How it’s made is as important as the brand

How is an innovative financing initiative aligning incentives, promoting transparency and embedding Puma's shift to supply chain sustainability?

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In 2016, European multinational PUMA SE terminated its relationships with 11 footwear, apparel and accessories suppliers because of failure to comply with its social and environmental standards. The move sent two clear messages to members of the supply chain: PUMA cares about more than just profits, and the company is willing to take bold action push forward its vision for a more just and sustainable future.

PUMA’s staunch commitment to health and safety, human rights and environmental conservation is evidenced not only by the aggressive targets the company sets for its internal operations, but through its comprehensive supply chain sustainability initiatives, including an industry recognized best-in-class supplier audit program.

Consumer demand for transparency will continue to pressure high-profile companies to drive more responsible business practices throughout their supply chains.

These efforts have been an important differentiator for PUMA, particularly against the backdrop of high-profile social and environmental controversies that have tainted the footwear and apparel markets in which PUMA operates. “Today’s consumers are demanding transparency from the brands they use and holding corporates to account for the actions of their suppliers,” explained Thomas Herzog, senior relationship manager with international banking group BNP Paribas. Herzog, who oversees PUMA’s business with the bank, noted that PUMA’s supplier audit program enables the company to clearly show customers that their products are manufactured in facilities where human rights, the environment and workers’ health and safety are respected and protected.

For PUMA, however, the audit program is about more than just mitigating risk. The overarching goal is to drive lasting, positive change in PUMA’s sourcing activities. In recent years, though, PUMA observed that the effort was not inspiring the level of transformation the company had hoped for. “We have found that the audits would, at times, create an ‘in or out’ mentality,” said Frank Wächter, Senior Head of Treasury and Insurance at PUMA. “Too often the result was either a supplier complied and got our business, or they didn’t. There was no real incentive for them to improve further.”

Empowering progress

In order to motivate suppliers to move beyond strict audit compliance to achieve truly integrated operational sustainability, PUMA decided it was time for another bold move. In 2016, PUMA introduced an unusual vendor financing solution, after the brand had recognized that efforts to comply with its social and environmental standards often posed an economic burden for many suppliers. The solution was modeled after a similar program implemented by International Finance Corporation (IFC), a member of the World Bank Group, and Levi Strauss.

PUMA’s vendor finance program (VFP) was designed to motivate suppliers to improve their sustainability performance by tying financing terms to their compliance with PUMA’s standards, as opposed to standard supply chain finance offerings that rely strictly on the borrower’s credit rating. The program offers tiered pricing of short-term working capital, with lower borrowing costs for those suppliers that achieve higher scores on PUMA’s audits.

PUMA developed this solution in collaboration with BNP Paribas, IFC and GTNexus, a supply chain cloud service platform provider. The program leverages the GTNexus centralized purchasing platform to automate and expedite receivables funding for PUMA’s Tier 1 suppliers, who represent approximately 90 percent of the company’s annual worldwide invoice volume, Wächter reported.

Doing well by doing good

The program aligned well with BNP Paribas’s vision to be “the bank for a changing world.” Though the margin risk was somewhat higher than a typical bank-backed supply chain finance agreement, BNP Paribas, like PUMA, recognizes that value isn’t always measured in narrowly defined monetary terms. With its participation in the PUMA VFP, BNP Paribas became the first market-listed bank in the world to accept a sustainability-based interest rate grid for supply chain finance.

For members of BNP Paribas’s team like Thomas Herzog, successful implementation of the program was not just a professional win, but also personally satisfying. As a father of three small children, Herzog wants his kids to have the opportunity to grow up in a world that is clean and fair. Working with PUMA has given Herzog the opportunity to actively participate in an effort that could bring his dream for his children a few steps closer to reality. “We all put in the time and effort to realize this program because we only have one Earth and this is an opportunity for us to invest in society and impact our children’s future,” he said.

In addition to providing BNP Paribas with a vehicle to ensure that the bank is not inadvertently financing supply chain activity that runs afoul of its sustainability principles, the PUMA VFP also fortifies BNP Paribas’s distinctive approach to supply chain, reported Suresh Subramanian, managing director, head of trade and treasury solutions, Americas, BNP Paribas.

“If you talk supply chain finance with many other banks they look at is as being analogous to a payable program,” Subramanian said. “But we take a more holistic approach to supply chain. Our solutions in the supply chain are focused around improving working capital efficiency, optimizing cash-to-cash cycles and mitigating risk, while being tailored to the specific goals of each client.”

An idea whose time has come

Subramanian expects the program will be a catalyst for promoting more sustainable sourcing across multiple industry sectors. “Consumer demand for transparency will continue to pressure high-profile companies to drive more responsible business practices throughout their supply chains. Solutions like the VFP will help them break down the barriers between sustainability and sourcing,” Subramanian concluded. “It’ll take time, but the idea is good and the time is right.”

Adding a financial incentive to supply chain sustainability is not only a good idea, but also an important step in the maturing of supply chain sustainability, according to Michael Rohwer, associate director, Information and Communications Technology at the non-profit business network BSR. “I am excited to see companies crack that code around supply chain sustainability and finance,” he concluded. “Until now, we haven’t seen this concept take off in a way that has been impactful, so I am eager to see how this develops.”