Background for a SCF solution

Supply Chain Finance is a very exciting area, which is an integration of technology solutions and services that links buyers, their suppliers, and financing providers; optimizing the visibility, financing cost, availability, and delivery of cash. It is the next wave of cost optimization for organizations. More than two-thirds of companies are investigating or putting in place the Supply Chain Finance programs to improve financial metrics and lower end-to-end costs. New innovations in trade finance, supplier payment terms, and invoice automation are helping early adopters gain a strategic advantage. Automating the Financial supply chain and employing networked financial services can reduce cost of capital and create a beneficial ecosystem. The overall goal of SCF is to optimize Working Capital throughout the end-to-end supply chain for both buyers and sellers.

The current scenario

In an increasingly global marketplace, it is more challenging than ever for corporations to sustain their competitive edge. Persistent tight credit conditions have made liquidity scarce. Though Corporations are in a position to extend payment terms for their supply chain, suppliers are however finding it difficult or impossible to accommodate the requirement. In a typical buyer-seller scenario, due to the inability of tracking shipment of orders, buyers cannot accurately predict when shipments will arrive or payments are due. To overcome this situation, buyers are holding higher levels of inventory to prevent outages and cash to ensure funding is available to meet payment obligations. Thus pressurizing sellers for longer payment terms has increased prices, severed relationships with sellers, and decreased the stability of the buyers' supplier base.

On the other hand, sellers are also equally affected by this scenario, wherein it makes it difficult for them to obtain timely payments. Typically, they might need to wait atleast 45 to 50 days for payment and sometimes as long as 90 to 120 days, which really makes the seller’s business unviable and non-profitable. Due to their geographical constraints, sellers typically lack access to reasonably priced short-term financing. Added to that, the pressure from buyers to stretch the payment terms only aggravates the situation, which often results in higher prices or an inability to continue as a seller. The net result is a financially unstable and higher-risk supply base.

Need for an SCF solution

From the above backdrop, Tangent had extensively conducted market research in Supply Chain Finance domain by performing the systems study of various banks, financial institutions and comprehending the work flow within which a banking sector operates.

A typical work flow integrates a bank with its sellers and buyers in executing financial transactions, wherein the bank forms the core entity within this framework.   Based on our comprehensive study, the following observations were noted down which are outlined as follows:

• A Supply Chain Finance model need to be built around financing transactions and not companies. Just as the physical supply chain made rapid strides in visibility, SCF players need to do it on a financial side. Supply Chain Finance (SCF) improves the twin challenges of visibility and certainty. It improves the confidence of third-party financial institutions and banks (FI’s), decreasing risk – reducing cost and increasing availability – of cash in supply chain.
• End to end financing options – such as raw material or production financing, need to be done across the supply chain. Today, the market focus is around post shipment finance executed when goods have been shipped and invoices have been presented.
• Banks/Funding Agents who capture the Supply Chain Finance opportunity will transform their businesses into ones that align with, and permeate into, their customers’ quickly evolving supply chain strategies.

In tune with the above objectives, Tangent came out with an SCF solution namely CashCow+, addressed to the banking and finance domain, which is an invoice capital solution. One of the core objectives of an SCF solution is to strengthen buyer/supplier relationships in addition to improving the working capital finance.

CashCow+ - an overview

CashCow+ is a web based supply chain finance application, which acts as an interface between buyers, sellers and the funding agent/banker completing the trade transaction as a win-win-win deal for all the parties. All the three parties involved can transact online on a single platform. The application is built on a robust GenX - a Flexible engine, which is built to support multiple industry specific solutions.

How does it work?

• Supplier ships the goods to the buyer
• Bank receives invoice validation and payment information from Buyer
• Bank executes either of the two tasks as per the supplier’s instructions:

• Purchase eligible invoices offered for sale

• Post eligible invoices available for sale to CashCow+ and await supplier offers to be communicated electronically.

• Bank issues payment to Supplier
• Supplier’s bank receives payment from source bank
• Buyer sends payment to Bank at normal terms.

The above process involving all the three entities of the CashCow+ application is depicted diagrammatically as follows:

 

Conclusion

To conclude, companies are now proactively turning into applying financing techniques to improve their supply chain efficiency without damaging essential suppliers in the chain. As CashCow+ has been acknowledged as a cost-effective and a secured product for SCF transactions, banks and funding agents are becoming active in adopting this product quickly and Tangent is making rapid inroads into this domain, including providing after sales support for existing customers.