The COVID19 pandemic created a seismic shift in the Indian economy, shutting down businesses for months and dramatically affecting the financial health of a swathe of India’s businesses.
Riddled with supply and demand side uncertainty, every business went into cash conservation mode during the lockdown, but as companies restart their operations, designing an optimal working capital management strategy has become paramount for all. Suspending or delaying vendor payments is not a long-term viable solution, and collecting from customers is harder than ever before.
In such times, while healthier corporates have raised fresh capital and opened new credit lines to prepare for the worst, new credit for relatively weaker and often smaller businesses has been hard to come by, as they struggle to meet their existing loan obligations, pushing many companies into a fight for survival.
Amidst all of this, dynamic vendor financing has emerged as an increasingly potent avenue to unlock working capital, going beyond the traditional models of bank led supply chain financing.
Supply chains are very much a key strategic asset for many organizations, built over years. A recent report from EY indicates excess of Rs. 4 lakh crore of working capital trapped in India’s supply chains. This number has likely gone up further in the last 6 months. In the wake of the disruption from the pandemic, many companies have looked at creating win-win arrangements from their supply chain, attempting to simultaneously solve a 2-part challenge:
Cash-rich companies are looking at their supply chains as an investment vehicle to achieve superior risk-free returns to the sub 6% ROIs currently achieved by most corporate treasuries.
However, leveraging existing supply chains is easier said than done. Vendor finance programs have existed in the west and in India for many years. A PWC Report in fact expects Asia to be the fastest growing region for Supply Chain finance in the near future.
An SCF program done right can ensure a financially healthy supply chain and lead to 300 bps increase in EBITDA or improve overall organization’s cash conversion cycle by up to 45 days at no cost. Yet, the promise remains largely unfulfilled till date. Programs in India have faced numerous challenges, and our qualitative research has surfaced four key impediments to successful implementation:
Over the last 3 years, working with leading corporates on implementing dynamic vendor finance, we’ve identified 6 key imperatives to deliver value:
The first four imperatives above are structural – and require, in essence, a working capital exchange. An exchange allows transactional separation – a buyer can deploy working capital (supply) independently of supplier access of working capital (demand). This allows both parties to optimize their half of the equation – supply and demand, and let the exchange bring the two pieces together seamlessly, without manual negotiations.
The next two imperatives are operational – without catering to them, even the most perfectly designed program would not succeed. In fact, a recent McKinsey study ranks “Ease of onboarding suppliers” and “support and education for procurement teams and suppliers” as the two most cited success factors for a supply chain finance program. These two imperatives are also why global platforms may not necessarily be the most optimal choice for Indian supply chains. In fact, no two supply chains are the same and a bespoke solution is required for truly implementing a successful supply chain financing program. Everything from vendor onboarding to regulatory compliance to structural flexibility (such as managing late payments or disputes, recourse structure) need to be built in at platform level for a uniquely Indian context.
In this post-covid era, enabling access to necessary liquidity is a need of the hour and responsible corporates are increasingly setting up programs to support their supply chain, which is the only viable way for SMEs to access affordable working capital in these times of adversity.
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