Supplier onboarding in supply chain finance

July 2019

How to safely navigate the minefield between myths, half-truths, and nonsense

In my meetings with financial decision-makers like Corporate Treasurers or Financial Controllers, their questions – sooner rather than later – are directed at the most significant factor for the success of each Supply Chain Finance initiative: the supplier onboarding process. This comes as no surprise since most Finance Executives lack adequate experience in the field of supplier management. Such a knowledge gap, however, manifests itself in an unfortunate manner: a community in which numerous myths, half-truths and sometimes even plain nonsense are propagated regarding the topic of supplier onboarding. Accordingly, I feel the need to share with you the most common misconceptions I regularly encounter.

“Can CRX Markets guarantee a supplier onboarding success rate of 50%+ within the first 3 months of our reverse factoring program?” “Would your solution allow us to fully outsource all supplier onboarding activities related to our supplier finance program?” “Can you perform the onboarding of a supplier in less than 10 seconds?” “Can CRX Markets apply predictive analytics to determine which terms and conditions our suppliers will accept?”

These types of questions represent an underlying lack of clarity regarding supplier onboarding processes, relevant technology adaption curves and Working Capital Financing platforms themselves.

Let´s dive into the different types of supply chain finance models to understand how supplier onboarding really works, in order to clarify the misconceptions represented by these sorts of questions.

Supplier onboarding in reverse factoring

In a conventional Reverse Factoring program, a corporate aims to re-negotiate and harmonize the existing payment terms with its suppliers. They are bilaterally negotiated and documented. The third-party provider – the platform – is not directly involved in this process nor do they manage it at any given time. Consequently, a trusted business partner would never provide any kind of guarantee for success. For the same reason, one-hundred percent outsourcing is simply impossible.

I would also like to answer the question of whether predictive analytics can be used to determine which terms and conditions suppliers will most likely accept. Especially when it comes to large suppliers – those typically targeted for a reverse factoring program – terms and conditions are often individualized or explicit. Simply transferring someone else’s agreed-upon payment terms to another supplier would disregard relationship-specific bargaining power, industry practices or specific performance indicators. This simplification will most likely result in the loss of important aspects of a cooperation e.g. innovative capabilities and ultimately deliver sub-par results.

Supplier onboarding in dynamic discounting

Let’s have a look at another popular supply chain finance model: Dynamic Discounting. Provided that the Dynamic Discounting initiative is not linked to the harmonization of existing payment terms, it still requires a diligent examination – as the devil lies in the details.

Here, conversion rates are far higher and can be achieved much earlier in contrast to reverse factoring, where the supplier may see the initiative as a free lunch, with no extension of payment terms. Generally, if discount rates are below the supplier’s cost of funding, acceptance rates are fairly high. However, to answer one of the questions above, a conversion rate of 50% within two months is by no means attainable. Here’s why: from my experience across a number of industries, a great portion of suppliers either simply have no need for funding or do not fancy the idea of funding from a large customer. In other cases, the existing payment terms may not qualify for a dynamic discounting model or the invoice approval just takes too long. All these factors melt the available spend significantly.

“Fine.” you may say, “50% conversion rate refers to the remaining spend”. This is the point, where the aforementioned devil enters the scene. A large portion of the remaining spend mostly originates in jurisdictions with very specific requirements on how to recognize, document and archive discounts from Dynamic Discounting initiatives. But don’t worry, most of these challenges can be overcome. It will, however, take you a while to analyze, assess, and thoroughly implement tax compliance processes for jurisdictions in focus – which is seldomly achieved within two months.

Can supplier onboarding be outsourced to the platform provider?

Which brings me to my next topic: outsourcing. For those of you considering an outsourcing of the assessment and mitigation of tax compliance risks of the supply chain to a platform – be warned; your future sleep quality is in peril. Even if doing so seems a logical step, most platforms are not even permitted to give such advice.

Thus far, I have already highlighted several areas that need to be considered before and during an effective onboarding strategy. Though all of the above topics merit substantive consideration, it is worth noting that the actual onboarding itself – the technical integration – can be achieved as quickly as ten minutes, as successfully proven in CRX’s fully electronic onboarding process.

How to safely navigate the space

There are many myths, half-truths and plain nonsense circulating in the Supply Chain Finance community when it comes to onboarding. Here is my advice to help you navigate clearly around these pitfalls:

Don’t overly confide in large numbers They are primarily designed to catch attention or create confidence. Whether a platform provider has onboarded 500 or 5,000 suppliers has little impact on the value or quality of the services on offer. This is because the significance of additional supplier onboardings becomes increasingly negligible past a certain point. This eventual phenomenon of diminishing marginal benefit can be observed in any scenario where one is attempting to learn from a number of similar experiences.

Scrutinize the context – always Does it represent the same (single) supply chain finance product you are looking for or is it a mixed bag of supplier management instruments? Are you talking about the same industry, jurisdictions and even cultures? Always do some thorough research before comparing.

Seek out objective advice – and a lot of it Given the complexity and number of potential pitfalls in a supply chain finance program, seek out the most objective advice you can find in the market. This often correlates with the product offering. The more options one can offer, the lower the risk of hard selling.