Financial supply chain debate: Linking the supply chain

Financial supply chain debate participants

JL, J&W Associates Let’s start with working capital. Corporates are trying to optimize this, but what is optimal working capital?

MK, Philips Defining optimal working capital is difficult. The theoretical answer might be that it is the minimum net operating capital (NOC) that you can achieve, measured by earnings before income or tax, or profit, such that you don’t destroy value, measured by earnings before income or tax, or profit, for the company. But who owns working capital, who’s driving it and why in a company is often not clear.

RD, Citi Optimal working capital is very hard to define with a broad-brush approach, given that companies are to a large extent different from one another. However, one could say it really boils down to the optimization of a company’s cash conversion cycle within the context of its reality, namely, its relationship and position of strength vis-à-vis its customers and suppliers. It’s also dependent on its products and business model. For example, manufacturers are different from service companies, which in turn do not have the same structure as technology companies, and so on.

PR, HSBC It’s difficult to define optimal working capital as an equation or a set of metrics that an organization can work against because different sets of people have differing parameters. A CFO may have ideas around optimizing working capital and cashflow, but those underneath him may have conflicting issues, depending on whether they’re logistics, procurement, or the treasurer. For example, you appease the CFO and the treasurer by having great cashflow, but you’re starting to erode value with a procurement officer who sees his unit price creep up because he’s had to trade off some of that discounting process for an extended payment period.

SJ, SCF Capital One size doesn’t fit all, and every company is going to be different. There are some generic measures such as DPO/DSO [days payable outstanding/days sales outstanding], for example, but there’s no one single definition. It comes down to having an understanding of the end-to-end supply chain and its multiple layers. You have to start looking at how to optimize the whole chain rather than looking at a single organizational level.

JL, J&W Associates Sarah has made the obvious leap from working capital to the supply chain. Is that where companies are focusing in order to achieve optimal working capital? Lionel?

LT, RBS I agree that no single formula fits all but the larger companies we speak to have similar generic drivers towards maximizing working capital and supply chain efficiencies. I’m finding that in the more go-ahead corporates, procurement and treasury are coming closer together; the relationship is not there yet (in some companies we have had to introduce them to each other) but there’s certainly movement towards maximizing the supplier relationships to retain goodwill but at the same time getting the cost of goods reduced.

MK, Philips Does it work as a partnership or does it work as a confrontation? A procurement officer is going to be very happy if he achieves 75-day payment terms, whereas treasury is going to be looking at the cost of doing that.

The treasury is one of the only areas in a corporate that is concerned with the time value of money, and they notice when things are askew. Most procurement officers will think on an accounting basis, which is often marking things at par, so they don’t mind if things are 100 days, 180 days. It’s a payable for them. Having optimal drivers is the best way to drive optimal working capital inside a company and treasury should help police this process.

RD, Citi Many companies we speak to are indeed focusing their working capital optimization efforts upstream via the procurement channel. Others are more focused on the downstream (sales and distribution) part of the equation. Very few have really brought it all together. Much has to do with the inherent conflicts that could exist between the goals of finance and procurement or finance and sales functions.

KD, CCE Working capital can be described as the management of your cash inflows and outflows, which has in essence always been part of the treasurer’s responsibilities. In other words, working capital management is trying to retain your cash as long as possible by ensuring longest-possible payment terms to your suppliers, shortest possible-payment terms to your customers, and reducing the inventories balance as much as possible. Alternatively, finding a financing solution that is cheaper or at least equivalent in cost to the cost of the funds of cash trapped in working capital.

DC, ABN Amro The challenge is that you have to engage procurement and understand more of a company’s work flow and supply chain management before you can design and deploy financing solutions. You also have to be able and willing to expand your scope as a bank to go into tier 1, tier 2, tier 3 supplier relationships. We do this in partnership with corporates. Initially it’s an advisory-type dialogue rather than a traditional bank/client direct selling approach.

PR, HSBC I would define financial supply chain management a little more broadly. Improving working capital across the chain and reducing the cost of finance to the buyer and the supplier base are the main priorities. It is about looking at all of the finance-related costs along that chain. It’s also about the management of risk and information across the chain – the exchanging of purchase orders and the invoices, and then improving the efficiency of these processes and reducing costs for buyers and suppliers and the banks themselves. The combination of the CFO, the procurement officer and the treasurer is making banks work a lot harder for their money both in terms of breadth and depth of services and the margins offered to both the buyer and their supply base.

