Krispy Kreme Doughnut, Inc.: Best Supply Chain Solution Highly Commended at the Adam Smith Awards
Headquartered in Charlotte, North Carolina, Krispy Kreme is one of the most beloved and well-known sweet treat brands in the world. For over 85 years, its iconic Original Glazed® doughnut has been universally recognised for its hot-off the-line, melt-in your-mouth experience. The Krispy Kreme Doughnut Corporation operates in more than 30 countries through its unique network of fresh doughnut shops, partnerships with leading retailers, and a rapidly e-commerce and delivery business. In 2022 alone, Krispy Kreme sold over 1.6 billion doughnuts.
Krispy Kreme implements SCF via virtual payment card solution
The greatest unsolved challenge for supply chain financing (SCF) has been the management of interest rate risk. This is true for all suppliers but particularly:
- Suppliers in highly competitive industries such as fast-moving consumer goods (FMCG) and retail. Net margins in such industries are often single digits.
- Smaller companies that may not have significant alternative sources of financial resilience.
2022 was a year of monetary policy “Shock and Awe” as central banks, led by the US Fed, reacted to rapidly increasing inflation rates. Official interest rates rose by over 4%, with more expected, and money market rates (LIBOR and Term SFOR) by even more.
These moves have had dramatic effects upon the costs to suppliers of liquidity under SCF programmes. In many cases, these moves have eliminated the net margins that such suppliers would earn on their delivery contracts.
Krispy Kreme had three key objectives:
- To manage its working capital balances for both inputs into production and capital expenditures.
- To ensure that all suppliers, in multiple jurisdictions and regardless of spend, have access to the same favourable SCF terms.
- To protect supplier margins from shocks that might be delivered by changes in interest rates.
For suppliers to Krispy Kreme, however, the fixed rate SCF programme established with Orbian, and using Orbian’s virtual payment card (OCS) to enable all supplier inclusion, has provided protection from these interest rate rises. Suppliers have been largely immune from the over 4% rise in US rates as well as similar rises in the UK, Canada and other countries. Instead of worrying about the costs of their working capital, they have been able to continue a sole focus on providing the highest levels of materials and service delivery to Krispy Kreme’s global procurement needs. Orbian’s solutions provided a natural and well-established fit for the first two of the above mentioned objectives.
The third objective set new challenges that have yet to be fully answered elsewhere across the SCF industry. Two factors underpinned Orbian and Krispy Kreme’s ability to solve the third challenge: Firstly, a programme funding model that separates supplier discount decisions from underlying sources of programme liquidity. Secondly, a robust set of historic payment and discount histories for both Krispy Kreme and across all Orbian’s activities that allowed sufficient modelling of supplier behaviour to support a supplier-based interest rate management programme.
Best practice and innovation
The Orbian Fixed Rate SCF via Virtual Payment Card has very important implications for the facility with which the buyers and suppliers can now negotiate the SCF programme. Thanks to this solution, the programme has met all Krispy Kreme’s objectives.
Krispy Kreme achieved its targeted working capital metrics (DPO), thereby supporting the cash conversion cycle at industry leading levels. Suppliers of all sizes from jurisdictions across the globe were able to participate in the programme. Suppliers were protected from the rises in interest rates particularly in the second half of 2022 as central banks accelerated their pace of response to inflation that has clearly proven far from “transitory”.
This Orbian/supplier/Krispy Kreme driven solution is the culmination of a multi-year collaboration in 2022 that has created exceptional value for all. Interest rate risk management has been an unsolved problem for an industry that grew up as a “LIBOR + spread” based tool. The dramatically changing monetary policy landscape of 2022 showed the weaknesses inherent in such a reliance upon floating interest rates. Krispy Kreme, its suppliers and Orbian have worked together to demonstrate and execute a solution to offset these challenges.
- Cost savings
- Risk mitigated
- Improved key performance indicator (KPI) metrics
“The fixed rates for both the SCF and OCS products have important implications for the facilities with which buyers and suppliers can now negotiate the SCF/OCS programmes. It is a unique proposition
allowing suppliers the opportunity to lock in the rate they are going to pay on the discounts they have for a defined period (less than one year), rather than being priced on Libor or other floating rates.” James S Krikorian, Vice President and Treasurer
“The Adam Smith Awards are the gold standard in treasury accolades. We are truly honoured to receive this on behalf of our client, Krispy Kreme Donuts Inc. Underpinning this award is one of the most important innovations of recent years in supply chain finance. For too long, SCF programmes have exposed both buyers and suppliers to the material uncertainty of fluctuating interest rates. Drawing upon the deep behavioural insights of Orbian’s ten-year engagement with the Technical University of Munich, under the leadership of Professor David Wuttke, and enabled by a unique set of funding and risk management tools, Orbian provided Krispy Kreme and all of its suppliers with a fully fixed rate SCF programme. Throughout 2022, Krispy Kreme’s suppliers were entirely protected from the dramatic rises in interest rates. On average, they enjoyed funding rates more than 300 basis points below comparable programmes and were able to continue serving Krispy Kreme without fear as to their cost of liquidity”. Thomas Dunn, Chairman, Orbian
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