Photo of James Hayward with Chetan Talwar, J.P. Morgan who collects on behalf of China Merchants Logistics.

This company’s bank worked with them to modify its internal process flows to standardise invoicing, accounts payables and system changes to accommodate this supply chain finance programme. The resulting improvements to the company’s DPO and DSO metrics have justified the project.

The challenge

In line with CML’s vision to become a leading total supply chain management services provider in China, the company has been investing substantially in developing its distribution centres, network and fleet of vehicles. This has resulted in a net borrowing position for CML with its banks and it was looking for opportunities to reduce the amount and the cost of its borrowings. CML also wanted to improve its overall cash conversion cycle so it could manage its balance sheet more effectively.

Zhang Libin, Finance Manager explains: “Our goal is to move at least 30% of the company’s total purchasing volume, or about CNY2bn, to supply chain financing. The company expects that reaching this level and extending payment terms by an additional 30 days would enable us to release at least CNY150m in working capital.”

The solution

J.P. Morgan started working with CML in 2013 in a Supply Chain Finance (SCF) programme offered by one of CML’s large fast-moving consumer goods customers, who was working with J.P. Morgan to harmonise payment terms for its suppliers by implementing a SCF solution. While CML wasn’t familiar with SCF programmes at that time, it decided to join the programme for the purpose of maintaining a good relationship with its buyer. It soon found the programme offered alternative off-balance sheet financing for its receivables faster and at an attractive rate.

After being part of its customer’s SCF programme for about a year, CML gained a much better understanding of how SCF programmes operate and the benefits. In 2015, CML decided to set up its own SCF programme for its suppliers so that it could harmonise payment terms for its suppliers from current levels up to 90 days. Having had a favourable experience partnering with J.P. Morgan, the mandate was awarded to J.P. Morgan for its concise and well thought out proposal which helped position CML to:

• Improve its balance sheet and working capital position, by releasing cash from working capital and paying down debt.
• Harmonise and extend its payment terms.
• Secure the stability of its supply chain by offering attractive financing for its suppliers at comparatively better rates than if suppliers were to rely on their own credit rating.

Best practice and innovation

While setting up a SCF programme is straightforward, CML found that it needed to modify some of its internal process flows to standardise invoice processing and accounts payable (AP) processing. Throughout the process, J.P. Morgan worked closely with CML and advised them on ways to redesign the processes and system changes to accommodate the SCF programme.

As soon as the SCF programme was established, J.P. Morgan worked with CML to introduce it to the company’s suppliers. While extending payment terms for suppliers to 90 days could have been a challenge, CML used its own experience as a SCF programme participant to explain to its suppliers how the programme would provide benefits.

Libin concludes, “As a leading total supply chain management services provider in China, the programme has helped us sharpen our competitive advantage by entrenching our relationships with our suppliers more strongly and securing stable access to the supplies we need at competitive pricing.”

Key benefits

• Early payment at attractive rates, based on the buyer’s credit rating, which would allow them to improve their own working capital position.
• DSO improved.
• Access to lower-priced financing.
• An easy-to-use web-based platform which is also customised to support multiple entities and currencies.
• Payment made directly to the supplier’s account of choice.