Interview: Harmonizing Supply Chain Finance with Supplier Sustainability

Supply Chain Finance (SCF) plays a crucial role in strengthening buyer-supplier relationships in today's complex global business landscape. It optimizes cash flow and liquidity for both parties, benefiting suppliers by providing affordable capital and enhancing their financial stability. SCF creates a win-win situation that promotes mutual growth, collaboration, and resilience, reinforcing the buyer-supplier relationship.

Recent times have witnessed numerous advancements in the structuring and execution of Supply Chain Finance (SCF), one notable development being the integration of SCF with a company's sustainability objectives.

As companies worldwide strive towards achieving their net-zero goals, those in the consumer goods sector face a unique challenge. This is due to their massive distribution scale, involving billions of packages shipped to millions of customers globally. Monitoring the Product Carbon Footprint (PCF) and managing the collection of bottles and packages for recycling programs presents significant challenges.

Coca-Cola Europacific Partners (CCEP) is the largest dedicated Coca-Cola bottler in the world based on revenue, serving over 1.75 million customers with a diverse range of iconic beverage brands.

CCEP's Procurement team has devised an innovative strategy that intertwines their Supply Chain Finance (SCF) program with their sustainability initiatives. Suppliers participating in the SCF program are encouraged to meet sustainability goals by gaining access to more affordable financing through CCEP. This approach not only aids suppliers in managing their working capital requirements but also promotes a more sustainable supply chain.

In a discussion at the company's London office, Ralf Peters, the Chief Procurement Officer (CPO) of CCEP, and Anthony Breach, the Director of the Procurement Centre of Excellence (CoE), shared insights about the operation of the program and key post-launch takeaways with Beroe.

Ralf started by outlining CCEP's sustainability strategy, which focuses on six key pillars: Climate, Packaging, Water, Supply Chain, Drinks, and Society.

“Each of these pillars has explicit targets. Climate targets include a 30 percent carbon emission reduction across the entire value chain by 2030 (vs. 2019), and a net-zero emission target by 2040. Packaging objectives entail increased use of recycled materials, phasing out virgin plastics, and ensuring the return of 100 percent of packaging materials,” Ralf said.

The company also intends to decrease sugar content across its beverage range. Each goal is assigned a responsible department, with procurement overseeing supplier-related targets due to the majority of carbon emissions being in the Scope 3 category, associated with the supply chain. The company is also promoting supplier-guided principles and sustainable agriculture, demonstrating a commitment to accountable and sustainable practices.

The SCF Program

Just as with any organization, CCEP needs its suppliers to assist in reaching its goal of net zero emissions by 2040. An essential part of lowering CCEP’s Scope 1 and 2 Emissions is its dedication to RE100. However, Scope 3 emissions, which originate from suppliers, account for a significant 91% of CCEP's total emissions.

Besides the GHG reduction initiatives, CCEP also provides a Supply Chain Finance (SCF) program. This program incentivizes suppliers by offering a reduced funding rate that is tied to the attainment of environmental KPIs.

All suppliers can access SCF, but in order to qualify for CCEP's sustainability linked SCF program, suppliers must meet a minimum Ecovadis rating. Then specific Key Performance Indicators (KPIs) related to climate, particularly GHG Emissions and Renewable Electricity are used to reward supplier performance with discounted funding rates.

(Source: CCEP)

CCEP has already exceeded its goal to expand SCF program usage from 300 million to 400 million euros in the first year, and is targeting 600 million euros in the third year.

“For suppliers to qualify for the sustainable aspect of the program, they need to score 50 or higher on EcoVadis. The ultimate goal is to encourage suppliers to establish Validated Science-based Targets (SBTs) for cutting GHG emissions and achieve 100 percent purchased Renewable Electricity. With the initial funding rate set low, all suppliers gain an advantage from day one and can then achieve significant discounts,” Ralf told Beroe.

Scouting for a Banking Partner

Ralf underscored the importance of involving suppliers in the achievement of the company's sustainability goals. In 2019, the company requested their suppliers to commit to three key actions: setting their own carbon emission reduction targets based on the Science Based Targets initiative (SBTi), using renewable energy by 2025, and sharing their data to identify potential for carbon reduction projects.

"While we framed this global overarching message...we also have to give suppliers tools and opportunities to deliver that," Ralf said.

The company thus started with a carbon reduction toolkit in 2019 and 2020, offering free training to suppliers to build their capacity and enable them to set their own science-based targets.

Discussing the link between sustainability targets and business processes, Ralf mentioned the acquisition of Coca-Cola Amatil and subsequent expansion into the Asia Pacific region. The expansion provided the opportunity to review their supply chain financing offering, which was managed by two banks in Europe and two banks in Asia Pacific. The idea was to consolidate to as fewer banks as practically possible.

