauty parade – and supply chain pharmaceutical group AstraZeneca finance is a real help in that.” from Reckitt Benckiser in 2015, Reynolds is also concerned to charged with improving the ensure the financial sustainability of company’s working capital position on the supply chain. Nortel and Motorola the payables side. Part of that strategy have both failed in the last ten years, involved standardising payment he recalls. Alcatel-Lucent, formed terms for suppliers and improving via a merger in 2006, subsequently adherence to the company’s payments went through a painful restructuring policy. “We wanted to negotiate before being acquired by Nokia in slightly longer terms,” Wilson recalls. 2016. “Anything we can do that helps A benchmarking exercise showed suppliers get through liquidity issues 75 days from receipt of invoice to makes their business more stable payment was pretty much in the

PROCUREMENT LEADERS INSIGHT | 3 middle of pharmaceutical industry network as very much a long-term practice, “So it felt like a fair place relationship, so we want to ensure that for AZ to go to,” he says. Taking a everybody in the network, including conservative interpretation of the EU’s ourselves, is doing well. It’s no good Late Payment Directive, AZ decided for us if we’re doing well but all of our that 60 days should be the common suppliers are struggling – that’s not in payment term in the region. our long-term interest.” “We’ve changed the culture of the organisation such that standard THE NEXT LEVEL terms are now the norm,” Wilson says. Wilson explains there is a much more “That doesn’t mean our procurement strategic level businesses can operate function always achieves that, but at, which is above and beyond simply we start with 60 or 75 days as our not harming the supplier base. As he objective and they have to justify sees it, there are three levels: it if they can’t achieve that [with a At the tactical level, a business particular supplier].” extends its payment terms because it The payment terms extension has so has a working capital challenge. That far freed up more than €600m on AZ’s improves the cash position of the at a time when, because company but, in an equal and opposite of debt-financed acquisitions and the manner, damages the cash position of need to fund new drug development, the supply chain. “In that scenario, we the company’s need for cash had would have come off better and the hardly ever been greater. supplier would have come off worse,” But it was important the company he says. did not take advantage of its suppliers, At an operational level, a supply Wilson says. “We see our supplier chain finance solution such as

STEPPING BACK FROM THE

Early payment programmes that depend with Vodafone’s business. “That’s something on third-party funding, rather than the a bank can’t offer.” corporate’s own cash, have traditionally At AstraZeneca, working capital been provided by banks. Such programmes leader Andrew Wilson says the pharma have a number of shortcomings, however, group had a bank-led supply chain which platforms such as Taulia’s are able finance programme. But, because the to address. compliance requirements of the ‘know Even without the finance part of the your client’ (KYC) banking regulations are offering, corporates are generally in so great, that programme was only rolled agreement that fintechs are better placed out to “a tiny number” of AZ’s suppliers – to provide platforms because technology although they did represent a relatively is their focus. Graeme Reynolds, principal larger share of the company’s total spend. finance manager, decision support, Vodafone “The contractual stuff was incredibly Procurement, says Taulia provides the telco’s burdensome to business stakeholders,” he small and medium-sized suppliers with an says. “They seemed to spend a lot of time e-invoicing platform that fits seamlessly pushing bits of paper backwards and forwards

PROCUREMENT LEADERS INSIGHT | 4 “We should start to move the discussion on about the value we’re creating and how we share that... because we all win”

reverse factoring is put in place. That across the supply chain by doing helps “neutralise” the impact of the this,” Wilson says. “Then we should lengthened payment terms, Wilson start to move the discussion on about says: “We would have still come off the value we’re creating and how we better and the supplier would be share that. For me, that’s the next broadly neutral.” step and that completely transforms But taking a strategic approach the relationship with the suppliers – to cash optimisation takes the because we can all win.” conversation from a “cost and cash” An important point to understand perspective to a focus on “value”, he is that this reduction in finance says. Because the buying organisation costs is value that is being injected is typically able to arrange for supply into the supply chain – even if the chain finance to be put in place at a buying organisation does not extend lower cost than the supplier is able to its payment terms. “Working capital get itself, t he overall amount of finance requirement should be borne where cost across the supply chain is reduced. it’s most easy to,” says Reynolds. Because the buying organisation has “Sometimes that’s Vodafone, sometimes facilitated the injection of finance that’s the supplier, sometimes it’s a into the supply chain at significantly third party such as a bank. lower cost than the supply chain “One of t he beauties of supply chain currently bears, “we create real value financing is that you’re leveraging