JL, J&W Associates In the optimal financial supply chain structure within a large group, who should be involved? What should a corporate treasurer reading Euromoney be told about the composition of the team?

SJ, SCF Capital There’s a definite role for the CFO, who has to work with his or her business units to bring them in. I would assume that if the CFO is there then the treasurer is automatically going to be involved. But every organization is different as to where procurement sits, where supply chain sits and who they report to.

DC, ABN Amro We apply a collaborative approach. If that’s not in your culture or not at the forefront of the way you operate, then it is likely to be a very siloed organization, and collaboration is not going to happen.

PR, HSBC You build the right team to deliver the specific business objectives set within that organization. If that is improving cashflow and extending payment terms, you choose the team that’s going to best interact with the suppliers and banks to achieve this. Treasury is now expected to move beyond cash and FX and to get more directly involved in all aspects of working capital management. Some treasuries are expected to drive this process. To be effective in this extended role, the treasurer needs to be much more involved with physical and operational supply-chain management processes and the teams that manage them.

MK, Philips In your own single-proprietor company, it’s very clear what optimal supply-chain financing is and you can control that. As soon as more and more people are involved, then it becomes rather cloudy, because what you ask each person to do could be contradictory. You need the involvement of procurement. As customers are also important, the people that negotiate sales terms should be involved together with treasury. Further, if your accounts processing is outsourced, either to a shared service centre or to a body outside the company, you need the involvement of that entity.

RD, Citi The CFO will be a key champion of any supply chain effort and some organizations have gone as far as segregating the supply chain function in order to provide the appropriate level of focus and drive. However, the success of any supply chain initiative will largely depend on the support of the business areas it touches. For example, the success of an upstream initiative will largely depend on the direct involvement and commitment from the procurement head and its key buyers.

KD, CCE I agree with Mark. The optimal group is the CFO with a representative for the suppliers and customers (AR/credit & collection) department, treasury, procurement, sales and supply chain. Although this may seem a big group, it is necessary to ensure that there is agreement internally and that all parties are aware of the impact of their decisions. It is important to ensure that although each group might have contradictory requirements, there is consensus on what needs to be achieved and how you as a company decide to get there. An internal decision needs to be made on what the optimal strategy and focus is before the banks get involved in the discussion. The banks’ role is to ensure that they work together with an appointed member of this group to come up with solutions and alternatives to achieve the agreed strategy and requirements.

LT, RBS I don’t think you need to have all parties involved at the beginning. Corporates should try to get some clarity within their own organization before they bring us banks in. It’s important we all know why we’re having the discussion.

Specialist inputs

JL, J&W Associates With working capital and supply chain optimization involving many different people and initiatives, how should banks and specialist companies approach this business?

SJ, SCF Capital Supply chain finance is moving towards more of an investment-banking model where there is a need for specialist advisory services. You need to be able to understand the complexities of a corporation’s business models and understand their short-term and long-term objectives. Supply chain finance objectives could as easily be driven by the business units or by the finance or tax function as much as procurement or the treasurer. Traditionally, the banks’ contact points have been treasurers, but they are no longer the ones that necessarily have the remit to focus on the end-to-end supply chain, nor are necessarily bonused to do so.

DC, ABN Amro The banks are becoming more like partners, proactively assisting companies to manage their commercial strategies, and not solely institutions that deal with their funds or provide liquidity. Not only are sectors different, but within each company every business line has specific requirements. That makes it quite a task to find the right partner with whom to tackle the complex end-to-end supply chain view. In addition, banks are increasingly evaluating the whole value chain for opportunities. If the bank is positioned with an international network, it can finance the suppliers as well as the purchasing organization.

