Supply chain finance: The chain takes the strain

Laurence Neville
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Supply chain finance has come of age in the post-financial crisis period with a growing acceptance among buyers and suppliers and a greater breadth of offerings from banks. Laurence Neville reports.

The global financial crisis and the patchy recovery that has followed in much of the developed world have highlighted both the fragility of companies’ global supply chains and the increasing importance of optimizing working capital. As a result, supply chain financing (SCF), has become a mainstream working capital management tool for many global companies.

Chris Bozek, BAML
“The financial crisis dramatically reinforced the notion that a chain is only as strong as its weakest link,” says Chris Bozek, managing director, global trade and supply chain product head at Bank of America Merrill Lynch. “As supply chains became ever more extended in an effort to source at the lowest possible unit cost, the risks of doing so were not always fully appreciated.”

In response, companies have made SCF a mainstay alongside traditional trade finance tools, such as letters of credit, to meet the need for alternative sources of liquidity and supply chain security, according to Jonathan Richman, head of trade finance North America and financial supply chain, Americas, at Deutsche Bank. “During the financial crisis, these instruments remained more accessible than many other forms of capital and, as such, have become good supplements to the treasury toolkit for managing working capital.”

As market turbulence and credit constraints look set to continue for the foreseeable future, there is continued growing interest in how SCF can be used to improve cash flow and counterparty relationships, and further promote supply chain sustainability for all parties in the chain. “Over the past 18 months we have seen a dramatic shift in the approach that organizations are taking towards risk and resilience of financial supply chains,” says Mike Smith, senior product development manager at SunGard Availability Services. “Businesses are understanding that resilience cannot be compromised, even when costs are being stripped to the bone, as this may well prove a false economy should disruption occur.”

However, SCF faces challenges. “For financial institutions, the challenge is how to deliver efficiently and profitably both the credit capacity and global network required of a full programme rollout – and to do so in the current headwinds created by increasing competition and higher costs stemming from Basel III,” says Bozek. For technology providers, the challenge is to invest enough to keep pace with the speed of innovation – and to make the right bets on where the market is headed.

A new approach

In the period before the financial crisis – when SCF was less common – the goal of buyers (which almost always instigated such programmes) was usually to improve their working capital and lower costs. Now, corporate clients, especially the ones with dominant buying or selling power, no longer want simply to impose payment conditions, says Markus Wohlgeschaffen, head of global trade finance and services at UniCredit. Instead, they analyse how to support strategic partners along their value chains. “Mid- to long-term strategic considerations have become increasingly important,” he says.

Corporates have also broadened their view on their upstream value chain. “Instead of only looking at their direct suppliers, they understood that a portion of the purchase price consists of accumulated financing costs,” says Wohlgeschaffen. “The more players in the value chain, the higher the accumulated financing cost. Thus, we see more and more corporates that support supply chain finance programmes in which their tier one partners act both as suppliers and buyers.”

Bozek at Bank of America Merrill Lynch says that supply chain disruptions beyond the control of corporates (such as political unrest or natural disasters) have prompted companies to re-evaluate the risks of far-sourcing versus near-sourcing, as problems with a supplier or logistics partner in a remote part of the world can cause widespread issues with management of receivables, payables and inventory.

“Collaboration, both internally and externally, is the biggest single consideration today,” says Bozek. “Major financial supply chain decisions are guided by a strategic framework that balances cost, risk, supplier diversity and sustainability. No single department has complete responsibility for supply chain management; hence the need for an enterprise management approach that considers all stakeholder interests (procurement, treasury, accounts payables, technology and operations) with an emphasis on collaboration, integration and shared metrics.”

While many parts of a company are involved in a supply chain, treasurers and CFOs have the major role to play in scrutinizing and optimizing their company’s supply chain processes. “They see the financial supply chain as the driver of the company’s working capital and are deploying enterprise goals and metrics deep into the operational processes to drive this enterprise collaboration,” says Bozek. “Forward-thinking companies have established the executive role of head of supply chain management to drive senior-level visibility and collaboration.”

The geographical nature of SCF is also changing. “Global companies want greater consistency of programmes,” says Adrian Rigby, global deputy head of trade and receivables finance at HSBC. “Why? Because some programmes in the market have been ineffective, not replicable and funding appetites from some institutions have changed.” Bozek agrees that most clients are looking for a global solution and “a provider that has a footprint to match their own”.