Supply chain finance (SCF) is an important lever for managing a company’s working capital requirements. It also ensures the suppliers are paid on or before time.
An effective working capital management system aims to increase the accounts payable period (DPO) while reducing the accounts receivable period (DSO) and inventory retention time (DIH). A key metric in working capital management is the “cash conversion cycle”. Procurement teams are essential in managing the payment terms and inbound inventories with suppliers.
A very common SCF instrument is reverse factoring, a method by which companies pay their suppliers without using their own working capital. Financial institutions -- ranging from traditional banks to fintechs -- enable this trade funding activity by acting as the intermediary between Procurement Organizations and Suppliers.
The demand for SCF spiked due to the ongoing COVID-19 pandemic as companies across the globe sought to improve liquidity -- while industry experts have raised concerns over aggressive funding practices. Naturally, the question arose as to whether the procurement function should generally be concerned about the recent collapse of a high-profile SCF intermediary, Greensill Capital.
Beroe posed this question to Erik Hofmann, Professor and Director, Institute of Supply Chain Management, University of St.Gallen, Switzerland. Erik is a supply chain specialist and has written several books on Operations Management and SCF.