SUPPLY CHAIN MANAGEMENT
Purchasing Power: Adding Value with a Treasury-Procurement Partnership
10 August 2022 |
Tom Alford, Treasury Management International
When a business’s treasury and procurement teams collaborate, it can transform how that business builds and sustains relationships with suppliers. Andrew Burns, Senior Vice President EMEA, C2FO, explains.
With the primary responsibility of treasury being to protect against financial risk, the idea that it can operate in isolation is obsolete. Treasurers need to understand how other functions are operating to be able to grasp where those risks potentially are. The deeper treasury reaches into the organisation, the better the insight it will gain on how and when to mitigate those risks. As Burns states: “It’s essential for treasury to be proactive within the business, making connections with other team members in order to be effective.”
In the past, treasury may have seemed to be something of an enigma to other functions of the business, its presence apparent only when something went wrong. When the global financial crisis of 2008 struck, the real value of treasury to other areas of the business became obvious, opening up channels of communication.
Today, new challenges are being imposed by the fallout of the pandemic and the war in Ukraine. Treasury has maintained its position of strategic importance but Burns notes that circumstances have also seen the procurement function riding a similarly steep trajectory into the consciousness of business leaders.
Procurement has typically been perceived as a background operation that simply deals with suppliers and reduces costs. But the damage that has been inflicted on whole supply chain ecosystems by events of the past couple of years has illustrated just how existentially important procurement’s activities are to the running of a business. Without raw materials, there is no production, no sales, and no business.
While treasury is tackling rising inflation and interest rate pressure, inflation is forcing procurement teams to deal with increasing price stresses on their supply chains, and there is very little leverage with which to work. Indeed, a series of challenging circumstances have propelled treasury and procurement into positions of obvious strategic value.
“The impact of what procurement does is huge in terms of the financial risks that treasury has to manage,” says Burns. “Closer collaboration has been driven by events of the past few years because a better and more immediate understanding of the impact of those has been required.”
With board-level demands to incorporate ESG initiatives into everyday organisational activities, treasury is increasingly required to seek compliant ways of funding and investing, and procurement must similarly manage its supply chains. Of the latter, Scope 3 of the Greenhouse Gas Protocol focuses on “activities from assets not owned or controlled by the reporting organisation, but that the organisation indirectly impacts in its value chain”. This is in addition to meeting any social element of an ESG commitment.
The collective responsibility to de-risk the business forces the conversation between all the different departments, says Burns. “It requires an understanding of how each set of responsibilities affects the others, and organisations that were proactive in their response to these challenges before the current crises have fared much better than those that failed to act.” Of course, a business that has a robust understanding and response to circumstances will be in an even stronger position as the global trading environment begins to rebalance.
“In industries that demand a greater level of innovation, procurement functions have been able to educate other departments on the importance of paying attention to procurement, simply because the innovation coming out of the supply chain often drives business success,” notes Burns.
For businesses in other industries to similarly benefit, he argues that the perception needs to shift away from the obstructive ‘us and them’ mindset, towards one that recognises suppliers as part of the trading ecosystem. With the well-being of that ecosystem, and thus every participant, having a direct impact on viability of the entire business, he says treasury must work with procurement to help see, understand and mitigate the risks that potentially undermine it.
With costs rising, a buyer seeking to enhance its own cash flow simply by squeezing its suppliers with longer payment terms is forcing extra risk into its supply chain, potentially driving those suppliers out of business, warns Burns. However, the early detection of potential weak points in the supply chain, seen by procurement and shared with treasury, enables a financial solution to be brought to the table that can support participants and protect the ecosystem.
Sharing vital information is key. Data and knowledge are second only to strong relationships, says Burns. “You can supply all the facts but if your counterpart is not receptive – perhaps it is deemed a lower priority or, more often, in conflict with your own KPIs – then you will not achieve the necessary results.” Success means stripping away preconceived perceptions and understanding what exactly the other party does. For this reason, he says the starting point for closer collaboration between functions has to be based on “a driver of strategic initiatives”.
Indeed, if a top-down vision is used to push functions into collaboration, the grip of individual focus on KPIs is lessened. It will produce better results and create a more agile organisation. Functions that have been siloed in their operation may find this considerably more challenging in the current environment, Burns concedes. However, he asserts that an open mindset is necessary, with treasury flexibility needed towards procurement’s currently exceptionally difficult circumstances.
“It’s about being a support function, which is what treasury is, but approaching it in a much deeper way,” he explains. This may see treasury attending meetings with strategic suppliers alongside its procurement colleagues and helping procurement to understand the financial aspects of decisions for which they are responsible. That list may include insight into payment terms, counterparty credit risks, exposure limits, FX risk, and the impact these may have on working capital, cash flow forecasting, and debt and borrowing.
Historically, the financial support of suppliers by buyers has been dealt with through SCF programmes. “SCF has been a great tool for what it does, but in the past few years it has been exposed for its inflexibility,” comments Burns. In recent times, many businesses have struggled with cash flow. There is no quick means of generating it, particularly where there is little or no internal collaboration.
Indeed, treasury may seek a certain cash flow metric as a KPI, and push for payment terms harmonisation through SCF. But procurement typically does not possess the financial skills or the capacity to offer the depth of conversation necessary to accomplish the right results, warns Burns. Procurement can often spend months trying to engage suppliers but achieve very little, often missing its own KPIs in the process. “And that can leave a bad taste.”
