During a period of industrial slowdown, cash-flow can make or break a business.
For the U.S. and UK manufacturing sectors, cash management has soared up the agenda in recent times. Both geographies are unquestionably experiencing a squeeze, and various commentators (including The Financial Times) noted the stateside decline is mirrored by a similar slowdown in the UK. But because the manufacturing sector is still recognized as a sensitive barometer of wider economic health, at both a micro and macro level it is critical that manufacturing companies manage their cash carefully to weather the current storm.
The outlook is positive. Prudent business management is something the sector has proven itself to be rather good at in recent years.
Over the last decade, almost every area of a manufacturer’s most critical business process – the supply chain - has been subject to strict efficiency measures. It could be argued that the transition to “just in time” manufacturing, coupled with years of relentless cost cutting and other efficiency savings, have squeezed the supply chain to the limit. Corporate buyers have forced down prices to the point where suppliers’ margins are pared to the bone; and logistical (physical) processes have been streamlined to reach maximum efficiency. In reality, there is very little room for further price reduction and efficiency improvement.
In fact, as the sector tightens its belt still further and concerns over cash-flow move to the forefront of manufacturers’ minds, the supply chain has become a battleground. In many cases, we see unproductive tugs-of-war taking place between buyers and suppliers over payment terms. On the one side, buyers are seeking extended payment terms and lower prices; on the other, suppliers are demanding timely payment. If payment terms are extended, the buyer’s cash-flow situation improves, but at the expense of their suppliers, whose cash-flow suffers, leaving them in a vulnerable position. Of course, since a continuous supply of goods is essential to the buyer’s business, then the buyer is also, in effect, threatening its own business by putting pressure on its suppliers.
On the other hand, if the buyer shortens payment terms, it improves the cash-flow situation for the supplier but the buyer loses out. In effect, it’s a battle with no winner.
So how can the manufacturing sectors across the U.S. and Europe achieve further efficiency without jeopardizing the very stability of essential supply chains? The answer lies in the financial management of the supply chain.
This area has recently come under the spotlight as offering the potential to make significant improvements for both buyers and suppliers alike. The U.S. market is already reasonably well advanced with the implementation of a new breed of supply chain financing techniques, but there remains significant opportunities for further take-up and awareness among manufacturers and other industries.
Europe, too, is beginning to realize the great demand for new funding tools. A new research report that Demica will publish in the New Year investigates this demand more closely. Demica’s research found that a large majority – over 70 percent - of large European companies are actively trying to extend the payment terms offered by their suppliers, in a bid to alleviate the working capital pressures they find themselves under. Furthermore, the executives who were interviewed pinpointed manufacturing as one of the top five industry sectors that can gain the greatest benefit from adopting supply chain financing, with buyer-supplier relationships in this sector seen to be under the greatest strain.
Supply chain financing programs ease the tension between the conflicting demands of buyers and suppliers by enabling buyers to get extended terms (for example, from 30 to 90 days) from their suppliers, and suppliers to receive payment as early as days following invoice approval. This process is facilitated by the financier (bank), who provides funding to the suppliers. The process hinges on the fact that, when making credit assessments, the financier looks to the buyer – the entity obliged to pay the invoices – rather than the supplier. Such programs are underpinned by a sophisticated reporting technology platform that allows invoices to be viewed by buyer, lender and supplier in real-time, streamlining the execution of transactions.
U.S. and European banks have responded very positively to the new corporate demand for supply chain finance and many are already offering such programs. At the very time when manufacturers urgently need to improve their cash-flow and consolidate critical supplier relationships, they have the opportunity of harnessing these new tools to transform tugs-of-war with suppliers into a situation where buyers and suppliers begin to pull together in the same direction. For the manufacturing sector in the U.S. and Europe, and the economy as a whole, supply chain finance is a tool that can make a significant contribution to softening the blow of a sector dip.
Barry Wood is a senior vice president at Demica, a consulting and advisory firm.