Smart solution fixes a BAD problem

The challenge

Whirlpool in China has earned a reputation for delivering reliable, high-performance and user-friendly home appliances by incorporating western designs and technology to meet the needs of its local Chinese customers.

However, as Whirlpool grew, so did the complexity of its supply chain. The firm worked with many suppliers globally and adopted different payment terms and settlement methods, creating inefficiencies in its processes.

In particular, Whirlpool issues Bank Acceptance Drafts (BAD) – a common form of payment in China which works like post-dated cheques that can be cashed after the delivery of goods – to its local suppliers. However, the issuance of BADs required substantial documentation as stipulated by China’s banking regulations, adding administrative burdens, exposing the firm to potential risks and increasing costs.

To overcome these issues, Whirlpool wanted to:

• Standardise settlement methods across the region through open account (OA) terms – with payments made on a deferred basis after receipt of goods, and replace its dependence on BAD issuances in China.
• Align supplier payment terms with market standards, by potentially extending terms with selective suppliers to optimise its overall cash flows. At the same time, Whirlpool wanted to further optimise its cash conversion cycles and improve its working capital.

The solution

Recognising that suppliers require a regular flow of operating funds and may be reluctant to accept later payments, Whirlpool decided to explore the option of supply chain financing, a solution that allows the firm to standardise its payment terms, whilst providing an alternative financing tool to its suppliers at favourable rates.

J.P. Morgan was appointed as Whirlpool’s trade banking provider and aided the company as it launched its own SCF programme, the first by a white goods firm in China. Whirlpool used the solution as a tool to facilitate discussions with suppliers to standardise payment terms and settlement methods.

By leveraging a single global banking platform, Whirlpool is also able to:

• Further strengthen controls in managing the entire payment process.
• Minimise workload and human error in invoice processing and reconciliation, due to host-to-host connectivity established between the firm’s ERP system and J.P. Morgan e-platform.
• Benefit from scalability as the firm extends the solution to other countries in the region as well as across the regions in the future.
• Provide alternative financing tools for its suppliers beyond regular payment terms.

Best practice and innovation

By standardising settlement methods and payment terms with suppliers, the entire SCF solution is expected to deliver over US$10m in working capital benefits for Whirlpool, of which US$5.5m has been realised since the solution went live in China and Hong Kong.

By getting suppliers in China to switch to OA payment terms, the firm has saved over US$29,000 in BAD issuance fees, reduced administrative burdens and minimised its risk exposures. Whirlpool’s suppliers have also benefited from the solution through stable access to additional liquidity at favourable rates, more predictable cash flows and improved days sales outstanding.

Through the collaborative partnership between Whirlpool and J.P. Morgan, the firm successfully conducted its first SCF transaction within a short timeframe of three weeks from the time the SCF agreement was signed, a strong testament of how Whirlpool successfully managed its relationships with its suppliers.