With the demand for a rapid reaction to cash flow needs currently heightened by macro events, it seems that SCF, especially receivables purchasing with its demanding KYC and contractual components, “has tended to fall down”. Burns believes that procurement requires a tool that can be offered to suppliers that is both “flexible to their needs and capable of reacting to internal business KPIs as they are impacted by certain events”.
While the board may be demanding more cash flow, if the business is simultaneously being hit by huge price increases, its margins are also being reduced. Offsetting that risk is a familiar quest. If this quest is combined with the additional demands of ESG compliance, Burns says a procurement function, which may have only SCF or dynamic discounting in its toolkit, is facing “a very challenging environment”.
While SCF is a perfectly functional offering for a select band of key strategic suppliers, it cannot cater to the large number of smaller suppliers that make up the long tail of an ecosystem, says Burns. This raises questions about the impact that even a small percentage of business failures in this space could ultimately have on servicing the buyer’s own customers. In current times, that failure rate could be a lot higher and lead to longer-lasting ecosystem damage.
Conversely, dynamic discounting can deal with large volumes, but it is limited by the use of the buyer’s own balance sheet. If the cash is required, which in difficult times it probably is, supplier support is a difficult option. An inflexible tool clearly only increases risk for procurement and treasury, so what is the solution?
Meeting of minds
In the first instance, a collaborative approach enables a shared understanding from different perspectives of current and future risks and requirements and how these may be resolved. It helps form an accurate view of which suppliers need access to liquidity and which do not, which just need improved cash flow metrics to maintain their pricing, and even which can be motivated to better comply with the buyer’s ESG criteria.
It would seem that building an accurate picture of a supply chain ecosystem from a spend and risk perspective, understanding the requirements of that supplier base, and being able to provide funding optionality for those suppliers at the right time and price is the ideal. The problem is that if treasury and procurement lead a business to decide to support its supplier ecosystem, which may be thousands strong, using its own cash may not be an option in current times. What’s more, its banks may refuse to support that volume of business from a risk and administrative perspective. Contract complexity and KYC alone would put most banks off.
“If we remove these obstacles and allow for a greater proportion of suppliers across the whole supply chain to access finance, whether through their own balance sheet cash, third-party or bank finance or a hybrid, we can give businesses the speed and flexibility they are looking for to keep their supply chain ecosystems healthy,” says Burns.
An agent model, such as POBO, presents a simpler in-house approach and removes the banks’ reticence from the equation. But reaching out to thousands of suppliers, explaining the benefits and options, and securing their buy-in and ongoing participation is a logistical challenge.
Procurement’s supplier relationship managers would be unlikely to have the capacity to take this on beyond their core suppliers, and in any case, the department is unlikely to have reliable contact data for decision-makers within the long tail of smaller suppliers, notes Burns. He adds that treasury certainly would not be in a position to undertake this task. What’s more, a mass email approach to a contact database of suppliers will yield minimal results, as typically those messages will reach only salespeople.
A different approach
“This is where C2FO comes in,” says Burns. “We have the platform and, more importantly, we have the outreach capacity for local-language supplier management, globally.” C2FO’s team can speak with all of its clients’ suppliers, find the right decision-makers, and ensure all understand what financial support is available to them.
“But it’s not just about onboarding and registration,” says Burns. “When you remove all the regulatory documentation from the receivables purchase model and instead take a payment agent route, it becomes a simple click-through agreement to start the programme; that’s the easy part. It will be a success only if the business supports each relationship throughout the course of the programme.”
C2FO has a very large team of in-house support personnel, based around the world, who work with all suppliers and buyers, in their local language. Their support is available whether the need is for a sophisticated enterprise-level strategic discussion with the treasurer of a large corporate, a simple cash flow review for a smaller business, or even a gentle reminder that the programme is available to them.
“We’re in constant contact with our clients’ suppliers, capturing crucial knowledge, and enriching that insight for buyers and suppliers, helping both optimise their use of the programme,” explains Burns. “Our aim is to find the right funding solution, at the price, at the right time, for all suppliers.”
C2FO’s proactive approach, he adds, is rarely seen with a stock SCF programme, which typically receives only an annual review. “That’s too little, too late for many suppliers.”
To mitigate the risk of late intervention, in practice a C2FO team might use its understanding of an individual supplier’s changing cash flow circumstances to facilitate the uploading of more invoices or drive improvements in the speed of invoice approval with solutions such as pre-invoice approval financing. At a more strategic level, the team might collaborate on rolling out ‘always-on’ automated supplier funding, locked in at a rate for an agreed period, to cover cyclical cash flows.
As a bridge between buyer and supplier, and between procurement and treasury, C2FO creates better relationships that in turn drive improved flows of funding at rates that work for all, says Burns. In doing so, it enables other initiatives, such as ESG, to be plugged into that flow.
As supply chains are necessarily remodelled to keep pace with global developments, one of the key requirements to ensure their resilience will be a more financially supportive environment. By helping the different supply chain participants to enter into more informed dialogue on the issues that matter, Burns says the C2FO platform can launch greater collaboration and innovation. “It means businesses can move quickly and be more flexible, and now that it’s clear to most that supply chains are integral to organisational strategy, that is powerful.”