Last year, Samsonite, the world’s largest travel luggage company, received a Highly Commended award at the Treasury Today Asia Adam Smith Awards for its innovative supply chain finance solution. Here, we talk to Paul Melkebeke, Vice President, Supply Asia at Samsonite who explains how they did it and how you can too.
In recent years, many corporates operating across the Asia Pacific (APAC) region have placed a significant focus on improving working capital efficiency. But as suppliers to these companies will attest, this can often have negative impacts on the supply chain, especially if payment terms are pushed out to such lengths as to become counterproductive.
Supply chain finance (SCF) is the obvious solution to this, enabling corporates to achieve their own working capital objectives, whilst also safeguarding the health of their supply chain. Yet, in APAC, there are still many with little knowledge about the solution. Establishing a SCF programme is, therefore, no easy feat. So, how do you ensure that a SCF programme is successful in Asia? We ask Adam Smith Asia Award Winner, Samsonite.
Establishing the drivers
As is typical with any project, before commencing, there is a need to outline the drivers of the project and its objectives. For Samsonite these were two-fold. Firstly, the company has ambitious growth plans, aiming to double the size of the company through both organic and inorganic growth. This, of course, makes working capital efficiency a high priority for the company.
Samsonite is also listed on the Hong Kong Stock Exchange, whose analysts hold working capital efficiency as a key performance indicator (KPI). The company therefore needs to keep tight control of this so as not to negatively impact shareholder value.
“There are numerous ways to improve working capital efficiency and we had already worked a lot to reduce inventory and optimise accounts receivables (AR),” explains Melkebeke. “But accounts payable (AP) is also a significant part of this equation and we have been working closely with suppliers to push out our payment terms to 105 days.”
But for the company’s suppliers, this was a tough ask, given that the payment terms only begin once the goods have been shipped. For many of these suppliers however, their cash flow cycle begins once they purchase the raw materials, around 75 days before shipment to Samsonite. “Cash was therefore locked up for around 180 days on average for these suppliers,” says Melkebeke. “As a result, the more these companies worked with us – which they wanted to do – the more restraints they had on their cash flow. But our focus on working capital meant that we couldn’t compromise apart from in exceptional cases where the supplier was critical to our operations. Something had to give.”
Delivering a solution
It was at this point when supplier relationships were coming under strain that Melkebeke’s finance colleagues proposed that the company look to initiate a supplier finance programme. And from the first conversation, he knew that this solution would be pivotal in ensuring that the company could achieve its goals.
Bank of America Merrill Lynch, a key banking partner for the company in Asia, offered a scalable SCF program delivered through a web-based portal that allows Samsonite to upload their invoices for suppliers to manage their receivables effectively, achieve savings from lower financing costs and improve liquidity by leveraging Samsonite’s credit strength.
The company decided to run two programmes: a USD solution for the region as a whole (covering markets that include China, India, the Philippines, South Korea and Taiwan) and an RMB solution for those suppliers that supply goods for the Chinese domestic market. “It can be very challenging due to local regulations to establish a solution that covers the whole region. It is therefore very important to select a banking partner that has a network which matches your geographical reach,” explains Melkebeke. “Not only will they understand the local regulations, but they will also have people on the ground able to speak to your suppliers and help sell the solution.”
Making a case
Selling the solution is indeed the key to any successful SCF project. Typically, this will not only be selling the solution to suppliers, but also to business units within the company who often are working to achieve different, and sometimes conflicting, KPIs.
However, due to the fact that Samsonite is a fairly lean operation, Melkebeke was able to avoid the often tough internal selling of the project – both finance and procurement could see the benefits from a very early stage. But the suppliers still had to be convinced.
“We operate in a fairly small and conservative industry and many of our Asian suppliers were unfamiliar with or completely unaware of the product,” explains Melkebeke. For those that were familiar, a stigma often existed. “It seems that there are some negative connotations that exist in the market around SCF. Many suppliers seem to believe that there is no upside for them from the solution so we have a challenge to both educate and convince suppliers that this solution is a win-win.”
To do this, the company set about educating its suppliers with the aid of its banking partner, holding numerous meetings. “Key to these discussions was transparency,” says Melkebeke. “We never disguised that there was a cost involved for the suppliers – there is a cost for us setting up the programme after all. But what we paid particular attention to is that in the grand scheme of things, there is more upside for the suppliers. This is because by agreeing to join the programme these suppliers can receive cheaper funding than they could from financing their receivables with a local bank and secondly they will become our preferred suppliers.”
It is this second point which is very important, Melkebeke stresses. A SCF programme should not be seen as a short-term fix to a short-term problem. It is a broader strategic change for the company. “We didn’t offer the scheme to everyone, only those companies who we would like to have as long term partners.”
Long lasting benefits
Samsonite has reaped the rewards of this approach, with nearly 90% of suppliers now accepting 105 day payment terms. “Once we went live with the first batch of suppliers, which were high profile names in our industry, the solution quickly gained credibility and traction in the industry,” explains Melkebeke. “Where once we had to explain the benefits, now they are knocking on our door wanting to be part of the programme.”
As a result, relationships, which at first were tested due to the new payment terms, have actually been strengthened. Internally, there have also been many benefits including procurement now being a net contributor to working capital, for instance, due to the increase in the company’s days payables outstanding (DPO). Cash flow planning has also been greatly improved as a result of the certainty around AP.
“Based on our experience, there is no reason not to launch such a programme, especially if you are paying attention to working capital metrics and do not want to undermine your key supplier relationships,” says Melkebeke. “And now, given the low interest rate environment, is an especially good time to get suppliers on board.”
Tips for success
Be transparent and honest with suppliers.
Select your banking partner(s) carefully. They have to be able to meet your objectives.
Build a strong implementation team.
Facilitating, promoting and partnering with suppliers is the key to a successful implementation. Select the suppliers you will test the programme with carefully – success here will make or break the programme.
Involve the IT department to drive straight through processing (STP).
Has your treasury department recently undergone a successful SCF project in APAC? If so, why not nominate yourself for a Treasury Today Asia Adam Smith Award? Don’t delay, nominations are now open.