The relationship between big companies and their small suppliers has often been balanced in favour of the larger firm, with long-payment cycles often putting pressure on smaller companies. However, a number of new businesses are harnessing technology to help rebalance the relationship between suppliers and buyers, and dramatically changing the concept of supply chain management.
Financing forms an essential component of all parts of the global supply chain, but for many years a lack of coherent planning has led to inefficient and lengthy payment cycles. In a number of industries, big companies have been accused of holding smaller suppliers to ransom over the way they pay for goods, with terms stacked heavily in their favour.
One industry in particular that has come in for a good deal of criticism is the UK supermarket sector, where huge firms like Tesco have aggressively dictated terms and demanded discounts for bulk orders of goods from their relatively small suppliers. Indeed, earlier this year Tesco was investigated by the Groceries Code Adjudicator for the way apparently threatened to delay payments in order to gain discounts.
However at the same time, these bigger firms have been praised for propping up small suppliers by signing long-term contracts. Tesco, Sainsbury’s, Marks & Spencer, and Waitrose have all been praised for providing industries with long-term and secure contracts to help keep them afloat. For the supermarkets, these contracts might not make all that much financial sense, as they are inflexible.
40%
Of SMEs need more working capital
60%
Of SMEs have struggled to borrow through traditional methods
Certainly, something within the way supply chains are managed needs to change so that suppliers are able to get paid quicker, and aren’t held to ransom by their buyers. Similarly, these buyers should be able to be flexible with the way in which they allocate their money, giving them plenty of scope to react to unforeseen market conditions.
New platforms
One new platform is offering a way for suppliers to get their payments upfront, while bigger companies can get a discount for doing speedier payments. C2FO, launched in 2010 in the US by CEO Sandy Kemper, has established itself as a pioneering firm making it easier for both suppliers and businesses to get credit and meet the demands of the market.
World Finance spoke to C2FO’s London-based Senior Vice President for the EMEA region, Colin Sharp, about how the company is changing the way supply chains are financed. Sharp said that the inspiration behind launching C2FO came from Kemper’s time as a banker, where he saw how businesses had struggled to borrow funds at advantageous rates. “The seeds for this company were planted when our founder, Sandy Kemper, was a banker at a multi-billion dollar bank in the US. Over time he noticed how challenging it was for businesses to borrow money from banks at reasonable rates, even when they had large customers with very favourable borrowing rates.”
According to Sharp, Kemper also discovered that there was a disparity between the returns cash-rich companies were getting, as well as the eligibility for loans of those companies with lesser cash piles. “He also observed that companies with cash wanted better returns and that companies who needed cash had to borrow at higher rates and often did not meet loan qualifications. Like many great business concepts, the idea of C2FO was born of necessity and critical observation of a broken system.”
In order to help change the way supply chains are financed, C2FO has devised a platform that allows for discounts to be offered to buyers in return for earlier payments to suppliers. The platform works by directly connecting buyers and sellers within their own unique marketplace, said Sharp, “to facilitate the acceleration of accounts payable (AP) / receivable (AR) at a discount rate that works for both parties. Buyers can increase EBITDA and gross margin and earn a better return on short-term cash while improving the financial health of their supply chains. Suppliers can take control of their cash flow and strengthen their partnership with the buyer.”
Signing up
The reception to the product has been enthusiastic, with many leading international businesses signing up to manage their supply chains with the company. The company has already secured a number of high-profile clients, including Amazon, Pfizer, Costco Wholesale, and Walgreens. “They define the amount of cash they wish to make available for early payments to their suppliers, and the desired rate of return they seek for making early payment. Suppliers can then request early payment at a rate that is less than their alternative cost of borrowing. The utility-based pricing market lets cash flow freely between companies at the unique rate that works for both.”
Sharp says that although the platform is applicable to all industries, they are seeing the most growth in the retail, industrial, manufacturing, energy, healthcare, technology, telecom and transportation sectors. And enthusiasm for the platform has not only been from these industries, but also big investors too. Union Square Ventures, notable for its backing of tech successes Twitter and Zynga, has backed it, and Kemper has been widely praised for his innovative work by the likes of the World Bank and the US Government.
Simplicity for these systems is key, says Sharp, and C2FO has managed to keep the set-up time relatively short. “Unlike other enterprise software as a service (SAAS) solutions that can take a year or longer to implement, the C2FO technology is enabled with a simple data exchange.”
The advantage of the platform to suppliers is that they will be able to get paid early, allowing them to be less vulnerable to sudden market headwinds. “Suppliers are able to receive early payment of their approved invoices directly from their customers at a rate they control”, said Sharp. “Our ‘name your rate’ market-based approach lets buyers and suppliers discover the early payment rate that works for both parties. Suppliers ultimately have access to the lowest cost of capital to help grow their business.”
In recent years, there has been a significant increase in the need for working capital among small and medium-sized businesses. This is particularly apparent in the UK, according to C2FO, who conducted a survey in July that showed 40 percent of SMEs needed more working capital, and 60 percent of them had struggled to borrow through traditional methods because of the “expensive, inflexible or time-consuming processes involved”.
On the other hand, buyers are able to improve their balance sheets and make money from the supply chain process. “Buyers can improve the financial health of their supply chain while improving their gross margins. Plus it’s a risk-free alternative to investing short-term cash in low-interest bearing options. Only a simple data exchange is needed to allow approved invoices and vendor information to display securely in the C2FO marketplace supplier portal. The C2FO global support team offers turnkey support to activate the market, on-board and service suppliers and optimise the results”, said Sharp.
Eradicating trust issues
In recent years there has been an element of mistrust that has developed between suppliers and their buyers. However, C2FO feel that their platform can get rid of this mistrust by making the whole process of financing more transparent. “C2FO improves relationships between buyers and suppliers by collaborating on cash flow optimisation. When business partners can work together to improve key working capital metrics, at a rate that’s a win for both, there is clear partnership value. Complete transparency between the AR of suppliers and the AP of buyers makes the early payment marketplace model possible.”
While C2FO are not alone in trying to make supply chains more efficient and work for both ends of the spectrum, the company has been one of the most widely adopted platforms in this new tech space. Global accountancy giant KPMG last year signed up the business for a strategic partnership in the UK, while many other big global businesses are using the firm.
However, Sharp welcomes other firms that are also trying to bring about a change within the supply chain management process. “And yet, we don’t expect to do it alone. Today, we are leading the charge but we welcome others who create working capital markets to ensure a strengthened financial system that will impact global gross domestic product through comprehensive liberation of working capital.”
The ambitions for the firm are to continue bringing its services to new markets and sectors around the world. “Our mission is to liberate working capital”, said Sharp. “This will be made possible by expanding our global working capital marketplace and making other marketplaces possible by leveraging our technology. As more companies struggle to access third-party funding, as they find it difficult to access reasonably priced options or they just become tired of the broken system and processes, C2FO is here to help.”
