Unilever (China) was looking to partner with a bank to implement a supplier finance solution. Unilever wanted the solution to be attractive from both an economic and operational point of view for Unilever (China) and its suppliers, specifically meeting the goals of:

• Improving working capital by increasing DPO tenor and reducing working capital cost.

• Mutual benefits for Unilever (China) and the suppliers.

• Streamlined operation from shipment to payment.

In the past few years, supplier finance has attracted increasing attention in China as a method to reduce the overall supply chain cost. “There are mainly two approaches to handle supplier finance, one is leveraging the electronic platform, and the other is based on the commercial draft,” says Fred Tang, Unilever (China).

The electronic method is based on open account terms under which the PBOC regulated short-term loan rate applies for financing cost. While under the commercial draft solution, it is paper based and the draft discounting rate applies. The rate of draft discounting is market-driven, and most of the time, lower than regulated short-term loan rates.

Tang explains, “Citi China’s solution is to take advantage of both options and customise a specific one for Unilever China.”

“Our DPO is extended and cost of working capital is significantly reduced with this solution. Overall supply chain efficiency is achieved without risk to suppliers.”

The solution uses the commercial draft as the underlying instrument in order to enjoy a better financing rate. Citi acts as the paying agent for Unilever, who undertakes to pay on due date per the commercial draft. Citi will enter a discounting agreement with the suppliers and purchase the drafts from suppliers on a without recourse basis. Either occasional financing based on suppliers’ ad-hoc request or permanent financing with automatic discounting is supported. Most suppliers select automatic discounting.

The issuance of the commercial draft is automated by Unilever in-house, and the endorsement is performed by the bank upon suppliers’ upfront authorisation. Suppliers, wherever located, are isolated from transactional process. Citi strictly follows Unilever’s commitment to mitigate financial impact on suppliers.

They ‘push’ the discounting information to suppliers via automatic fax. Other account information is available on EB platform on real-time basis. MIS reports are provided to Unilever on a periodic basis. The solution has also built in the room for ERP integration when the Electronic Draft Exchange system is launched by the regulator. At that time, the end-to-end flow will be seamlessly streamlined.

Unilever China has realised the following benefits from the solution:

• Increased DPO.

• Reduced working capital cost.

• Simplified operational processes.

Unilever’s suppliers have benefited as follows:

• Decreased DSO.

• Speeded up cash conversion cycle.

• No adverse operational impact.

• Rich information available via auto fax and on electronic banking platform.

• Establishment of an additional banking relationship.

“Our DPO is extended and cost of working capital is significantly reduced with this solution. Overall supply chain efficiency is achieved without risk to suppliers,” explains Tang.