The Importance of “Preferred Buyer” Status & Its Role in Supply Chain Finance

Alex Weiss

The tightening of supply chains is threatening businesses globally. Luckily, attaining “preferred buyer” status with suppliers through a supply chain finance program can help keep production – and profitability – moving forward.

Over the last few years, supply chain disruptions have brought a screeching halt to the lifting of production and shipping restrictions. Going beyond the impacts of COVID-19, the rising interest rate environment and economic uncertainty have cast a pall over business growth and supply chain health and resiliency.

Manufacturers around the globe are trying to manage shortages of critical components, higher raw material costs and bidding wars on shipping in order to keep production moving. “We can’t get enough components, we can’t get containers, costs have been driven up tremendously,” Chief Executive Officer of Hong Kong-based Musical Electronics Ltd. Christopher Tse said in an interview with Bloomberg.

Skyrocketing shipping costs

According to data from the freight tracking firm Freightos, container shipping rates from China and East Asia to the United States East Coast climbed above $20,000, compared with about $4,000 a year ago. The cost of sending a container from Asia to Europe is about 10 times higher than in May 2020, all the while cost from Shanghai to Los Angeles has grown by more than 600 percent, according to the Drewry World Container Index. Those high prices are attractive to shipping companies and are leading to the abandonment of other routes, causing the problem to spread. The shipping issues have been exacerbated by related imbalances: boats are backing up at ports, and as demand for goods booms in the United States, empty shipping containers haven’t been able to get back to China fast enough.

Impacts are even being felt across industries and are even leading to liquor, beer and wine shortages.

“Preferred buyer” status

Sellers have always strived to become a buyer’s “preferred supplier.” But with the current supply chain challenge, the balance of power lies with the suppliers, and buyers are adopting an approach of presenting their company as a “preferred buyer.” In this situation, the buyer is seeking a more beneficial partnership with suppliers, such as access to research and development, intellectual property, white papers or technology road maps, delayed implementation of price increases, preferential pricing or, most important in this context, avoidance of allocation rationing in times of shortage or other limitations.

Simple procurement and contracting processes, on-time payment, clear documentation, the avoidance of unduly onerous terms and conditions, ethical behavior, and transparent processes can help differentiate the buyer’s organization from other buyers.

Supply chain finance & preferred status

Another way buyers are incentivizing sellers to do business with them is through supply chain finance programs — programs that help align the buyer-seller relationship and maintain healthy, resilient supply chains even in times of disruption.

Suppliers control how and when they get paid with supply chain finance. As mentioned above, burdensome payment can prevent a buyer from doing business with a company. Supply chain finance represents the opposite of that. Even if a company agrees to industry-standard terms with a supplier, say 30, 45, or 60 days, a supply chain finance program can cut those terms to two to three days. Because supply chain finance programs rely on third-party financing, buyers can help provide the working capital to their suppliers without having to sacrifice their own liquidity.

“If buyers want to keep those small pharmaceutical companies or small apparel or footwear companies working for them, then they want to do everything that they can to help them,” said Analyst George Lawrie at Forrester Research. “And, if that means helping their working capital, making sure they don’t go out of business, well, that’s to the [buyers’] advantage in the long term.”

Learn more about how we can tailor a program that can improve your company’s status with your suppliers through Esker Pay.

Author Bio

Alex Weiss

Alex Weiss is part of the Esker Alliance team. In his experience as a B2B trade finance specialist, he’s worked with customers small and large to optimize their working capital and payments. Alex channels his experience in building online invoice factoring, supply chain finance and payments platforms to help integrate financial service partners into the Esker ecosystem.

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