In a previous post about procurement-led inventory finance, we explained how in a zero-sum game, large buying organizations — when engaging directly with suppliers — often deploy forceful if not arbitrary rules around payment terms, delivery terms and even the reduction of inventory levels. These tactics, used to reduce working capital, each bring additional, mostly unnecessary risks and buyers working with sellers as a team could be more effective in assuaging such concerns.
New techniques and business practices based on inventory financing tied to broader procurement and supply-chain strategies have started to become more mainstream and they can help your business reduce its exposure to commodity price swings, long production times and other risks in the metals supply chain.
If you’re a large manufacturer, a metals service center or a metal producer, you can take advantage of these techniques and essentially link the buyer, seller and financing institution to lower financing costs to improve business efficiency.
Supply chain financing connects financial transactions to value as it moves through a supply chain. Instead of all parties working to maximize their profits and efficiency individually, supply chain financing links the chain financially, allowing it to work together as a team, maximizing value at each link and speeding products and transactions along. It’s the difference between individual companies working in silos and all of them truly functioning as one unit.
Using traditional procurement systems, an end-user manufacturer is incentivized to delay payment as long as possible, while a metals producer or service center is traditionally incentivized to seek payment as soon as possible. But if that end user-manufacturer/buyer has a better credit rating than the service center or metals producer seller, the buyer can leverage that advantage to get better payment terms, such as longer payment extensions that enable it to conserve its cash on hand or use it for other costs. The seller similarly wins by accessing cheaper capital that it wouldn’t have access to without the buyer’s credit rating.
In metals markets, no matter which part of the supply chain a company is in, excess inventory can kill a business. A 2014 Bureau of Labor Statistics report showed that, for primary metal manufacturers, the top quartile of companies have inventory turnover of no more than three to four days of raw materials on hand. Other producers hold onto aging, unsold finished goods much longer, believing that one day they might get full value for those products that have been sitting around in yards and in warehouses.
Others, still, purposely hold more than a month’s supply of commodity metal raw materials as “safety” stock to cover unexpected shortfalls.
Unlike other commodities such as food or delicate electronics, metals neither spoil nor do they quickly become obsolete. Managers can stockpile inventory at any step of the manufacturing process without immediate repercussions. The manufacturing process can be long, too, allowing for a longer supply chain than other commodities. These are all disincentives to keeping that supply chain moving and that’s why the efficient producers generally perform much better than the field.
Supply chain financing can unlock efficiencies between primary producers, the service centers they sell to and the end user manufacturers that ultimately buy their raw material products. Those efficiencies can grease the wheels toward more, less costly transactions and less unnecessary inventory clogging up the supply chain.