STEPPING BACK FROM THE BANKS

between the bank and the supplier and being implementing didn’t require an enormous involved in all sorts of conversations.” effort on their part,” Wilson says. “We Taulia partners with Greensill Capital, were providing them with a tool that which acts as an intermediary between suppliers could use if they wanted to, and the suppliers and the ultimate providers of our people’s involvement in the admin was finance, comprising a portfolio of pension almost nonexistent. Internal stakeholders funds, hedge funds, or even banks. Other were really keen on that.” corporates have even been known to invest Moreover, from the suppliers’ perspective, surplus cash in this asset class. Because of “onboarding is a very easy, seamless the structure of the arrangements – with experience – which is not always the case finance providers being effectively one step with a bank-led SCF programme,” says Chris back from the suppliers themselves – the Cauley, head of working capital solution compliance burden is a fraction of that consulting at Taulia. “Every supplier can required when dealing directly with a bank. be invited, from the one that is selling you “People in our business were very the Christmas tree one time a year to the keen that the Taulia programme we were largest, which you spend billions with.”

PROCUREMENT LEADERS INSIGHT | 5 the credit rating of the customer – Vodafone operates a few simple so our suppliers are getting access to r ules so the SCF scheme can aim to be a funding based on Vodafone’s credit cheaper source of funding than banks rating, which is cheaper than they for SME suppliers and, in particular, can get themselves. By giving the startups. “The pricing caps we use supplier access to cheaper funding, in the SCF scheme are a key tool for their costs come down, and if their ensuring we’re shifting the funding costs come down your pricing should cost onto the part of the value chain come down, so you actually get a where it can be most cheaply and cost saving – higher profit margins easily funded,” Reynolds says. and improved capital efficiency, Taulia and firms such as just by rolling out an SCF scheme, consultancy EY can help businesses even if you can’t actually improve analyse and benchmark their own your cash position [by extending working capital position and their payment terms].” supply chain’s financial health.

WHY PROCUREMENT TEAMS SHOULD STEP UP TO THE PLATE

“Procurement organisations were very cost- enterprise resource planning system, created centric in the past,” says Taulia CEO Cedric a shared service centre in Budapest and a big Bru. “Their main job was to negotiate and procurement company out in Luxembourg. reduce the cost of sourcing parts or services. The procurement company in Luxembourg It’s pretty clear the role now of procurement suddenly realised they were buying the teams is more around value. Cost is an same product from the same supplier in 16 element of that, but the value is to turn the different countries, and we had 16 different supply chain into a strategic advantage, as payment terms, 16 different prices, and well as ensuring the supply chain is healthy.” 16 different sets of warranty and support In a number of client organisations, Bru arrangements. That’s inefficient.” adds, the CPO is the champion of their Then, he adds, the procurement business working capital management initiative. “Why “found these opportunities around working do they do this? They do it because they capital and seeing that there were huge feel that the CPO has a relationship with regional differences in commercial terms.” the suppliers, they feel the CPO has the best Now, he says, Vodafone’s CPO is the “accounts intentions for the suppliers, and they feel payable champion”. The relationship that the CPO is an ideal person to drive the with Taulia is owned within treasury, but initiative,” he explains. “getting the buy-in from the vendors to use Vodafone’s own mission to unlock value it and understand it – that’s run from the from its financial supply chain got under way procurement organisation.” once the scale of the opportunity materialised That kind of cross-functional alignment during a procurement restructuring is a critical success factor, says Bru. A programme. “At the time, we had at least commonality of interests means the business 16 different markets, all run as standalone takes a strategic view of the supply chain. companies,” says Graeme Reynolds, principal “The winning companies are the ones that are finance manager, decision support, Vodafone looking at their supply chain as an ecosystem Procurement. “Then we rolled out a global and trying to create a win-win situation.

