Supply Excellence

Credit Crisis Collaboration: The Best Cash Flow Alternative

October 7th, 2008 · by Drew Hofler · No Comments · best practices, financial value chain, mid-market/growing enterprise, sourcing, supply management, supply risk

While it may not have the news-cycle cachet of a $700 Billion bailout, or the immediate voyeuristic drawing power of the battle of the banking titans (i.e. Wells/Citi/Wachovia), the struggles that suppliers are facing finding cash flow and short-term credit can have immediate and long-term impact on supply chains if those suppliers fail or are forced to raise prices to cover increasing costs of alternative sources of capital.

A recent BusinessWeek piece summed up the situation with the story of Drew Greenblatt, owner of a profitable steel wire company. Drew asked his bank for a $175k increase in his line of credit and was told by his bank that he’d have to put up the same in a certificate of deposit (If only they’d asked for 20% of that strict standard for home buyers, right?). As Greenblatt pointed out, “when banks can’t service guys like me, how are they doing it for the other guys?”

The answer: They’re not.

Particularly with small to med-sized suppliers (SME) and those with longer cash conversion cycles - the life-blood of many supply chains - cash flow is the most immediate risk to an otherwise healthy business model in the current environment. The recent credit-crisis survey by AFP (subscription required) reveals that up to 63% of companies with under $1B in revenues depend on secured and unsecured lines of credit for their short term cash needs….unfortunately, as we have seen over the past year, and especially the past few weeks, this is exactly the type of credit that is becoming less and less available.

But what is a supplier to do? As one article out of the UK puts it, “such a sharp and unanticipated cash drought has made financial directors look to more tangible sources of financing for the business.” So let’s take a look at a couple of the primary categories of alternative financing suppliers have to choose from and what that may mean to buyers:

Traditional Bank Offerings: ‘nuff said! The traditional bank offerings of secured and unsecured lines of credit and other such sources of short-term cash are exactly what suppliers are seeing dry up. And if they aren’t drying up, they are either becoming more restrictive in their covenants, or more expensive in their rates.

Non-Bank Alternatives: Suppliers who can no longer access what used to be relatively cheap sources of capital can often increase their cash flow by accepting Pcards or selling their Accounts Receivables to traditional factoring companies. But such cash flow does not come without a price. Pcards generally charge a 2%-2.5% fee, which can amount to a 24%-36% annualized cost of capital (a primary reason why Pcards have traditionally not been used for higher $ spend in better times). Factoring also enables suppliers to access the value of their receivables, but depending on the particular “factors”, this too can come at a high price and usually only advances a portion of the receivable’s value. Certainly not ideal, but to suppliers without other alternatives, it does keep the cash flowing.

Buyer-Supplier Collaboration: As one community banker said in BusinessWeek last week: “When there’s disruption in the marketplace, that creates opportunities for banks like ours that have lots of liquidity.” This holds true also for Buyers with strong cash positions as the credit crunch creates an opportunity for them to utilize that cash lucratively and become “the bank” for their supply chain. Giants like GE and Dell have been doing this for years, using their own cash to finance supplier early payment at rates that are far less expensive to suppliers than alternative forms of financing, but at the same time are far more profitable to themselves than alternative short-term cash investments.

If a buyer has the cash sitting somewhere earning .5% (Treasuries) or 2%-3% (money markets), why wouldn’t they offer early payment to a supplier in exchange for a discount equaling 10-16% APR? For a supplier paying 20% or more, and in vital need of cash flow, that’s a bargain. And it’s a win-win for both parties…particularly when such collaboration is facilitated by network technology which allows the thousands of individual supplier early payment ‘conversations’ to scale for the buyer and gives the supplier the ability to access early payment at the click of a button.

If buyers and suppliers fail to get this situation under control, the crumbling of supply chains - and their repercussions in employment, tax revenues and GDP - could be the next shoe to fall in the ever widening financial meltdown.

I recently contributed to a white paper title Strategies for High-Yield Working Capital in Today’s Economic Environment that dives further into supply chain finance. You can download a copy of the paper here if you’d like to learn more about your options, such as Discounting and Third-Party Finance.

Drew Hofler is the Senior Manager responsible for Ariba’s Financial Solutions suite of products. In addition to extensive experience in banking and financial services, Drew is ACH Accredited and held Series 7 & 63 NASD certifications.

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“Greening” the US Ports

October 6th, 2008 · by Rachel Rutkoski · No Comments · oil/energy, sourcing, supply management

A recent Newsweek article showcased the “greening” of the Los Angeles and Long Beach ports. Both ports have a long history of polluting the air, water and citizens’ lungs in the area. In fact, their current clean up efforts were sparked by a combination of lawsuits, shockingly high local cancer rates and public outcry.

But in their defense, port officials in LA and the LBC are taking their new found environmentalism very seriously - so much so that they are literally paying for container ships to use cleaner marine diesel instead of cheaper bunker fuel (at a difference of $650 per ton). They’re also using the first “Prius of the Sea” hybrid tugboat, electric trucks and plug-in ships, so engines don’t need to run auxiliary diesel engines while docked in port for up to 3 days, in order to cut emissions in half by 2012.

And since most cargo is offloaded onto short-haul trucks, which transport the containers to distribution centers, tightening up the trucks’ emission standards is key component as well. October 1st was the first day of a new rule barring pre-1989 trucks from the ports and an even stricter diesel rule takes effect in 2012.

These green port initiatives represent commendable political will, noble goals and eventually perhaps even costs savings (depending on economies of scale for new technology and what direction oil prices hit). Although they lead the way, LA and Long Beach are not alone in their green port initiatives. Up and down the east and west coasts, other ports are slowly moving towards more green operations.

So where does all of this leave transportation buyers and companies that utilize US ports in their transportation mix?

Well the good news is that the government has picked up most of the tab to date. In California’s case, when a bill to attach a per container charge of $30 hit the Governor’s desk in 2006, he vetoed it (the price a state pays to keep their lucrative ports competitive I suppose). A few individual shippers, such as Maersk, have also voluntarily cleaned up their fleets and rolled out some of the new technology.

All told, the impact right now on transportation pricing is minimal. And when you also consider that companies can include shipping through “greener” ports among their own sustainability programs, it adds another positive aspect. And with the competitive nature of shipping contracts, if/when any surcharges or fees make their way into your shippers’ proposals, it may be possible to push back on them just like you should for any accessorial charges.

Rachel Rutkoski is a Category Manager for Transportation and Logistics in Ariba’s Global Services Organization. Rachel is recognized by the Institute for Supply Management as a Certified Professional in Supply Management (C.P.S.M.) and has several years experience as a supply chain and transportation analyst in Fortune 500 companies.

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