While drafting the Request for Proposal (RFP), Ralf’s team explored the idea of incentivizing suppliers based on their sustainability credentials.

“The aim was to find a bank that could translate these credentials into a supply chain financing program,” Ralf said.

He described the RFP process as a learning experience, with the company and the banks testing various scenarios and going through different iterations of value.

The final framework incentivizes suppliers based on certain measurable criteria. "If you have a certain EcoVadis score, that's your entry ticket into a conditional bucket...If you then add to that, the fact that you have either an SBTi Target or you are using renewable energy, you move into a better bucket...If you have both, you move into another bucket which is even better conditions. And if you have on top of that, an EcoVadis score 65 Plus you actually move into the best bucket," Ralf explained.

For its part, Rabobank, the chosen bank, chose to also invest in the programme and established a system where they contribute to the Rabo Foundation. This investment is then directed towards initiatives that foster sustainable agriculture. Indonesia, one of the markets where Rabobank is very active, was identified as a potential beneficiary of such projects.

Ralf believes this approach creates multiple wins. "Our suppliers will win, especially those that are more sustainable...because they get better financing. And we will win because we will provide an additional incentive for our suppliers to advance in carbon reduction journey."

Ralf added that the company will benefit from improved sustainability credentials from suppliers, ultimately helping them achieve their goals sooner. Rabobank, as the innovator and executor of this unique solution, also stands to gain with the addition of a new product to its portfolio.

Negotiating with Banks

The process of working with banks to streamline sustainability incentives revealed that a pragmatic approach was most effective. Ralf explained, "If you have something very pragmatic, it's a winning proposition. If you make it too complicated, if you put too many conditions on that, it makes it admin heavy, not easy to understand."

He emphasised the importance of transparency and straightforwardness, stressing that if a program couldn't be explained to a CEO in 10 minutes without extensive support and demonstrations, it needed refinement. This led to the establishment of straightforward, easily understood criteria for supplier assessment based on well-accepted industry standards.

When presenting these clear-cut standards to the banks, the question was whether they could implement this model. Rabobank emerged as the company's choice, thanks to their clear communication and innovative interface.

Ralf also spoke about the transition from four banks across two territories to one bank covering most markets. He mentioned that an exception was made for one market where Rabobank lacked a banking license, allowing another bank to provide supply chain finance.

Simplicity is the Key

Through this process, several lessons were gleaned from negotiating with bankers on subjects that don't typically fall within procurement's purview and were integral to the negotiation process.

Ralf was part of the second and third rounds of presentations where various banks showcased their approaches. According to him, the banks didn't have much difficulty understanding the sustainable business concept, given their own obligations towards sustainability. The main challenge lay in transforming the concept into a feasible solution.

"There was a joint excitement about getting that done. Ultimately, you wonder why it hasn't been linked before. So nobody had something like a solution in the drawer. That was the exciting part in terms of it was truly a new product development," he reflected.

The requirement to cover all of CCEP’s 29 markets brought about a sense of urgency and created a lively atmosphere. This motivated banks to bring in their experts or "big guns" into the discussion, keen to devise a commercial solution that would be beneficial.

In the end, the alignment between the company's internal team, the Treasury and the CFO, sped up the process. Ralf shared, "Internally, we are fully aligned with Treasury and the CFO. And then it was pretty clear that the whole package, including the generating funds for social investments, Rabobank was in a strong proposition".

For his part, Anthony Breach, the Director of CoE and the individual responsible for bringing the program to life, stated that a key takeaway from the process was the recognition that banks tend to complicate matters. He said that some of the solutions proposed by the banks could have been excessively complex to manage from their side and confusing for CCEP suppliers. However, he praised the final program for its direct connection to themes already discussed with their suppliers.

"One of the beauties of the program, which I like is it's very simple." Anthony also mentioned receiving positive feedback from suppliers, who felt the program was in line with their objectives. This harmony was largely due to prior conversations about mutual goals. "We've had feedback from our suppliers on the program, saying that it's perfectly aligned with their goals," he said, further noting their satisfaction seeing this incentive applied in unanticipated areas.

Ralf acknowledged Anthony’s opinion and further commented on the importance of practicality in solutions, cautioning against getting swept up in overly complex strategies. He pointed out that complexity often leads to comprehension difficulties, requiring undue effort. "Make it easy and make it easier. You will be surprised how often you will be then presented ultimately with a plain solution," Ralf emphasized.

Ralf added that he consistently advocated for clarity to avoid future complications during implementation, operation, and reporting. He further stressed how certain programs become so convoluted that one might need specialized knowledge to comprehend or implement them, highlighting the importance of user-friendly tools and functionalities that can be easily retained and utilized.