PROCUREMENT LEADERS INSIGHT | 6 “The devil is in the detail,” says Nick SMARTER, PROACTIVE FINANCE Boaro, a working capital partner Artificial intelligence technology is at EY in San Francisco. “We take a pushing early payment practices from risk-based view of the supply base traditional, passive ‘it’s there if you to see where you’re likely to be able want it’ facilities to being proactive to drive value and where you’re not management tools. By analysing going to have leverage to make an enormous transactional databases, impact. If an organisation makes up AI can alert buying organisations as 50% of a supplier’s sales, then there to the optimal timing and terms to is significant leverage, but also a suggest to suppliers that they may, lot of risk. If the buyer accounts for in fact, want to take advantage of an just 1% of the supplier’s sales, they early payment facility. Such detailed may not have a lot of leverage, and analysis of the flow of payables and should have minimal risk. We find receivables could reveal particular the most successful approach is a quarterly or monthly spikes in cash differentiated strategy to generate need, or determine the discount limits cash where you can from the supply that a supplier is prepared to accept. base and then deploy cash where For example, offering early payment needed to mitigate risk.” to a supplier in return for a price Boaro is clear buyers should not discount may not be so successful the underestimate the value of addressing week after they had a bond interest working capital needs across the payment due; offering it a few days supply chain – even when they beforehand, however, could yield account for only a small proportion of shared benefits to buyer and seller. a supplier’s revenue: “If a buyer’s early Timing is money. payment programme can offer even “Let technology show the just a small percentage of a supplier’s opportunity,” says Taulia’s Bru. revenue in liquidity, most CFOs would “We’re able to let our AI engine show jump at that opportunity.” the opportunities on both fronts –

PROCUREMENT LEADERS INSIGHT | 7 how much cash a company could more insightful understanding about unlock from their receivables and what is possible will result in even their payables, and how much cash more value being generated across they can generate from investing any the supply chain. “The starting point excess cash. It’s a supplier-by-supplier is, what is it that you are trying to analysis, leveraging the 1.5 million achieve? It’s not necessarily just about suppliers we have in our network, cash. Is it about building robustness using pattern recognition and third- into your supply chain, providing party information to give – with a access to funding for vendors if they pretty high level of precision – the need it? Is it taking cost out of your opportunity that this corporation may business by replacing expensive bank be sitting on.” finance with cheaper finance through Reynolds says organisations need SCF? Is it about diversifying your own to be clear about what they want to funding? There’s a whole range of achieve – and to appreciate that a possible strategic objectives.” n

ABOUT OUR PARTNER

Taulia delivers working capital solutions that and suppliers the chance to skyrocket their make it easy for businesses to free up cash, cash – cash to fuel economic growth all over the accelerate payments and improve supply world. It’s win-win for everybody. chain health. Since founding in 2009, we’ve envisioned a Contact: world where every business thrives by liberating Matthew Stammers cash. Today, our team of financial gamechangers VP Marketing, Taulia Inc. have built a network connecting 1.5 million 250 Montgomery St. Suite 400 San Francisco CA 94104 businesses across 168 countries and accelerated M: +1 415 900 8838 more than $80bn in early payments. W: www.taulia.com Using our state-of-the-art platform, businesses now have the option to choose when and how to pay and get paid. It sounds simple. But our painless process provides both buyers

© A Procurement Leaders publication in association PROCUREMENT LEADERS with Taulia. All rights reserved

Director of content and community: Steve Hall PERMISSIONS AND REPRINTS PLQ editor: Tim Burt Reproduction in whole or part of any photograph, Special projects editor: Andrew Sawers text or illustration without written permission from the publisher is prohibited. Due care is taken to Production editor: Peter Ellender ensure that the content of this publication is fully Art director: Salvatore Spagnuolo accurate, but the publisher and printer cannot accept liability for errors and omissions. W: www.procurementleaders.com T: +44 (0)20 7501 0530 E: [email protected]

Advertising opportunities: Matt Dias Published by: Procurement Leaders Ltd T: +44 (0)20 7819 1029 Prospero House, 241 Borough High Street, E: [email protected] London, SE1 1GA, UK

PROCUREMENT LEADERS INSIGHT | 8 INSIGHT 9

Join the cash flow revolution

Procurement Leaders