{"id":25604,"date":"2017-11-15T20:24:42","date_gmt":"2017-11-16T01:24:42","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/can-we-prevent-the-end-of-toys\/"},"modified":"2017-11-15T21:35:35","modified_gmt":"2017-11-16T02:35:35","slug":"could-smart-supply-chain-financing-have-saved-toys-r-us-from-bankruptcy","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/could-smart-supply-chain-financing-have-saved-toys-r-us-from-bankruptcy\/","title":{"rendered":"Could smart supply chain financing have saved Toys R Us from bankruptcy?"},"content":{"rendered":"

On November 6, 2017, Toys R Us announced they are filing for bankruptcy. The driver was not their inability to support their long-term debt obligations, but a rapid retraction of available supply chain financing. Company leadership describes the cause of the squeeze as a \u201cdangerous game of dominoes\u201d with the company\u2019s suppliers [1]<\/a>. In this instance, because trade credit is last in line if a company goes bankrupt, suppliers like Hasbro and Mattel were highly attuned to any indications of trouble. When a rumor of potential bankruptcy spread, it became a self-fulfilling prophecy where the suppliers refused to deliver, preventing the Toys R Us from continuing profitable operations. This outcome was of course undesirable for Toys R Us, but also for their suppliers who need the retail channel for sales.<\/p>\n

As supply chains digitize, supply chain financers (SCFs), like Citigroup, have potential to mitigate the impact of this net working capital death spiral and become strategic partners with their customers.<\/p>\n

How does SCF work? <\/strong><\/p>\n

Though the mechanics are complicated (see process flow below), the crux of the product\u2019s value is enabling suppliers be paid earlier, reducing their risk, while also enabling customers to retain advantageous payment terms. Typically, the customer contracts the service with Citi, and they are underwritten for the financing. Suppliers then have the option to purchase the financing based on the invoices from their deliveries to the customer, enabling the suppliers to be paid at the time of sale rather than 30-120 days later. For smaller suppliers, this product enables them to pay based on the cost of capital of their larger, more creditworthy customer.<\/p>\n

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Image source: Citi Supplier Finance [3]<\/p>\n

Though SCFs serve many major supply chains, including Toys R Us\u2019s, they have thus far largely served as a passive broker of financing between players. As supply chains digitize, Citi will have new opportunities for thoughtfully structured financial products and strategic advising that shapes the dynamics of the complete supply chain.<\/p>\n

Citi has already taken a number of steps to entrench their role as a broker in digitizing supply chains. They have worked to enable the automation of key processes like reconciliation by offering electronic invoices [2]<\/a>. Additionally, as customers globalize their suppliers, Citi has expanded their footprint accordingly to meet this demand.<\/p>\n

Citi has also made investments to set them up for growth in the medium and long term. The have invested in technology like CitiDirect BE Mobile that allows suppliers to check the status of payments from their mobile device [3]<\/a>. They have also begun collecting data from \u201cevery aspect of [their customer\u2019s] supply chain down to country by country, almost by subsupplier and then sub-subsupplier [4]<\/a>.\u201d This data presents huge opportunity for enhancing Citi\u2019s offerings.<\/p>\n

In the medium term, Citi should build out its ability to see a customer\u2019s complete supply chain in order to act as a strategic partner. Developing this visibility would enable them to advise on key vulnerabilities, present opportunities to save cost, and share customer performance relative to peers. Over time, this advising could become real-time \u2013 a missed delivery far up the chain is immediately communicated to the retailer along with the expected impact on inventory, enabling the customer to plan for the disruption and adjust their financing plans. Thinking back to Toys R Us, a financer with these capabilities could have helped them weather their crisis by immediately alerting them when a supplier skipped their delivery and perhaps even recommending smaller suppliers that could bridge the inventory gap. Before the crisis, such a financer could have also provided crisis planning advisory based on their supply chain visibility.<\/p>\n

Moving forward, it remains to be seen if Citi will be able to compete in the increasingly competitive environment. The growth in competition is seen particularly acutely in Europe where \u201cbank proprietary platforms\u201d have declined to be less than half of SCF platforms [5]<\/a>. Competitors are both other investors and fintech players. Fintechs have entered the market with a sole focus on SCF, and largely compete on improved customer services like a superior technology offering, easier legal contracting process, and quicker supplier onboarding (a particularly arduous aspect of the process with banks because of Know Your Client requirements) [5]<\/a>. Citi\u2019s ability to leverage the data they collect into actionable insights for their customers will be a key determiner of how much share they will win. Key questions remain around how the market will unfold:<\/p>\n