The Online Portal

The SCF interface was developed by Rabobank. Anthony said: "We've introduced an online portal in collaboration with Rabobank, chosen largely for their flexibility. They took an active step by launching the portal six months ahead of their planned development timeline, specifically to cater to our needs. This has streamlined our management process as we can transmit our invoices in an automated manner to our suppliers. The portal also provides a secure environment for our suppliers, offering them the flexibility to auto-enrol or manage their cash flow manually and effectively."

He continued to elaborate, "Rabobank's environmental credentials also played a significant role in our decision to choose them. During negotiations with the banks, I made it a point to ensure that none of our existing suppliers should be negatively affected by the introduction of this new supply chain finance program linked to sustainability. Rather, we wanted to provide an incentive for all our suppliers from the start, enticing them to join the new program."

He further added, "our suppliers have invested time and effort over several years in setting up an automated process with the previous banks, so we needed to offer them a reason to join the new programme. We managed to do so by ensuring better value from the first day, maintaining clarity in our processes, and rewarding our suppliers. These were the three primary criteria I considered during the negotiations."

Learnings from the Program

Ralf made some interesting observations, stating, "A key lesson for us is that practically any category can fuse commercial requirements with sustainability objectives." He explained that this wasn't the first or the last time they had integrated these two aspects, with the Supply Chain Finance program being a prime example.

He also noted how his team had to redesign the program due to changes in their global footprint and added sustainability as a necessary requirement. He reiterated on this concept, much like they do with other categories, continually updating requirements to include sustainability, supply chain transparency, and social enterprise targets.

However, Ralf remarked, "What surprised us was that despite the advanced state of these areas, we could not find a ready-made solution in the banking sector." This was a noteworthy realization and ultimately led to the creation of a unique solution.

Ralf stressed the importance of not taking sustainability for granted, indicating that it's not always about choosing to pursue it or not. Sometimes the solutions aren't there, and development is necessary. He shared his initial positive feelings about the solution and the supplier's approval, yet he was unsure how it would fare in real-world application. But, it is exceeding expectations.

"The learning from this program is twofold. The size of the program exceeded our expectations, and it's gratifying that we indirectly created business value for our banking partners," Ralf said.

For his part, Anthony reflected on his experience, saying, "The practical transition of suppliers from one program to another hinges on the quality of your master data, and this can take time." He admitted that he may have underestimated the duration of this process, especially considering the timing of the program's launch.

Anthony noted that the initial stage of onboarding suppliers and transitioning them was slow, but it eventually gained momentum. He confessed, "Part of this slow start might be attributed to our decision to launch it in summer, something I wouldn't recommend."

He also shared thoughts on the program's design and evolution. It was purposefully structured for longevity, with its connection to challenging sustainability goals. The intent was to avoid frequent changes in the program and its targets.

"We designed the program to be adaptable, with room to incorporate additional incentives if new essential targets emerge for the organization," Anthony said. He acknowledged that while he hadn't yet encountered such a scenario, it was a possibility they were prepared for.

The focus was on adopting a rewarding approach rather than imposing additional conditions on suppliers. Anthony concluded by saying, "While it's not a learning, per se, I'm glad we were forward-thinking when considering the simplicity of the program and what could come next."

The Procurement team's hard work was rewarded when CCEP received the Gold Award for Best Working Capital Project. This award, given by the Working Capital Forum, acknowledges excellent management of working capital. The forum consists of professionals in treasury, payments, and procurement.

The Road Ahead

When contemplating future strategies, Ralf underscored his intention to maintain his approach to sourcing events, which involves evaluating the current incumbent while also keeping an eye on significant strategic objectives, such as sustainability and regulatory compliance.

Ralf said the strategy is to drive innovation in sourcing events by tapping into the intelligence of suppliers, who possess great capability to develop new solutions when provided with the right direction.

Ralf offered an example to illustrate this approach. He mentioned the regulatory requirement by the European Union, effective 2024, that all PET bottles must have closures attached to the bottle. This presented a challenge, as these closures weren't prevalent and the development and change of production lines would be costly. However, in the process of discussing and developing this new closure, suppliers came up with a smaller, material-saving neck finish. Instead of additional costs running into double-digit millions, there was a saving of the same magnitude.

"We went into it with an open mind, combining the necessity of a new closure and a redesigned neck finish, and ended up with a commercial opportunity rather than a burden," Ralf said. He then added that it was important to set targets and leverage supplier knowledge to find and develop solutions.

"We created an industry standard, and those closure suppliers have been providing for the entire industry over the last few years. We had options to change or not change the neck finish, but we decided to change it, " he explained.

Ralf said that the key lesson was to always consider "what if" scenarios and engage in open discussions with suppliers to find practical, executable solutions.

"Pragmatism is the winning formula, as it leads to results. They might not be perfect, but they are certainly measurable, and they create momentum for emotional buy-in from a resource allocation perspective," Ralf concluded.