Post-Budget 2021: Supply chain finance to alleviate SME cash flow issues

This article first appeared in Forum, The Edge Malaysia Weekly, on November 23, 2020 - November 29, 2020.
Post-Budget 2021: Supply chain finance to alleviate SME cash flow issues
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Back in June, the government introduced a much-welcomed move to provide relief cash flow to small and medium enterprises (SMEs), which form an important part of the supply chain for government-linked companies (GLCs) and large corporates. The larger players were encouraged to accelerate their vendors’ payment terms, under the short-term economic recovery plan (Penjana).

I wrote an article on this topic in this Forum section (Issue 1324, June 22), suggesting that large corporates, especially GLCs, consider a supply chain finance (SCF) programme, guided by the Penjana announcement. The article shared how SCF could be a mutually beneficial solution for both the GLCs and large corporates, as well as their SME vendors (trading partners) while supporting the Penjana initiative in a sustainable way using the most common forms of SCF today, which are supplier finance (or reverse factoring) and dynamic discounting.

In Budget 2021, the government announced that Exim Bank Malaysia would provide RM300 million to drive the national supply chain finance platform, known as Jana Niaga. This is a progressive move to help alleviate the cash flow problems of SMEs that supply to the government and GLCs.

It will be implemented together with Petronas and Telekom Malaysia, before being rolled out to other GLCs, ministries and government agencies. Although there are no further details available at this time on the mechanism of Jana Niaga, this is certainly a step in the right direction to encourage wider-scale SCF adoption by corporates, SMEs and funders.

In the past, we have seen industries with more complex supply chains and financial disparities being beneficiaries of SCF programmes. Automotive, F&B, retail and fast-moving consumer goods (FMCG), telecommunications, manufacturing, logistics, electronics and pharmaceuticals are some of the many industries that have witnessed increased SCF rollouts. Malaysia now joins the list of countries where the government is actively driving and championing SCF. Similar initiatives have been introduced by governments in the UK and US, and going forward, we may see more countries promoting SCF as a stimulus measure to stabilise supply chains and improve the financial well-being of SMEs.

How to get started on your SCF programme? 

Given that SCF is still in its early days in Malaysia, corporates and GLCs alike need to spend time thinking about the “why”, or the intended objectives, of launching their own SCF programme.

For most corporates, the “why” would be to stabilise and increase the resilience of their supply chains, whereas for suppliers, the “why” is typically to get access to financing at advantageous rates. The “how” (implementation) is where things may get tricky for corporates in Malaysia given the novelty of the concept here.

As a start, GLCs and corporates must strive to design a fit-for-purpose SCF programme and choose the right SCF instrument which makes sense for their trading partners. Having a robust digital SCF platform to anchor the SCF solution to is another key factor that will enable ease of onboarding and subsequent transactions.

On the financing front, a multi-bank SCF programme is increasingly preferred to reduce the dependency risk on a few financiers and also to cover a larger number of supply chain or trading partners by having more funding providers. As such, GLCs and corporates need to think through the above considerations carefully and consult where required to improve the adoption and success rate of such programmes.

The Covid-19 pandemic has clearly shown us that companies cannot function and succeed on their own if their supply chains are not stable. The collective well-being of supply chain partners is important to keep the entire ecosystem functioning well. Granting suppliers access to advantageous financing via SCF will be the right step towards improving supplier (financial) stability and eventually benefiting the corporates by making the overall supply chain more resilient.

SCF also plays a crucial role in the implementation of a sustainability strategy. We have seen a strategic push by companies, especially in the apparel industry in the US and Europe, to meet the demands of customers that want goods manufactured in a socially responsible way while fostering stronger relationships with suppliers. These companies use SCF as a reward mechanism to drive sustainable supplier practices. Suppliers who abide by higher environmental, labour and safety standards are rewarded with access to lower-cost credit via SCF programmes.

Lessons learnt from SCF implementations globally

SCF is in its early days in Malaysia but given the wider use of SCF programmes globally, there are several key lessons Malaysian corporates can learn from them to avoid repeating costly mistakes. A few key lessons worth highlighting are:

Onboarding of trading partners. For an SCF programme to be deemed successful, corporates must strive to increase the supplier coverage under SCF. In many cases, SCF programmes are rolled out only to large key suppliers while the tail suppliers, which are smaller in size and have restricted access to financing, are left out. Deploying a focused team to drive onboarding of the smaller or tail suppliers in a more inclusive manner will improve the adoption rate.

Cost of financing. Financing rates offered to suppliers should be kept in check for the programme to gain traction. Though the credit rating and spend volume of the corporate offering of an SCF programme are a key determinant of financing rates, there are ways in which the effective rates can still be kept in check.

Payment practices. In a post-shipment SCF model, one of the most compelling benefits for suppliers is the certainty of getting paid faster. For this to happen, the organisation needs to approve the invoice quickly to trigger the SCF financing option for the supplier. This step is critical as the supplier can apply for and receive payment faster, depending on how quickly the invoice is approved by the GLC or corporate. SCF programmes fail to take off if the corporates’ procure-to-pay process is not SCF-ready, which often results in failure to approve the invoices at a reasonable time.

Cross-functional collaboration.  Our experience shows that whether it is treasury, finance, IT or procurement that is driving the SCF programme, buy-in and participation by key stakeholders and functions are critical to drive continued usage and adoption of SCF among the trading partners.

A fit-for-purpose SCF programme design. Multiple SCF instruments can be used to initiate an SCF programme, the common ones being supplier finance, dynamic discounting, distributor finance and inventory financing. Similarly, there are multiple SCF technology providers, P2P providers and financial institutions with their own SCF offerings. However, the onus is on corporates to come up with a fit-for-purpose SCF programme which makes sense for themselves and their trading partners. Announcing SCF programmes without putting sufficient thought into the programme design and which SCF instrument works best usually results in a lukewarm response from suppliers.

In conclusion, for GLCs and corporates, the intent behind rolling out this initiative must be clear and strong so that the SCF programme establishes trust and properly benefits the trading partners in the supply chain ecosystem, enabling a lasting win-win outcome for all stakeholders.

Ganesh Gunaratnam is working capital management leader at PwC Malaysia

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