RD, Citi The role of banks that support large corporates is shifting and they will need to rethink and retool the way they approach credit risk. It is no longer sufficient to follow the corporates’ subsidiaries and provide parent-supported loans. In a supply chain environment, banks need to become comfortable with providing financing and taking risk on the SME/MME suppliers and distributors of these corporates. More often than not, these counterparts are in emerging market locations and the underlying commercial transactions may be domestic or cross-border and denominated in hard or exotic currencies. These are just a couple of the many variables that are very prevalent in a real supply chain environment and banks are expected to respond in Vietnam, China or Brazil with the same high service levels that they have in London or New York.

LT, RBS The basis of trade is buying and selling. Customers of all shapes and sizes want a bank that facilitates the buying and/or selling process, as the company grows and expands its activities into different markets.

PR, HSBC The banks have had it very good for 20 or so years, but the corporates are now in a stronger position because of technology and the competitive banking environment. They want value demonstrated. They want costs quantified and the component elements more transparent. They want banks to think less about selling products to specific functions and more about providing integrated services that focus on current business priorities.

At the moment banks are working hard to align parts of their organization that have traditionally acted in silos to better support increasingly distant cross-border supplier relationships. The big corporates are increasingly saying: "Get your teams aligned across the regions, better leverage the relevant technologies and start thinking where you can better support my current business imperatives, which are increasingly focusing on supply chain management."

KD, CCE Before banks get involved, corporates should probably first focus on getting a good understanding about what it is they can achieve themselves. Very often corporates turn to the banks to provide them with solutions or answers before they have actually done their internal due diligence in assessing what can be achieved without external financing help.

The outsourcing complication

JL, J&W Associates Sarah, what main changes in the business model are then driving the demands and changes in a financial supply chain model?

SJ, SCF Capital Some large organizations are outsourcing production and manufacturing to third parties, such that they become effectively R&D, sales and marketing, and not much else. That’s leading to a couple of things that are relevant for the financial supply chain.

First, the business models become more complex. Large original equipment manufacturers might buy components, sell them to contract manufacturers (CMs) and then buy back finished products. Those buy-sell arrangements create challenges. On the one hand, the CMs are buyers, but they are also suppliers and you have to manage the credit risks around that. Secondly, your outsource partners become exactly that. It is not a question of separate suppliers and customers any more. They’re partners, and your business is heavily dependent on them. Outsourcing your manufacturing usually means outsourcing your financing by default, but if it is to a lower creditworthy counterparty that doesn’t make sense from an overall risk-management perspective. You have to start thinking about those outsource partners as strategic to your business.

When people talk about supply chain finance, they usually talk in terms of supplier financing, but there’s a whole downstream supply chain involved in the distribution of your products to end buyers. Does it make sense for some of those distribution counterparties to take title to goods or does it make more sense for them to be paid a service fee for what they’re doing? One of the issues is that, as a business model, toll distribution collapses the revenue line, and that has implications if it’s a public company. With the rise of privately owned companies this issue may become less relevant.

LT, RBS A lot of corporates in the technology sector and in the auto sector are outsourcing a lot of the manufacturing. It should be the responsibility of the corporate to stand behind those manufacturers, but they can often refuse to do that.

JL, J&W Associates A lot of the supply chain financing is based on using the more credit-sound large organizations in the supply chain. But now you’re saying they’re unsound?

DC, ABN Amro The traditional model is that the credit rating is more sound and is better than the supplier, so you use a financing structure to lower the financing costs throughout the supply chain, which creates a win-win situation. Lower financing costs for the supplier mean lower cost of goods, which makes them more competitive. But, as we said before, it’s not one size fits all.

JL, J&W Associates So there are two trends here. We have more complex models, as we get more and more outsourcing; at the same time new financial supply chain solutions are starting to emerge. What opportunities are coming out of these changing business models, Paul?

PR, HSBC Before we get to the solutions, there is another trend. Banks are now facing a threat from specific elements of the changing business model, with different and specialist solution providers emerging. We’ve suddenly got IT companies, logistics companies, business process outsourcing companies invading this space and offering to do parts of the business model better than the banks, as well as offering to provide some of that managed service capability. Banks could be pushed onto the margins, where they are only providing some of the payments and financing function and we all know about the downward pressure on margins there. The source of a lot of their transaction-based revenue has suddenly been eroded as improving technology has eliminated the need for some services; non-bank providers with the latest technology are providing very competitive alternatives.

