Neatly describing the involvement of working capital in the supply chain is not easy, one of the simplest and most elegant ways to do this is shown in Eugenio Cavenaghi's (Director Trade and Working Capital Europe at Barclays) figure below.
Working Capital along the Supply Chain
Source & Copyright©2013 - Barclays
In a wide-ranging discussion with Barclays' Cavenaghi, who has also worked at a global consumer goods company, on working capital and financing in the supply chain, he pointed out several key features of working capital management and financing in the supply chain:
- each type of industry and corporate has a different working capital profile which evolves, nevertheless the objective remains the same: to minimise working capital tied up in the supply chain
- comparing working capital performance with peers in the same type of industry and of roughly same size is vital in determining what areas of supply chain to focus on
- banks act as a sort of financial outsourcer who is better equipped to keep the supply chain running more effectively
- supply chain finance can be used for very different goals: 1) ensuring that the supply chain remain resilient by supporting the suppliers with liquidity problems, and 2) reducing their bank costs by generating income for the bank financing the SCF programme or extending their DPO to reduce overall working capital in the supply chain
- more companies see the opportunities are planning to exploit receivables as an asset class which can follow the dynamics of the business and because, if see receivables without recourse, they come off the balance sheet replacing a working capital element with pure cash
- risk mitigation is another driver for receivables discounting in many companies, e.g. selling receivables in Southern Europe
- more companies are selling receivables to introduce some stability in their cash flow planning
- the 'just-in-time operations' way of working has effectively replaced inventories with cash because companies need to have cash available to be able to specific issues, e.g. if there is an issue with a particular type of equipment which need to be fixed immediately, i.e. 'just-in-time' has been replaced by 'just-in-case' cash management
- distributor finance makes sense, particularly in emerging market such as the Middle East & Africa, where there is a strong manufacturer with a network of small distributors who are highly dependent on their product and the supplier can give the bank some form of guarantee.
Cavenaghi expects increased growth for all types of financing in the supply chains world-wide, particularly in "in the large corporate segments in Europe. Treasuries of international companies have now a global, real-time view of their payables and receivables and are keen to manage them actively."
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