Supply chain finance: New finance models for a stronger chain

Not only is supply chain finance an instrument for solving chain partners’ financial problems, but it is also a powerful tool for strengthening the entire supply chain. Especially now that banks are far from generous with their lending, supply chain finance is an interesting way of still being able to pay for the company’s activities. This is a potentially lucrative development for banks too, since it concerns short-term financial arrangements which involve relatively few risks. The question is, are companies and banks ready for it?

By Marcel te Lindert

In July 2012, ASML – manufacturer of machines used in the production of integrated circuits or ‘chips’ – surprised the financial world by announcing that Intel was to take a 15 percent minority share in the company. Intel paid EUR2.5 billion for the privilege, and invested an additional EUR800 million or so in ASML’s R&D activities. Less than two months after Intel, TSMC and Samsung – two other ASML customers – followed suit by purchasing minority shares in ASML of 5 and 3 percent respectively and investing almost EUR300 million apiece in R&D. ASML said that it saw this as a way of speeding up its technological developments: thanks to Samsung’s investment alone, the Veldhoven-based company was able to hire between 1,000 and 1,200 extra workers.

Michiel Steeman from Involvation calls this investment by the three chip manufacturers in one of their key suppliers a prime example of supply chain finance. He believes that supply chain finance is about creating financial arrangements between two links in the chain in such a way that financial performance improves or the level of risk declines. “Companies can use finance models to really optimise and strengthen their supply chain,” states Steeman, who left the financial world behind him a year ago after a ten-year career at ING to concentrate on supply chain finance. He is working on a PhD in this subject at Nyenrode Business University and, as partner at consultancy firm Involvation, is initiator of The Cool Connection, a management game based around supply chain finance. “Supply chain finance developments tend to be initiated on the SCM side rather than the finance side. The SCM side is where the need for finance models lies, and where product development begins,” explains Steeman.

Reverse factoring

A common form of supply chain finance is reverse factoring. This concept has been developed to bridge the gap between when a supplier sends an invoice and when the customer makes payment. Customers pay as late as possible in order to hold on to the working capital as long as they can. However, that has a negative impact on their suppliers’ working capital and can even cause them to get into financial difficulties. “Many suppliers are treated disgracefully. They simply have to wait and see whether their invoice will be paid at all. And if it isn’t, because it has been rejected internally for instance, they are often expected to chase it up themselves,” says Joaquin Jiménez Krijgsman, head of supply chain finance at ING.

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