An emerging market future

JL, J&W Associates Do you see any other major business model changes or trends that are driving financial supply-chain management?

MK, Philips Going forward, the largest population and wealth growth will be in four or five emerging markets in the world. The banks have to adapt their models to be competitive in these markets. That is a challenge because the problem faced by almost everybody in Brazil, Turkey, Russia, China and India is lack of credit, and they want to buy things. International corporates have more and more suppliers and customers in these markets. The way to grow our top line and our bottom line is to finance our customers to buy more of your goods in these markets.

DC, ABN Amro Banks do understand that. International banks are making acquisitions in all these markets to extend their footprint. The key is to make the link so that there is a branch network and a client network, and the exchange of information a bank needs to fully understand the industry dynamics. Then the bank can, in certain cases, take a portfolio approach to financing the whole supply chain.

SJ, SCF Capital But do you think the banks are geared up to do that on a portfolio basis? Are there other providers in the marketplace? You’re talking about risk management and there are credit insurers, for example, that are well placed to look at portfolios.

PR, HSBC Isn’t that why you should bring the banks in, particularly those with regional or global coverage to leverage these relationships and work out how to develop a strategic partnership between the corporate and the bank to help minimize some of that supply chain risk with those suppliers.

MK, Philips Absolutely, but the decision to outsource is often not taken by the people who are capable of managing the credit risk.

RD, Citi Banks do recognize that there’s a continuous shift in the manufacturing base to low-cost production centres and that there’s a preference for locations that can also provide an interesting domestic marketplace for the products being produced there. There are still very few banks that are able to respond to the call to action. For example, the upstream requirement often includes pre-shipment financing as the suppliers are too small to generate the working capital needed to produce the orders of their corporate clients. So very often, the suppliers have to choose from domestic or non-bank alternatives and in many cases still rely on a letter of credit (LC ) issued by the corporate in order to obtain financing.

JL, J&W Associates You’re saying that the basic business models for which you have to provide solutions are disaggregating. There are many more different components. You’re also being asked to do more all the way through the multi-layers of financial supply chain, including the end customers and the early suppliers. This requires a whole series of partnerships that we’ve not seen before.

LT, RBS At RBS we’ve taken a view that the way we can grow our business and support our customers is through partnerships around cash management. A good local partner can understand the credit, understand the local corporates and may already be banking them anyway.

DC, ABN Amro Partnerships can make a lot of sense, because those banks do have the credit appetite, the reach and the branch network.

MK, Philips What’s more, local banks have more insight into companies than is suggested in the published balance sheets.

RD, Citi I completely agree. In the end, lending in the supply chain model requires a differentiated credit approach that goes well beyond the balance sheet lending model that international banks are so used to. It’s really forcing the banks to step out of their comfort zone and be creative in the way they box the risks involved; the competencies required for this are generally not found in the traditional LC-focused trade shops.

DC, ABN Amro Understanding local credit conditions can be a detailed and time-consuming exercise. But it’s what the market is demanding and you have to learn how to approach it. I’m not yet sure how you can make the economics of this work.

PR, HSBC There’s a lot of talk about banks as strategic partners, and many of our large importer customers want us to provide support for their supplier base as well, particularly their strategic suppliers. This is a great opportunity for the banks, but there are costs associated with building these new supplier relationships. When you look at the KYC [know-your-customer] and supplier enablement economics, the risk-return for all the effort involved might not stack up. I think the upside of the access to this extended customer base is an exciting prospect but it will be will be interesting to see how far the banks will be encouraged to go.

A role for alternative providers

JL, J&W Associates Let’s talk about the opportunities for improving financing and operational efficiency. What are the latest trends for improving the financial supply chain?

DC, ABN Amro Companies are increasingly looking for tailored financing solutions that don’t necessarily need to come from the same provider or from a bank. There are some quite good non-banks in this business that do settlement for domestic solutions very well. They are not so proficient at international cross-border solutions, and this is where international banks with a global footprint have an advantage in serving clients.

SJ, SCF Capital There are opportunities with alternative financiers. Where’s the liquidity in the marketplace today? Hedge funds, for example, have tons of liquidity, but they don’t have access to the corporate world. So if you look at the roles of platforms such as SCF Capital, we’re sitting in the middle and linking these multiple parties.

