Sustaining the supply chain
Supply chain finance models serve as an optimal way for Middle East’s retail suppliers to gain quicker and more flexible access to working capital
On 10 February, a live webinar hosted by MEED and Mashreq discussed opportunities and challenges facing retail suppliers raising capital. The summary below captures key highlights from the broadcast.
While e-commerce is creating fantastic new opportunities for retailers, it is also introducing major new challenges. Especially for manufacturers and producers.
To meet the just-in-time delivery expectations of online shoppers, retail suppliers must lock up large amounts vital working capital in big inventory stockpiles. The loss of liquidity puts significant strain of company finances. Covid-19 has significantly amplified the risk.
For many suppliers, access to working capital has become a major challenge, and with interest rates set to rise sharply over 2022 and 2023 to combat inflation, the cost of capital is rising as the financial risk grows for producers.
“There is an increasing pressure to convert cash across all of the players in the value chain,” says JD Reyes, finance director for global emerging markets at US producer General Mills. “Everyone is trying to balance on a tightrope.”
“For years, finance people have typically focused their time and resources on managing income statements, ensuring they grow their revenues and optimise profitability,” says Reyes. “The current environment has underlined why it is equally important to focus on the balance sheet, and particularly working capital and cash.”
“There is a need for a step change in the way we manage cash, working capital and the way we work together across the value chain, to ensure everyone wins.”
Where retail businesses in the past looked to raise capital to finance expansion opportunities, capital is now needed just to survive.
“Profitability is not what it used to be, and everyone is coming under pressure,” says PwC’s senior manager of working capital and operational restructuring, Dan Georgescu. “This impacts your balance sheet, because collections are not what they used to be, inventories are rising, and other global risks are in the play.”
Georgescu identifies two opportunities for retailers to ease the pressure on their suppliers. The first is to analyse sales data patterns to provide greater visibility of the expected pipeline of future orders. The second is to by making use of tech-based supply chain finance models.
Supply chain finance describes a system where buying organisations (in this case retailers) enable suppliers to receive early payment for invoices from banks using an online platform to facilitate the process efficiently. In doing so, the buyers pre-approve suppliers’ invoices, thereby unlocking bank financing for the supplier. By automating transactions and invoice approval, suppliers benefit from faster access to payments due, while buyers get more time to pay off their balance.
Used properly, supply chain finance provides access lower-cost finance, as well as greater flexibility on how and when suppliers access that liquidity.
Georgescu says that the Middle East has been slow to adopt supply chain finance.
“It wasn’t so popular until a while ago,” he says. “Because there is a misunderstanding around how it gets classified from a company perspective – will it be a debt for the balance sheet? Or is it an accounts payable?”
“Another thing is that for a supplier to benefit from the finance, it needs to raise and submit an invoice quite quickly,” he says.
“There is still room to improve,” says Georgescu. “We are seeing fintechs entering the market alongside banks, so competition is increasing, and the variety of products is increasing. So it is definitely improving.”
“The other change is the need for greater visibility,” says Georgescu. “If this visibility isn’t there, then everyone’s just making guesses and building in safety for risks and adding to costs.”
Handling over 15,000+ stock keeping units (SKUs) daily in its larger stores, and with a consistent demand for fresh products, UAE-based retailer Choithrams felt ramifications of rising costs and delays across its value chain.
What once constituted 5-6 per cent of total costs, has now more than tripled in the past year.
“These days, we talk more about the cost of the supply chain, than the price of the product,” says Abhishek Mundra, chief financial officer at Choithrams.
The increase is primarily attributed to the cost of freight, and is further exacerbated if any indirect costs – storage capacity or delivery delays – are incurred.
During the turbulence of the Covid-19 pandemic, the retailer began to look more seriously into supply chain finance solutions to help reduce business costs and improve efficiency for its suppliers.
“If done in a systematic way through the use of technology, it can bring a very powerful change throughout the ecosystem,” says Mundra. “The most important thing is to provide a platform to your suppliers and make it as automated as possible.”
Choithrams partnered with a local bank to offer a unified solution to its suppliers across its existing payment platform. No inconvenience was caused to the suppliers in terms of additional signoffs. Furthermore, visibility and transparency were improved via the dashboard.
“It introduced flexibility on the payments, while also reducing the timelines and certain operational costs,” says Mundra.
Growing supply chain finance
The funding gap for smaller firms is still quite significant, says Victor Penna, Co-Head of Global Transaction Banking at Mashreq Bank.
“There have been different programmes set up in different emirates across the UAE to help fund SMEs, but this is relatively underdeveloped compared to other regions,” he says.
Nearshoring and the development of domestic industries in the Middle East is enabling greater opportunities to bring in supply chain finance models.
“There is still a long way to go and an opportunity to do it more broadly,” says Penna. “There is also an opportunity for fintechs to play in this space, making it easier for banks to deal with the many smaller suppliers.”
It is the suppliers that benefit from the cash at discount and retailers that take on the risk, which provides banks with greater surety on payments.
“Many smaller suppliers may not be strong in terms of their balance sheet and thus cannot take on the higher credit risk,” says Penna. “Through supply chain finance models, their cost of raising capital comes down. It’s a win-win for all parties in the supply chain.”