Thursday, July 13, 2017


Trade Financing Matters--

5 Hypotheses Tested on Supplier Use of Supply Chain Finance

Recently, I participated in a webinar where Prof. David Wuttke of the EBS Business School presented highlights of his joint research together with Prof. Eve Rosenzweig from Emory and Prof. H. Sebastian Heese from NC State University on observed patterns of behaviors in Supply Chain Finance.
Part of his discussion centered around testing 5 hypotheses using Orbian’s network data on supplier take-up of early pay.

What determines the speed of supplier SCF adoption?

In the working paper Prof. Wuttke presented, the authors organized their hypotheses according to rational efficiency  and  institutional pressures. Rational efficiency says because I am better off, I adopt faster. Institutional pressures says because of pressures stemming from my environment, I perceive the need to adopt faster.
So let’s see what the data said:

Hypothesis #1: smaller suppliers adopt SCF faster

This was tested to be true, where companies 1/10th the size adopted 30% faster.  This news proves to be a double-edge sword.  The good news is smaller guys like it, the not so good news is it’s harder to scale programs up with smaller suppliers.

Hypothesis #2: suppliers with higher cost of funds tend to adopt faster.

Again, true, this time the effect was for every $20,000 reduction in financing costs, adoption improved by 10%. I recently penned a blog around this same subject of what basically comparing revolver costs with the SCF Libor rates coming from key customers offering the program, See The Suppliers Dilemma – How to use Large Customer Receivables for Working Capital

Hypothesis #3: Suppliers adopt SCF faster as mimetic pressures increase.

Here again Prof. Wuttke found support. When suppliers to a buyer are approached about supply chain finance and lack familiarity, it helps to know how others view these program.  As Prof. Wuttke commented, “I am uncertain as supplier: Will this work? Is this a trick? Sounds too good, where is the catch? And most importantly: what will others think about me, do they think I am selling receivables? Does that make me look weak?”

Hypothesis #4: Suppliers adopt SCF faster as normative pressures increase.

Here we see that no one wants to be the first in a program, but just like a rocket spends most of its energy getting off the ground, if you can get the program to some critical mass, that normative pressures take hold. In the analysis, for every supplier onboarded, it increases the likelihood of the next supplier onboarded by + 0.7%.

Hypothesis 5: Suppliers adopt SCF faster as coercive pressures increase.

This hypothesis was not supported. What Prof. Wuttke was testing was to understand if a supplier’s customer is a large percent of its revenue (25%, 40%, etc.) did this coerce it to joining the program. The answer was no.  It was really a win-win proposition, not do this or else. In thinking about this logically, I could reason that perhaps when a customer becomes a larger share of receivables, a supplier does not want to add financing as another variable under the customers control. The sales size is already enough.
As we know, there are other issues related to supplier adoption that are sometimes difficult to measure with data. For example, liens and revolvers that are structured contractually that are hard to get a release for certain receivables (or may trigger a bank review).  We also have accounting issues, where the supplier wants to ensure this is truly a true-sale off balance sheet item and needs to incur a fixed cost to do so.
Right now, the analysis is only focused on Orbian’s data set. But what the data above seems to be saying with any supplier execution strategy is go after the smaller suppliers first, sign them up, and let the normative pressures take over.
Agree? Disagree?
p.s. Prof. Wuttke has put together a website to help disseminate this type of information in future, register here