JL, J&W Associates Looking for alternative sources of funding, trying to use the platforms like SCF, to open up other sources of credit liquidity, is this new?

SJ, SCF Capital I think it’s relatively new. The hedge funds are beginning to look for asset classes they haven’t tapped into. Only a small percentage of trade receivables around the globe are financed, which is a tremendous opportunity for the people sitting on the liquidity. But who’s got access to the information and the corporates to be able to tap into that? Technology is key, the ability to link the alternative financiers to the corporates via technology platforms. Inventory is another asset class that has to be financed, so it’s back to the issue of outsourced manufacturing or distribution and does it make sense to have your inventory financed by someone whose cost of funds is higher than yours? There are opportunities for alternative players to come in and act as the procurer of the inventory, until such time as it makes sense to pass title on to another party in the supply chain – essentially a consignment model.

Evolution

JL, J&W Associates Again, you’re talking about the evolving business models underlying that, aren’t you?

SJ, SCF Capital Yes, although one could drive the other. You can evolve the financing structures and create that ability to consign inventory without necessarily having to change the business model.

LT, RBS Is a bank just a financier? Or can we add value in other ways? From a financing perspective, we’re trying to find the hubs within the supply chain where we can come in and finance. And obviously the earlier in the supply chain we can do that, the better. Take trade, for example. With the move to open account from LCs, we are looking to manage data where we’re providing added value, and it may give us a financing opportunity. Inventory is also an interesting area, because many major corporates, especially in the retail world, want to take control of the inventory at point of sale. As the consumer is paying for the goods, it gets on their balance sheet and then straight off. That demand is already there. The question is, do banks want to play in that space? And if so, how? Are there people better placed, maybe in logistics, to play in that space?

DC, ABN Amro Essentially, it means adapting commodity finance techniques to classic inventory management. It’s very difficult for banks, with our regulatory requirements to take ownership on our balance sheet. It’s just not economic.

JL, J&W Associates Mark, it’s clear that there are discrete little markets developing all the way through the financial supply chain. How does a large organization like Philips manage this?

MK, Philips In treasury we are trying to regain control of it. It’s all very well the banks financing my suppliers using my name, but if I want to borrow a sum of money quickly, that risk is already there eating my credit line. It’s a cost that nobody remembers. In India we were very successful at providing our banks with payment information on our distributors [after receiving consent from the distributor to do so]. The banks have used this information to give credit. In that way our distributors got much better financing from the banks directly than they would have received without that information. That’s value added for everybody.

KD, CCE I want the banks to come up with solutions that do not eat into my credit lines. I am willing to work with them to provide them the necessary information on our customers/suppliers but would expect that they build out relationships with our suppliers/customers based on that information rather than on my credit.

LT, RBS This is exactly what we have done with Bank of China. We’re using the trading histories of the buyer to facilitate the credit decision to provide better financing.

MK, Philips The banks could go much further. Look at what has been done in the loan market with carving up loans into senior, mezzanine and equity tranches. Why don’t the banks do this with receivables? If you don’t want to stomach any more credit risk, there are plenty of people who want equity risk. There’s a whole market out there with cash waiting for an investment with a high return. It shouldn’t take long for smart bankers to put that puzzle together.

DC, ABN Amro There are corporates that have explicitly requested that banks do not syndicate. They don’t want to bear the extra cost and they want to manage their credit themselves. So you have to ask yourself whether or not you have the credit appetite on your own balance sheet.

PR, HSBC I think banks have wanted to do some of that for a long time, but have never had that quality of information. As this becomes more electronic with more transactional players, better quality information is flowing across the system, and we’re being enabled to push it out into different parts of the market where the liquidity is.

MK, Philips In a country such as Brazil, traditional takers of risk are often full of certain names. But there is a world full of investors who want equity risk in Brazil.

SJ, SCF Capital What this says to me is that there’s a role for someone to sit in the middle and collect all of this information, tranche it up, and then offer it out to the marketplace. Also I think the traditional way of banks looking at credit needs to change as well. Typically, you take a long-term view, but in fact we’re talking about short-term credit risks.

