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Cash & Working Capital

A Dynamic Approach to Your Traditional Supply Chain

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June 15, 2015


 

By Ted Howard

With working capital the focus of Wall Street and low interest rates the norm, companies are looking for areas of their organizations to create value. Taulia is pointing them in the direction of the supply chain. Click here to download a copy of this story. 

football x's and o'sLowering operating costs while increasing value is a critical business objective seen across organizations of all industries. Multinational companies are constantly faced with increasing regulatory compliance, fierce global competition, shifts in customer demand and rising material costs. And with those ever-increasing challenges come new complexities in the supply chain, particularly ones with an expanding range of suppliers, including the smaller ones. What’s needed is an understanding of what their unique needs are.

The financial challenges crop up when large MNCs, being what they are and doing what they do, continue to practice the time-honored cash-management strategy of “quick to collect, slow to pay.” This might not be an issue for a big supplier, but it can be for a smaller firm, creating tension in the supply chain and possible disruption and instability. But nowadays third parties are entering the market to ease the strains of these challenges.

One such company is Taulia, a provider of supplier financing, connecting thousands of businesses worldwide to ease the exchange of payments. Taulia helps companies create stability across their supply networks by making the transaction work for everyone. By using Taulia’s ecosystem, the relationship between a buyer and seller gets considerably stronger because suppliers can request to be paid by the click of a button, and both parties can save significant amounts. Buyers capture discounts through the early payment program and suppliers no longer need to turn to high-interest loans or factoring.

Taulia traces its roots to invoicing, when its founders ran Ebydos, which specialized in AP automation software. Essentially Ebydos developed software specialized for, and locked into, SAP that helped route workflow. The company was eventually acquired by Swedish software company ReadSoft. But what they figured out over the years of selling the Ebydos product was that by accelerating the approval of invoices, they created an opportunity for organizations to pay these invoices early in exchange for a discount. “So a company would put their workflow solution in place, approve their invoices faster, but the invoices would still sit unpaid until the due date because there was simply no incentive to pay early,” says Daniel Pfeiffer, Senior Director, Supply Chain Finance at Taulia. “They came to the conclusion that there was a huge opportunity on the financial side.”

With this revelation the founders, Bertram Meyer, Markus Ament, Philip Stehlik, and Martin Quensel, headed to the land of tech startups—California—to meld their expertise in automation, and their vision for a more efficient supply chain with the innovation mindset of Silicon Valley. Thus was born Taulia.

The company started off with a supplier portal and dynamic discounting, which enables companies to automate and maximize discounts to their supply chain. Dynamic discounting is done using the company’s excess liquidity to fund the early payment. This is viewed by many treasurers as a risk-free investment in their supply chain, because they’re simply paying approved invoices earlier than the due date. It’s a platform that benefits all parties: buyers get better returns on their cash and suppliers can quickly access affordable funding.

It pays

It does make sense for everybody. Currently MNCs, the buyers, are sitting on billions of dollars with few places to put it where it will return a decent yield. And when they pay their customers slowly, they are letting that money remain in low-return bank accounts or money-market funds when instead they could be paying a little earlier and getting a discount, thus saving the company cash and making that money more valuable.

According to a recent American Express small business survey, more than half of small businesses are waiting between a month and two months to get paid for their goods. This of course is costing them money, and likely more money than they’d agree to part with to have buyers pay a little earlier. That’s where Taulia and dynamic discounting come in. Simply put, companies that pay early, say 10 or 20 or 30 days, and get a 1 or 2 percent discount from suppliers, could possibly be making high-single or double-digit returns on their money. That’s pretty good compared to current bank or money-market interest rates.

Further still, companies with a lot of cash, like tech companies, for instance, have been frequent targets of activists looking to get companies to return that idle cash to investors or make it work harder in some other way. This can create undue pressure for corporate managers who could end up taking large risks, or making bad acquisitions. Also, increasing dividends or share buybacks are viewed by many executives, especially those in the tech sector, as more of a slow-growth strategy than anything else. Therefore, in the seemingly eternal search for yield in the current near-zero interest rate environments it makes sense to extract some value from the supply chain.

“The logic is, what is your cash doing that’s earning a rate equivalent to the 10 percent or 20 percent a year it could be earning with dynamic discounting,” says Mr. Pfeiffer.

And for suppliers, it’s a way to eliminate the hassles of bank lending or factoring. Previously, it was hard for the smaller supplier to get any leverage. “The great irony is the person who needs the early payment most is the one who’s not getting it,” says Mr. Pfeiffer.

The market as it exists today is very centered on the big guys, Mr. Pfeiffer points out, while small suppliers have to jump through extensive documentation and contracts if they’re in need of cash. This has the potential of becoming a multi-month process between the bank and the supplier—often months a small supplier doesn’t have.

But on the Taulia platform, much of that legwork has been done, enabling the supplier to request to be paid early with the click of a button.

