I had the opportunity to attend the NACHA Payments 2009 conference in Orlando, Florida today. One of the better sessions that I attended was presented by Lowes and Wachovia/Wells Fargo on the topic of Supply Chain Finance (SCF). I found this session particularly interesting, because there has been a significant amount of hype about SCF in recent years, but very few public case studies of how companies are leveraging this new technique to their advantage. The speaker from Lowes did a great job of presenting real world examples of the challenges and best practices the DIY retailer had used with SCF. The following are some of the notes I recorded in the session along with some of my comments:
“Supply Chain Finance is Working for Us”
Lowes primary goal was to leverage its A+ credit rating and strong financial position to create a competitive advantage in the home improvement industry. The SCF program specifically was designed to better align inventory cycles with payment cycles. Several options were explored in addition to SCF including:
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Extended Payment Terms – One option considered was simply requiring suppliers to extend payment terms without any financing option. This option was eliminated because it would increase the supplier’s costs, which ultimately would be passed back on to Lowes directly via higher prices or indirectly via less obvious means.
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Reducing Inventory – Another option was to reduce the amount of inventory being carried in distribution centers and stores. Such an option was less desirable as there would be a higher risk of missed sales opportunities due to product availability issues.
Lowes has experienced tremendous success in the past 6-9 months on-boarding a few new suppliers each week. Lowes SCF program goal in 2008 was to increase Days Payable Outstanding by 4 days. Lowes spends an average of $90M per day in procurement. As a result, a 4 day DPO extension would equate to a $360M annual savings which is the equivalent of 15 stores.
Best Practices
There were a number of best practices mentioned by both Lowes and Wachovia, but a few caught my attention:
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Standardization of Payment Terms – Prior to starting its SCF program, Lowes did an analysis of the payment terms in place with its supplier base. The Accounts Payable (A/P) department discovered over 400 different types of payment terms being utilized. The retailer initiated a program with its procurement organization to standardize terms across the vendor community, which promises to greatly simplify contract management and A/P processes.
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Incentives for Buying Organization – Lowes explained that SCF programs can only be effectively sold by the procurement organization which owns the relationship with the vendor. However, the appropriate incentives need to be in place to encourage buyer participation. Lowes recommended selling the procurement group by quantifying the impact to the company that can be achieved through SCF. For example, if the electrical category could save $20M in DPO through SCF, it would be enough to finance a new store opening.
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Break Even for the Suppliers – Wachovia recommended comparing the effective discount rate a supplier with a lower credit rating would obtain through factoring to the discount rate applied by using a SCF program based upon Lowes A+ rating. The difference/savings should then be expressed in the equivalent number of days for payment extension. This DSO extension by the supplier is the effective “break even” point before which SCF is a net positive from a cost stand point.
Supplier Benefits
Lowes shared a number of anecdotal stories about the benefits achieved by some of its supplier community:
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One supplier of patio cushions stated that SCF was “the cheapest form of financing I’ve seen in the business” and insisted on being the first participant in the program.
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Another supplier not only participated in the Lowes SCF program, but had already implemented its own SCF program for their upstream supply chain.
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A bird seed supplier was excited to gain the liquidity advantage from the SCF program so that they could meet aggressive payment terms with their upstream agricultural suppliers.
Technology Integration
B2B integration is a critical foundation for SCF. Without electronic invoicing and payments, SCF cannot be effectively scaled or managed. Lowes stated that its SCF program required “Not much IT effort.” In today’s market the customer typically dictates B2B integration requirements to the financial institution. Wachovia has one of the stronger B2B integration practices in the industry, from my perspective, which I suspect was a key factor in the success Lowes has achieved.
2 Responses to “Lowes Supply Chain Finance Program”
Thanks for this information Steve, I’m sure your readers will find the Lowe’s story quite valuable.
To add a bit more background for those interested. With regard to the IT effort, Wachovia’s B2B integration practice had nothing to do with the ease of SCF implementation. Lowe’s is using PrimeRevenue’s technology platform and support services with liquidity from the legacy Wells Fargo/HSBC Trade Bank as well as other banks (Lowe’s SCF program is multi-bank as are most successful SCF implementations of any size). Most of the services PrimeRevenue provides support the rollout to suppliers.
The supplier anecdotes you passed along were interesting as well. The supplier referenced that implemented SCF for their upstream supply chain also chose PrimeRevenue for the technology/services component. They’re also working with multiple banks, including some of those on the Lowe’s program.
Robert Kramer
VP, Working Capital Solutions
PrimeRevenue, Inc.
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