A Healthy Apparel Supply Chain Starts with Access to Capital

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A Healthy Apparel Supply Chain Starts with Access to Capital

The implosion of Hanjin Shipping made headlines globally and once again drew attention to the widespread risk in today’s global supply chains. While major disruptions raise awareness of supply chain fragility, it’s the small day-to-day challenges sneaking up that can really erode a brand. Apparel brands rely on suppliers in places like Vietnam and Bangladesh. The everyday risks are aplenty – relating to quality, compliance and capital, to name a few. Assessing and mitigating supplier related risk is an ongoing challenge with many moving parts that can pop up and cause disruptions. But it’s the risk around capital that has a major impact and can cascade into other challenges such as disruptions and higher costs.
Small suppliers are the backbone of the apparel industry. Unfortunately, many lack credit strength to secure sufficient funding to keep up with their major apparel and retail customers. They need capital to purchase raw materials, pay employees, service factories and keep the lights on. The thirst for capital is intensified by customer payment terms that sometimes extend to 60, 90 or even 120 days. This is where a supplier’s financial health can become an issue. How? Delayed goods, sacrificed quality or non –compliance due to capital pressure can have widespread impact, particularly to the brand itself.
Leading apparel brands are finding that it’s in their best interests to assist suppliers in obtaining capital they need to ensure on-time delivery of quality goods. Puma and Levi Strauss have supplier financing programs in place that do just this. Their suppliers obtain capital in just days through a cloud based supply chain platform. The platform allows the financial strength of the buyer to be applied to the smaller supplier. These moves ease several burdens and concerns:
·        Expensive capital: suppliers are alleviated from paying higher interest rates locally in places like South East Asia
·        Cash flow bottlenecks: extended payment terms that can make it even harder for suppliers to begin their next order are removed
·        Compliance and sustainability concerns: capital constraints that can cause suppliers to cut corners or avoid taking proper steps to ensure safe and ethical production, are eliminated
In the case of Puma and Levi’s, suppliers are actually rewarded with even better rates based on a benchmark score of their sustainability and responsibility practices.
Win-Win Scenario
Ahill Apparel Exports is a supplier based in Tirupur, India. It operates five factories and turns out 5 million t-shirts and knitted garments each year. Like many other apparel manufactures, Ahill was challenged to find reasonably priced financing locally. In addition, banks often required ties to collateral, such as the owner’s personal property. In the past, Ahill used mostly a $5 million (US) line of credit from the State Bank of India. It carried continuous rotation limits and rates were Libor +2.5%. Ahill tapped into a supplier financing program through a cloud-based platform that allows all orders, invoices and funding to occur electronically in one place. An invoice discounting program now allows Ahill to get paid faster – just 7-8 days - in exchange for a small discount on the invoice. The automated arrangement offers a more competitive rate than traditional commercial banks. It offers .30% for 30 days plus 0.1% finance facilitation fees. The invoice discounting program has been vital to business development at Ahill. It has injected new energy and life into the company – and the supply chain it supports.  
For brands and retailers, there’s certainly value in improving metrics such as days payable outstanding. But squeezing the most out of the supply chain is not a long term strategy. In the end, it’s the brand with the strongest and most reliable end-to-end supply chain that will prevail.
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Additional Links with Relevant Information

Case Study: Ahill Apparel Exports Limited

Case Study: Dean Shoes

Levi's: Jeans Maker Launches Cheap Financing for More Ethical Factories

Puma Offers Financial Incentives to Improve Suppliers’ Environmental Management

The Power of Network Financial Supply Chain

Video: Overcoming Supplier Challenges