Photo of Saurabh Gupta, Citi and Joseph Chua, Lenovo.

In the last nine months this supplier finance programme comprising open account and Usance payable at sight (UPAS) letter of credit (LC) has exceeded US$500m in volume and extended Lenovo’s days payable outstanding (DPO) by an average of 60 days.

The challenge

During the last five years, Lenovo has witnessed growth in market share in the PC business and has since expanded into enterprise management, cloud computing and servers. In the same period, the company has also acquired Motorola Mobility and other investments. These changes compelled Lenovo to look for reliable options to generate sustainable cash flows without leveraging debt. Lenovo has embarked on a strategic drive to effectively manage its working capital, particularly monetising the receivables and extending payment terms. As the latter is not a straightforward process and could disrupt their supply chain cycle, Lenovo was looking for sophisticated tools to extend its DPO and bring tangible benefits to its suppliers.

The solution

In the last 18 months, Lenovo has implemented a supplier finance programme to help it generate the cash flow required for growth and create strategic partnerships with its suppliers. This would address the need for DPO extension and create working capital benefits by supporting suppliers through early pay-in programmes and cost effective financing. The supplier finance solution enables Lenovo’s suppliers to tap into the credit strength of their anchor (Lenovo) and opt for early pay-ins with reduced cost. Conversely, the anchor of the programme (Lenovo) would also benefit from extended payment terms or discounts on the purchase price.

Before implementing the solution, Lenovo faced various hurdles:

• Alignment between procurement and suppliers.
• Suppliers’ resistance to documentation and negotiation period.

In 2015, Lenovo worked closely with Citi to design a custom packaged solution to tackle these challenges. In collaboration, Lenovo and Citi jointly agreed on a two-tier approach:

• The first was supplier finance (open account) for a set of suppliers based on credit rating, transaction volumes and relationship history.
• The second was a UPAS Letter of Credit (LC) customised solution for only a few large suppliers. This solution was based on the principle that LCs are faster to execute, without any pre-requisite for agreements and detailed documentation.

Usance Payable at Sight (UPAS) LC is an innovative instrument, which allows suppliers to get paid early, and with Lenovo paying on the final LC maturity. Citi structured the LC in a manner to suit payment terms, presentation timelines and documentation flow between parties. The features of this solution include:

• Allows set-up within 15 days and thereafter, support weekly payment cycles for Lenovo’s large suppliers.

• Used the LC as a payment instrument to overcome the lack of response from their large and strategic suppliers.

• Suppliers can present the documents for discounting almost immediately post-shipment, which support the objective of DPO extension.

• No additional effort, as suppliers were used to sharing their invoices with Lenovo for payment.

• Utilised an online banking platform for LC issuances, thus fully automating the process from Lenovo’s end and providing flexibility in the overall mechanism.

Best practice and innovation

Lenovo has taken the lead in driving new market solutions to be more nimble across their internal teams as well as delivering value to their supplier relationships. The solution, crafted together with Citi, is unique, scalable and meets their strategic objective of DPO and working capital management.

In many ways, this solution is a first for a Chinese company and goes beyond the traditional product suite. In the last nine months, the programme has exceeded US$500m in volume and has extended DPO by an average of 60 days, thus generating cash flow benefits to the company.

Joseph Chua, Head of Global Treasury Operations says, “Against a backdrop of global expansion, our transformative treasury initiative reflects our unyielding spirit to achieve working capital efficiency, extend our DPO and strengthen our supply chain relationships.”

Key benefits

• Differentiated approach – increased flexibility.
• Quick turnaround time, no documentation.
• Scale and replicability.