SUPPLY CHAIN PRIMER
SUPPLY CHAIN 101 BY BRIAN RESUTEK Ask ten people to define the meaning of a supply chain and you might come away with eleven answers. Most will likely agree, however, that the supply chain involves the end-toend production and delivery process through final payment of a product or service. In this supply chain primer, we will explore the parts or “links” in a typical supply chain and focus on where secured finance plays a role along the route. Additionally, we will illustrate the areas where more risk is borne by a potential lender and how pricing and structure work for lenders and borrowers. A chart outlines the various phases of where lenders are involved in a company’s supply chain along with illustrating where lenders traditionally are involved along with the elements of cost, loss probability and collateral value.
From the Beginning From a lender perspective, involvement in the physical supply chain is not at time zero in the supply chain. The borrower has likely already vetted various suppliers, tested prototypes/ samples and spent a good deal of time understanding their customer base, which is required to ultimately generate revenue. A lender sometimes gets involved as early as financing the purchase order (e.g., the borrower has secured a purchase order from a large customer to deliver a product by a certain delivery date). While a purchase order is a contract between two parties, the degree of risk is higher on a PO in comparison to inventory and accounts receivable as POs
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THE SECURED LENDER SEPT 2023
are not a collateralized asset class. Should a PO be cancelled or greatly modified, a lender could find themselves in a difficult position. As a result, this is why PO lending is traditionally handled by specialized lenders or niche lenders and not offered by other lenders as a fair degree of monitoring and expertise is required (refer to chart below).
BRIAN RESUTEK Rosenthal & Rosenthal
On to the Inventory Phase Understanding the supply chain as it relates to the inventory phase is traditionally one of the longest and most challenging parts of the supply chain. For this primer basis, a few areas of consideration: 1) Understanding supplier agreements along with potential contingency arrangements in place; 2) Understanding the involvement of the inventory assembly to finished goods, work in process (WIP), and useful life or movement of inventory. A lender needs to be aware of the components of inventory required along with the complexity of the inventory process to a final finished goods state (see chart); 3) Lastly, salability of inventory components by both lenders and borrowers should be evaluated and monitored throughout the lending process. While there are countless other and deal-specific consideration points on inventory, these are a few common ones that should be part of any standard underwriting.