Extending payment terms is not a simple decision to take. Without careful planning it can hurt a company's working capital to the benefit of the party on the other side of the negotiating table. However, when a large and complex supply chain is involved, the implications can be detrimental to all.
A push to extend payables carries huge risks, placing relationships in jeopardy and compromising suppliers' cash flow, but there are ways to mitigate these risks to the benefit of both the buyer and seller. Vendor or supplier-focused financing programmes are one just method to overcome this.
For Lenovo, the Chinese technology company, the decision to extend its days payables outstanding (DPO), was precipitated by the acquisition of Motorola Mobility from Google in 2014, which placed a natural burden on the company's working capital.
Benchmark blues
After extensive analysis, Lenovo’s treasury department discovered its DPO was approximately a month shorter than its major US-based competitors. A short DPO affects the cash conversion cycle and, ultimately, a company's ability to manage its own working capital efficiently. This was an opportunity to both tackle its cash flow and level itself with its competitors.
"We believed at the time, our competitors were using supply chain finance a lot more effectively than we were. We decided to put that right," said Sriladda Chalermkarnjana, director, pensions and commercial financing at Lenovo.
Lenovo's relationship with DBS' supplier finance programme started in 2012. Since then, Lenovo had deepened its conversations with DBS on how a broader cross-border supplier finance programme could help its business. In 2015, Lenovo gave DBS the mandate to run a supplier finance programme for Lenovo in China, followed by Taiwan. The technology company was hoping to extend its DPO to an average of 90 days, but at the same time not place too much pressure on its suppliers.
In partnership with DBS, Lenovo set up a supplier finance programme to help suppliers get paid earlier at the cost of a haircut on the invoice. The suppliers can leverage on the credit worthiness of Lenovo to obtain off balance sheet financing and confirmation of payment on invoices.
Chalermkarnjana explained: "Our supplier sends the invoice, we then approve the invoice for payment on due date and tell DBS. DBS will provide a listing of co-published chapter confirmed invoices to the suppliers for them to choose which ones to finance. On Lenovo's side, we then pay the bank when our invoices are due."
Flexibility is key
It's important to note that suppliers are not pressured by either Lenovo or DBS to discount all their invoices simply because they are on the programme. The discounting is dependent on their supplier’s own working capital needs and they are able to pick and choose when it works for them. This flexibility is what makes supply chain finance (SCF) such a valuable tool.
DBS is also enhancing its online capabilities via IDEAL Supply Chain Finance to cater to Lenovo's specific requirements for further scalability.
More so, Lenovo has been very impressed with the way DBS has worked to ensure the solution meets their specific needs. "The team has been very open, listened to our requirements and made sure the details work - from how you submit an invoice to how you handle credit notes," said Chalermkarnjana. "We have therefore achieved our targets in a timely manner."
A case in point, is the latest addition to Lenovo's supplier finance programme where the onboarding of one of Lenovo's suppliers in China, which required collaboration within DBS (Singapore, China and Hong Kong offices), Lenovo (treasury, operations and legal) and its supplier.
DBS' group SCF team and Lenovo’s global treasury based in Singapore were responsible for negotiating the terms under the supply chain finance arrangement, covering both the procurement and sales legs. At the implementation stage, the key success factor was the strong internal cross-border collaboration on both sides.
"As Lenovo moves forward in its different businesses, it will be even more important for the company to have flexibility and the best possible arrangements for our own benefit, and that of our partners." said Chalermkarnjana.
Given the positive experience, Chalermkarnjana said Lenovo is now in the process of deepening the mutual relationship to expand the coverage of supplier finance programmes in Asia.
"DBS has been Lenovo's supply chain partner since 2012. Over the years, the successful collaboration can be attributed to the deep insights and industry knowledge that DBS has provided to help Lenovo achieve working capital optimisation through supply chain solutions," said Vijay Vashist, group head of trade and supply chain finance, global transaction services at DBS.
"We work closely with Lenovo to understand its specific needs, and offer highly customised and agile supply chain solutions that fit their requirements, achieving a win-win result for both sides."
(This article was first published in Corporate Treasurer, Aug/Sep 2016.)
