A Cautionary Tale Against a Single-Funder Approach to Supply Chain Finance Strategy

by Tom Roberts 0

If you’re familiar with supply chain finance, you know thatproponents fall into one of two categories – those that choose a single, largefinancial institution to fund their program, and those that deem that path fartoo risky. But, before we get into the reasons of why a single-funder approachis ill advised, it’s important to acknowledge why companies are drawn to it atall.

Despite the billions of dollars spent on supply chainmanagement and logistics innovation, today’s global supply chains are plaguedby inefficiencies that erode profits. This is due in part to the sheercomplexity of managing hundreds (or thousands) of suppliers across multiplegeographies, and all of the process, financial and regulatory nuances thatentails.

Also weighing heavily in this complicated mix of dynamics isthe need to improve cash flow and optimize working capital. Regardless of thechallenges facing the supply chain, companies still need to innovate, competeand invest in the long and short-term success of their business. Supply chainfinance gives them an opportunity to do just that. By extending supplierpayment terms, companies can optimize cash outflow – while enabling suppliersto trade their invoices with a financial institution that can providenear-immediate payment.

It’s a win-win for companies and suppliers, but establishinga supply chain finance program is also a significant undertaking just like anyother highly strategic business initiative. It requires a complex orchestrationof procurement, IT, finance and funder stakeholders – all of which have theirown business and departmental objectives and requirements. On the surface, askinga single, large financial institution to fund an entire program seems like agood way to simplify the process and reduce the program management burden.

Except that it’s not. Not by a long shot.

A single source of funding, no matter how large, cannot meetthe financial requirements of a global supply chain. There is no oneinstitution that can fund all currencies and jurisdictions. And, above allelse, there is no single funder that can accomplish the aforementionedrequirements without introducing considerable and untenable risk.

Many of the very financial institutions that claim to beable to fund supply chain finance programs have had struggles in thepost-financial crisis market landscape. Examples: Citigroup, Royal Bank ofScotland and Deutsche Bank.

Amid a soft global economy in 2014, Citigroupbegan exiting 11 countries (many concentrated in a single geography). RBS made a similar movein 2015 as it wound down cash management and trade services in 25 of the 38countries it serves. Very recently , Deutsche Bank’s share price plummetedfollowing reports that several key hedge funds had started withdrawing funds toreduce their exposure. This event was precipitated by the Department ofJustice’s recent $14 billion fine for the bank’s activities leading up to thefinancial crisis.

In regards to Deutsche Bank, the real concern isn’t thecorrections to Deutsche Bank’s position; it’s the aftershocks that could befelt by dozens of other large, multi-national banks across the globe. Earlierthis summer, the IMF remarked that Deutsche Bank “appears to be the mostimportant net contributor to systemic risks” in the global banking system.

These events in the context of global supply chain financecould have serious implications for companies that elect to employ asingle-funder approach. What happens when your funder can no longer servesuppliers within a certain market or entire geographical area? Cutting offfunding for any swath of suppliers – broad or narrow – not only weakens programperformance, it can have a lasting impact on the suppliers’ health as theyacclimate to a new standard of cash flow (which, in turn, can increase risk inthe company’s supply chain). And bringing in new funding sources on a one-offbasis is no less risky.

This is the single most important reason why companiesshould take a multi-funder approach to supply chain finance. Not only is itvirtually impossible for one bank to fund all jurisdictions, it’s dangerous atbest and disastrous at worst. Multiple funders prevent a company’s supply chainfinance program from being held hostage to the health and strategic imperativesof one single financial institution. It ensures that all currency andjurisdictions are well funded and also increases price competition so thatcompanies and suppliers can optimize working capital to full potential.

Supply chain finance helps companies unlock millions (insome cases, billions) of dollars of working capital trapped in their supplychains. A multi-funder strategy ensures and sustains this impact whileeliminating many of the single-funder strategy risks that could destabilizeprogram success.