Financial supply chain debate: Participants
JL, J&W What do you include in the financial supply chain, what are your key drivers and objectives and why should we look at this now?
SH, Flextronics The key objective is still working capital management. The rating agencies and investors are increasingly focused on cash on the balance sheet, so the cash-cycle day is key. Most corporates are relatively advanced in their strategy as concerns the customer, and that includes asset-backed securitizations, factoring and accounts receivable sales. Where they have been slower to adapt has been on the supply side. From most multinationals’ perspective, that means reverse factoring and inventory financing. Effectively, if you believe you don’t need credit facilities, but do need liquidity provision, you’re trying to pass that liquidity provision on to your supplier base. Through strategic financial partners you use your large supplier base to take advantage of the cash in the system. It’s a good time for companies to focus on this because the banks want to leverage off their very wide customer base. They realize that there are some very good cross-sell opportunities there. Pricing has tightened, but it’s still very good. As the footprint of multinationals becomes more global, the supplier base is increasingly diversifying. In my industry, as we chase lower-cost manufacturing climates, so our supply base has increased sixfold. This needs to be addressed.
BD, ABN Amro Defining this business is hard. Banks try to capture the end to end – importer-buyer/exporter-vendor. But that relationship contains many components, as there is a range of banking products that marry the physical and the financial supply chains, and there isn’t a common template at this stage. Now is a good time for bankers because that’s what the client base is calling for. Also the connectivity on the physical side has become much improved through technology. In order to assess risk you need information and data-flows, and an increasing part of this is inventory management. Steve says his supplier base is expanding but equally some companies are whittling down theirs – selecting strategic suppliers on which they depend, and maintaining fewer in number that are needed occasionally.
SH, Flextronics Typically, in our space the customer designates the suppliers. To keep the cost base low enough to satisfy customers, you have to use a locally sourced supplier base. In the past, a company such as Flextronics would have used a global supply base of 15 key suppliers located in a small number of high-cost developed markets. That is not sustainable today and companies have to use more suppliers in more markets. This is changing the way we finance and arrange the business. We need more global financial service provision to a wider supply chain, and the banks need to involve some of the smaller local players in their direct client approach portfolio. The banks must follow us to the lower-cost production environments.
SJ, Hewlett-Packard I define the financial supply chain as the order-to-cash: procurement-to-pay, end-to-end business processes and beyond into financing. We’ve spent a lot of time and energy moving our business processes to low-cost locations. But now we’re seeing salary inflation in some of these, and that’s forcing us to look for the root causes of business process inefficiencies. We’ve also put a lot of effort into ensuring that we have end-to-end efficiency in our internal business processes with the deployment of applications like SAP, for example. Beyond that, you look for savings in the way in which you deal with your customer and supplier base. HP has customers in the enterprise, SME and consumer space, and we have multiple business models. Banks are under huge regulatory pressure and are looking for areas where they can add value to their client base. Both corporates and banks are beginning to see that facilitating and financing the supply chain is a big area of opportunity. The technology is there and I see it as an enabler for what we are discussing, which is the optimization of the balance sheet and the P&L.
LT, RBS Quite simply, we are listening to our customers. They seek to reduce the costs associated with their supply chains. In an expanding global economy, if they wish to remain competitive they must lower their costs. Many previously concentrated on the physical flow of goods, shifting the costs of stockholding onto their suppliers. They are now switching their attention to creating greater efficiencies in the management of their supply chains. If we as a bank wish to remain intermediated with our customers then we must provide the solutions that assist them. Our trade services platforms are constantly being reviewed and enhanced to provide additional services that facilitate easier and more efficient trade processes. And the market is moving: for example, we cannot ignore the rapid growth in Open Account trading. Our customers need the bank to provide financing solutions more geared to that environment. They are increasingly focused on the finance costs paid by their suppliers and are asking the bank to find innovative solutions that will reduce those costs. SWIFT’s Trade Service Utility is being developed as a tool to help the banking world meet these challenges.
However, it is not just about cash. Equally important is visibility, both internally and externally. Our customers are looking at how both our and their own platforms can be developed to increase visibility and communication with their trading partners.
Increased complexity
JS, JPMorgan Financing is a key driver but it’s becoming more complicated. There’s a huge increase in compliance, risk management and risk control, and these factors are important. We talk about the cash-to-cash cycle, but a lot happens in between. You need to have the management information around the whole process, knowing where you are at any point in time with your suppliers – where your goods are – because there may be certain points within that process which can severely impact the financial supply chain. Process improvement is about transparency, about linking together a visible financial supply chain, and offering corporates a way to look at it from a different perspective.
