As well as optimising the physical supply chain, there is a growing need for optimisation of the corresponding financial flows. Supply Chain Finance is a promising approach for optimising financial flows in the chain. Through Supply Chain Finance, the physical flow of goods is integrated with information and monetary flows. This offers financial benefits for the entire food chain. For optimal application of Supply Chain Finance, collaboration between all parties in the chain is important.
Commissioned by the Rotterdam Food Cluster, Sam Schulze, Masterstudent of Supply Chain Management at the Erasmus University, researched the possibilities of Supply Chain Finance within the food sector. By integrating the financial flows with the physical flows, parties can work together and also benefit from it together, enabling retailers, wholesalers and growers to improve liquidity and cash flow. The financial position of companies are improved because risks are spread. Supply Chain Finance takes place in many other sectors. Logistics companies within the fruit and vegetable chain also play a crucial role; they can offer financial services to customers in order to create a competitive advantage thereby improving their position in the food chain. Outlined below are the financial challenges within the food sector, but also the opportunities and benefits of Supply Chain Finance.
Advantages of Supply Chain Finance
Supply Chain Finance improves the financial performance of individual companies in the food chain and the supply chain in general. Supply Chain Finance enables buyers to pay later and suppliers to be paid earlier. The main benefits are:
- Quicker payments
- Less financing
- More efficient and cheaper payment processes
- The option of providing value-adding services to both suppliers and buyers
- More predictable cash flows
- Stronger relationships with suppliers and buyers
- Improved working capital and liquidity position
- Positive brand image
Sam Schulze’s research into Supply Chain Finance in the food sector has revealed the following financial challenges:
- Many companies have to deal with retailer’s long payment terms, while suppliers must be paid in advance.
- Supply Chain Finance is stil an unknown concept.
- A standard payment process is lacking, which means that cash flows are unpredictable and payments sometimes take longer.
Two forms of Supply Chain Finance
Possible forms of Supply Chain Finance are:
- Reverse factoring: where an agreement is reached between seller, buyer and financial service provider. The financial service provider pays the supplier’s invoice with a discount (1-2%). The buyer then pays the financial service provider according to the payment term.
- Inventory financing: financing is hereby requested for products that are stored or are in transit. The more information available about the status, quantity and location of the goods, the more willing financial institutions will be to invest.
If you’d like to know more or are wondering what Supply Chain Finance could do for you. Please contact Adriaan van der Giessen.