Australia-listed food and beverage company Coca-Cola Amatil (CCA) has implemented a supplier-finance programme whereby the businesses that supply it with raw materials can discount their invoices and obtain access to funding. In return, CCA has been able to extend its payment cycle, enjoying a working capital pickup along the way. Michael Braude, the company’s treasury operations manager, explains why the programme was implemented and what other companies considering such an offering should look out for.
When did CCA set up its supplier-finance programme, and what was the reason for doing so?
We started the programme in 2007 after a number of banks approached us with supplier-financing initiatives. The proposition was simple; we could extend our payables cycle while offering our suppliers the ability to access finance on a fee-free basis by discounting their invoices at their time of choosing at our cost of funds. The programme would provide us a working capital benefit while, at the same time, potentially lowering the cost of funds for many of our suppliers. Commercially it sounded like a wise move, but we also liked the fact that it was conceptually simple and that it was user friendly. We realised that it had to be easy for our suppliers to understand in order for them to sign up to the programme. Suppliers simply log into the system to see which invoices have been approved by CCA and then they can discount those invoices at the quoted interest rate to access funds prior to the payment due date.
So you implemented the programme just prior to the global financial crisis. What effect did the crisis have on its success?
The crisis made it even more attractive to suppliers and we saw a rise in the number of suppliers enquiring about the facility after the collapse of Lehman Brothers. We were able to effectively provide access to our A- minus rating and our favourable cost-of-funds when a number of them were either shut out of the credit markets or saw their cost of funds skyrocket. Take, for example, the many fruit growers that supply fruit to us. These businesses have lower credit ratings or no credit ratings at all, and during the financial crisis their access to funds either diminished or disappeared altogether. We were able to maintain their ability to access funds and assist with their liquidity management and viability so that they could continue to supply us with product.
Is it only your smaller suppliers that take advantage of the programme?
No, suppliers from across the spectrum have signed up. In fact, during the crisis some of our bigger suppliers, those with international ratings not dissimilar to ours, were also interested in joining the programme. These bigger companies might have viewed it as another possible funding source if things got worse — a back-up plan that provided them with a little more funding certainty and available liquidity.
How did you decide who to offer the service to?
We considered a number of different selection criteria. We looked at annual spend and considered whether this should be above a certain amount. We looked at the size of organisations and asked whether their need for funds would be greater than others because of the cost-of-funds differential. In the end we settled on a fairly low threshold for minimum spend because we didn’t want to be seen to be discriminating. We wanted to be sure, though, that a wide range of suppliers would utilise the system and not be dormant members. There is administration involved in signing them on and the best way to cover these costs was through sufficient supplier take-up.
Did your suppliers catch on quickly to the concept?
In some cases, no. We thought that the concept of supplier finance would be relatively simple to explain, but it surprised us how much resistance we got from our suppliers in the beginning. We wondered whether we were targeting the wrong people in each organisation or maybe our message wasn’t clear enough. For some of our larger suppliers, it was a simple communication because these companies have dedicated finance personnel and they understood the benefits right away. But with some of our smaller suppliers, the take-up wasn’t that quick. We found, though, that after they had trialled the system and saw how an authorised invoice could be turned into a means to obtain financing any day across the cycle, they were much more receptive. You have to clearly communicate the benefits, otherwise they are more likely to focus on what suppliers may be giving up (such as shorter payment credit terms) rather than what they are gaining (which is access to a lower cost of funds and increased cash management flexibility).
Did CCA dedicate internal resources to the project?
Yes, it was important to have a project manager overseeing the implementation. This person wasn’t within the treasury function, but we would meet with them regularly to see whether the message was getting across to suppliers and to find out how many had signed up and how they were using it. This early process took about 12 months and we found that, while it was important to communicate the message well, it was equally important to follow up, to ensure that people were handling the system well and were becoming repeat users.
Did you have a target for the number of users on the system?
The bank set a minimum monthly usage requirement and, if we didn’t meet that, we would have to pay additional fees to the bank. So this was our minimum target and we were able to achieve it. Beyond this target, our main concern was to ensure that the facility would be large enough if the programme went off like a rocket and we got a spike in activity. Many of our suppliers operate in cyclical businesses, so we had to be confident that the facility would cover the peak periods.
While you have asked us not to name the bank that is providing CCA with the supplier-financing platform and facility, can you explain how you chose that bank?
There were several banks that came to us with a similar product offering. In the end, we chose a bank that we had a long transactional banking relationship with. This meant we had a good understanding of their capabilities in this area and we knew the people. We had a reasonable degree of confidence that they were putting the resources behind it. Some of our suppliers required software modifications before they could sign up, and we had to satisfy ourselves that the bank we chose had a dedicated resource to help with this; this was key.
Do you have any offshore suppliers using the system?
At this stage we have focused on getting our Australian suppliers on board. But the opportunity for CCA to offer supplier finance in other jurisdictions is there, driven by the spread differential between our cost of funding and many of our overseas suppliers’ cost of funding, which in some cases is significant. Some of our smaller offshore suppliers may not be able to consistently access credit or they may pay well in excess of CCA for their funding. This is where we could really add value. To get to this point we have to be sure that the banking platforms can adequately handle the transactions.
Can you give us an indication of how much the supplier-finance programme has improved your working capital position?
I’m not able to be specific about this; it is commercially sensitive. Suffice to say, the programme has been a success and has more than paid for itself. At the very beginning we took a long-term view because we knew that returns wouldn’t be immediate and we knew that supplier financing had to offer some benefit to both parties. The global financial crisis has changed the credit environment for some time to come and we have been a beneficiary of the changes relative to a number of our suppliers. If we can pass some of that on to our suppliers, then it is a good thing
