Category: Transport & Logistics
Winner: JK Tyre & Industries
Summing up: A supply chain finance programme featuring speedy, efficient, and flexible on-boarding processes that facilitated the involvement of small rural suppliers with minimal financial records
What the judges said: A proactive approach and [the programme’s] flexibility makes this a good story. The supplier onboarding was a success!
- More than 50 critical suppliers were onboarded within a week despite their remote rural locations.
- Around 80 per cent of critical suppliers were onboarded before the start of the rubber procurement season
- Buyer extended days payable outstanding to 90 days
JK Tyre & Industries is one of the leading tyre manufacturers in India and the flagship company of the J K Group. It is among the top 25 tyre manufacturers in the world, with a presence in 100 countries, including nine plants in India and three in Mexico.
The company heavily relies on supplies of natural rubber, making up around 38 per cent of its total raw material requirement.
Rubber supplies can be affected by limited supply and high demand, plus the negative impact of weather conditions such as flooding. The high demand for rubber often requires buyers to make up-front payments for supplies – which is not always optimal from a working capital perspective.
The Indian state of Kerala supplies over 90 per cent of the country’s natural rubber. Producers of natural rubber typically have small plots of agricultural land and work by forming small businesses with other producers creating various partnership entities to sell their goods. They often have limited access to unsecured funding at competitive interest rates and tend to rely on the much high-cost informal lending sector.
JK Tyres wanted to create an unsecured supplier finance programme for its suppliers which would help meet the company’s aim of optimising its working capital position via an off-balance sheet structure, while not placing a cumbersome financial burden on its suppliers. The programme would provide suppliers with a source of formal financing at a far lower cost than options typically available to them. The provision of supplier finance was also expected to reduce supply chain disruptions.
The programme faced many challenges, including arranging the lending of unsecured funding to suppliers widely dispersed across remote rural locations in Kerala. Many of the suppliers had little banking history with typically poor or unavailable financial reports that would not support unsecured credit. The buyer had to work hard to win the trust of suppliers and convey the benefits of the SCF programme to them as well as create a structure that its chosen bank was happy to lend within.
JK Tyres’ strong credit rating underpinned the SCF programme, helping the bank – IndusInd Bank – to be comfortable advancing funds to smaller suppliers.
The programme was a win-win for all parties involved. The suppliers were able to access unsecured financing at competitive rates as well as have the option to receive upfront payments for goods, improving their overall cash flow.
The on-boarding process was also quick and efficient due to the minimal required financial documentation. It was imperative to on-board suppliers before the start of the rubber procurement season.
Within a week, more than 50 per cent of suppliers were on-boarded to the platform and more than 80 per cent of critical suppliers were onboarded before the start of the season.
There was a degree of flexibility to the on-boarding process as well with JK Tyres agreeing to back the structure with accepted Bill of Exchange instead of accepted invoices. This meant the bank could waive other usually mandatory document requirements.
Further conditions such as the provision of audited financials were also waived by the bank, with the buyer providing information on its relationship with each supplier such as business volumes and projections.
JK Tyres benefited from the programme being an off-balance sheet structure that enabled them to extend their days payable outstanding to 90 days. This has helped improve cash flow and the company’s working capital position.
It has also supported the company in its efforts to build a loyal supplier base in what is typically a seller-driven market, which will hopefully minimise supply chain disruptions.
More remotely located suppliers are now being on-boarded to the programme, including from outside of Kerala in the more remote northeastern state of India. Such is the programme’s success; it is also being replicated by other companies in the same industry.