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How supply chain finance fuels growth
India’s vast population, characterized by its rich diversity of cultural backgrounds and dietary preferences, fuels a substantial demand for food products, making the food processing market highly lucrative. This demand is further intensified by population growth, rapid urbanization, and rising disposable incomes, all of which have contributed to evolving consumer preferences and eating habits. Bolstered by government initiatives, these dynamics have catalyzed extraordinary growth in the industry, with the Indian food processing market projected to reach $ 895.70 billion in 2024 and an anticipated annual growth rate of 8.3% (CAGR 2024-2029).
However, this expansion brings a complex web of supply chains that require immediate attention to meet the increasing demand effectively. The industry grapples with numerous challenges, ranging from volatile commodity prices and supply chain disruptions to an escalating need for transparency and sustainability. Efficient supply chain management, encompassing everything from sourcing raw materials to delivering products to consumers through B2B or B2C channels, necessitates a robust, technology-driven approach.
Managing working capital efficiently remains a persistent challenge, particularly for small and medium-sized enterprises (SMEs) within the food supply chain. The need for technological integration, risk mitigation, and sustainable practices further complicates the financial landscape. In India, many SMEs, often serving as distributors or dealers for large companies in sectors like FMCG and white goods, struggle with working capital constraints and financial discipline. Hesitancy among lenders to extend credit exacerbates these issues, leading to the emergence of innovative financial solutions, such as supply chain finance (SCF) programs, which provide essential liquidity and flexibility to navigate these challenges.
Supply chain finance, through its diverse range of technological products, offers the financial resources necessary to ensure the smooth functioning of supply chains. It facilitates the procurement of raw materials, supports production processes, ensures the timely transportation of goods, and provides easy access to credit. Moreover, financial tools such as working capital management, trade finance, and SCF programs play a pivotal role in mitigating risks and uncertainties.
These instruments provide liquidity at various supply chain stages and enhance the system’s overall resilience. Lenders, in particular, find comfort in the transaction-based nature of these tools, which makes it easier to track early warning signals and manage risks effectively. This added layer of transparency and control fortifies the entire supply chain, enabling it to withstand disruptions and maintain smooth progress.
Additionally, SCF improves stakeholder relationships, including those of suppliers, distributors, financial institutions, and internal teams. By enabling early payments and showcasing financial discipline, SCF enhances supplier relationships, securing better pricing and reliable supply chains. It also strengthens collaboration with distributors and retailers and fosters trust with financial institutions for more favorable financing terms. Internally, SCF promotes efficient financial management and alignment across departments, ultimately boosting profitability.
A well-structured financial framework acts as a stabilizing force, enabling the industry to withstand disruptions and maintain consistent progress.
Implementing a supply chain finance model can effectively mitigate procurement, manufacturing, and logistics risks. It offers several key benefits:
- Enhanced cash flow management through extended Days Payable Outstanding (DPO) facilitated by a financier’s involvement.
- Supplier discounts, resulting in reduced cost of goods sold (COGS).
- Improved operational efficiency and stability, leading to stronger partnerships and more effective supply chain linkages.
- Support for smaller or strategic suppliers, aiding their growth and reliability, ultimately benefiting the entire supply chain.
In conclusion, leveraging Supply Chain Finance in India’s food manufacturing sector can significantly improve cash flow management, cost efficiency, operational stability, and supplier relationships. These advancements can enhance profitability and provide a competitive edge in the dynamic and price-sensitive Indian market by reducing COGS through early payment discounts and bulk purchasing while strengthening supplier relationships through liquidity support. SCF also provides access to lower-cost financing, freeing up capital for growth and innovation financing, freeing up capital for growth and innovation.
The article is contributed by Priyendu Jha, Head-Treasury at Patanjali Foods.