A Dynamic Approach to Your Traditional Supply Chain 

Paying too soon

Mr. Pfeiffer points out that there are tradeoffs with dynamic discounting, most significantly days payable outstanding (DPO). With working capital management a focus, companies can get concerned if a DPO starts getting shorter. And that’s exactly what happens when that company starts paying its bills early. Further, dynamic discounting only works if a company is sitting on extra cash that they can invest in their supply chain.

Mr. Pfeiffer says these objections “were part of the normal Taulia sales cycle” and despite the company’s great success in selling the product, “those objections would come up.” So about two years ago the company decided that it needed to go a step further and, using the same dynamic discounting platform, create a neutral experience to the supplier by obtaining funding from a third party—either the debt markets or banks. Now the buyers were able to implement either a dynamic discount program if they had excess liquidity and weren’t concerned about DPO shrinkage, or a supply-chain finance program if they wanted to reap the same supply-chain benefits without using their own cash.

“So now Taulia becomes this massively agnostic platform,” Mr. Pfeiffer says. “You can fund the discount or we can get somebody else to fund it; target a large supplier or small supplier, it doesn’t matter. Our platform is able to pick from thousands of sources and doesn’t discriminate where the money comes from.” In this togetherness, all parties work out the economics amongst themselves “and make sure it makes sense for everybody.”

Taking it to the next level

Dynamic Discounting Benefits for AgilentTaulia’s vision was to build a platform that could handle all points in the supply chain. And it largely has according to Mr. Pfeiffer. It can service both big and small companies, it’s very easy to get onto the system, and it’s incredibly fluid on where the funds come from: banks or funds or pension funds, or from the clients themselves. Taulia can also work with the buyer or supplier’s banks if there’s an inherent preference. “We can do pretty much anything when it comes to where the money comes from and we can reach everyone in terms of where the money goes,” says Mr. Pfeiffer.

Taulia’s service is a software-as-a-service, or SaaS, which provides web-based invoicing to large corporate customers, including Coca-Cola Bottling, eBay, Deere & Co., Johnson Controls, Hallmark Cards and many more.

But the entire community of buyers and suppliers is much larger. “We have built this consumer-grade technology to get hundreds of thousands of suppliers on board and are able to, on a dynamic basis, present them all kinds of offers,” says Mr. Pfeiffer. “We’ve created a really nice ecosystem. The supplier can now get financing that they otherwise would never have been able to, and this allows the buyer to achieve a number of things, for instance they are helping the supply chain by giving suppliers access to cash at much lower rates than they would have before.” Beyond being profitable for the buyer, this is a great exercise of corporate social responsibility.

By adding a more robust financing aspect to its offerings, Taulia feels it’s added on to what it did well in the first stage—dynamic discounting—and married it nicely with the SCF world, “creating a really nice platform built on flexibility,” Mr. Pfeiffer says.

This successful marriage has also helped Taulia attract millions in financing. According to CrunchBase, a company that tracks startup activity, Taulia has raised $90 million since 2010 from 11 different investors.

Overcoming obstacles

One company that has benefited from Taulia’s solutions is life sciences, diagnostics and chemicals company, Agilent Technologies, which was looking to improve its working capital while keeping its supply chain healthy and happy. Before it signed up with Taulia, Agilent faced some of the same hurdles other companies faced, namely a cash pile earning minimal returns and a lack of transparency in the supply chain itself.

Agilent, a spinoff from Hewlett-Packard in 2000, like most tech companies, holds a sizeable amount of cash, most of it offshore. The company wanted to increase returns on that cash without increasing investment risk. It also wanted to help suppliers who needed cash for growth and investment opportunities. The company already dedicated a large amount of resources to supporting suppliers but it wanted to take their collaboration to the next level. With Taulia, suppliers are now able to login to a portal to see the status of their invoices and request to be paid early in exchange for a small discount. Agilent was able to strengthen its supply chain and supplier relationships by offering an improved and dynamic supplier financing option that worked for everyone.

Key components

As Taulia looks to expand its offerings and further enhance buyers’ ability to generate solid returns and suppliers’ ability to chart their own course when it comes to when invoices get paid, the company continues to grow. But despite the growing amount of tools available, the company also stresses that all stakeholders need to have good internal structures to make the process work most effectively. To that end, Mr. Pfeiffer lists four key components of a successful program. They include:

1. A clear alignment between procurement and treasury.

2. A reasonably strong invoice approval process (for which Taulia has tools as well).

3. Clear goals with regular reporting and monitoring.

4. Engaged and visible sponsorship from senior management.

All of these will help the process run smoothly from implementation to regular usage. Without these components, companies will struggle getting a fast and efficient SCF program in place. Further, once the internal structural components are in place, it’s key to find a tool that is flexible; it needs to meet various internal treasury and procurement goals, and also, the varying needs of the entire supply chain—from the largest companies to the smallest. “These programs are most successful when you have a tool that scales and a vision that resonates,” concludes Mr. Pfeiffer.

Sponsored by:
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