LT, RBS Banks are switching on to this, although maybe not quickly enough. Any business has to look at where the opportunities lie, otherwise you will not have a business, whether you’re a bank or whoever. They are looking at credit policies. It will take time, but the market will drive it there.

JL, J&W Associates Mark, where will this new tranche of credit for receivables financing come from, a single bank, or are you going to break it up into different sources?

MK, Philips Imagine a portfolio of receivables as being like a box, with each customer paying in certain amounts. Stop looking at it like that. Look at who pays first, who pays next, who’s the last piece of cash in. You have an AAA, a senior tranche, where the chance of default is very limited. The next tranche is like mezzanine, and the last tranche behaves much more like equity. I would like a bank to work with me to structure this, ensuring it is off balance sheet under IFRS. Maybe the bank is interested in the senior part. Maybe they’re interested in the mezzanine part. They may also be interested in the equity part, but there’s another set of buyers for this risk, and banks are in the perfect position to sell that to those buyers.

KD, CCE Although I completely agree with Mark that there should be sufficient examples of other products that can be tailored or copied to provide innovative new financing products, I do think that there is a need for centralized activity at corporate level in order to be able to provide sufficient data and economies of scale to help develop these types of products.

JL, J&W Associates If banks are doing less and less, and with alternative finances and third-party providers and new platforms stepping in, what are the banks going to be left with?

DC, ABN Amro The trusted relationship of bankers in the cycle will not be eroded by alternative suppliers. They may provide liquidity, IT systems and business processes to certain transactions, but in one form or another a bank will be involved in settling these commercial activities.

MK, Philips Banks have made a lot of money on a lot of rather operational things in the past – FX, payments and collections. As information gets better and better, it’s time for them to move towards the opportunities where you do add value, like structuring and finding buyers for portfolios. I can never do that. There are lots of investors who are clamouring for investments from the bank. Banks are much better placed to understand the credit payment behaviour of my clients – they can lend them money. That is their added value. But the banks should stop complaining about the vanilla areas. Some products are not going to be for everyone. Six or seven players dominate the FX market now. Within five years there will be five or six banks that dominate global payments, and that’s it.

PR, HSBC The banks are starting to think about where they can add most value in this new environment, particularly around transaction management and short-term financing, and the long-term sustainability of these services and margins. The focus is on building on core competencies, but the need to invest in new capabilities is very much on the agenda. Customer demand for financial supply chain management services has forced the banks to take a long, hard look at current capabilities, and what to develop and if needs be what to outsource or white label to specialist providers.

Banks’ future role

JL, J&W Associates Banks will always have a significant role in reducing risk in a financial supply chain. Are there new tools or new approaches you have been taking?

PR, HSBC The banks have created internet-based portals to better connect global or regional supply chain communities. Through these websites, they’ve started to better link and present trade-related information and have made it readily available in real time. The aim is to provide better connectivity across the supply chains of people and process – documents are being presented over this new bank platform, so that you can start exchanging information fast. Suddenly you can compress three- and five-day processing cycles down to minutes.

LT, RBS Technology is the key enabler. More information is available and being shared. A lot of these newly developed platforms provide visibility. Local banks cannot often trust the information they get on the ground. We can in effect pass on background information from the buyer about the trading relationship between that buyer and that supplier. Corporates take a tremendous amount of time to look at that potential supplier. Information is part of the sourcing process.

MK, Philips We know our suppliers much better than we know our customers, which is why I keep going back to customers. They’re the ones that the growth will come from, not the suppliers. We are in business to sell things. We can produce all we like, but if nobody buys it it’s an academic exercise. Going forward, it’s the customers you have to finance and it’s working with the distributors in these emerging growth markets.

JL, J&W Associates The fundamental opportunity you’re stressing is credit and risk management for the customers – not the distributors even, but the very end customers?

MK, Philips Who are you trying to sell to? Selling is about finance, and the poorer the people are the bigger the game of financing is. And whoever finances, sells.

LT, RBS But what happens to this financial supply chain when the corporates start to drive a different model? There is a certain point where you start to lose supplier goodwill. The corporates have a responsibility not just to their customers but to their suppliers in these developing markets. They have gone into these markets because they can get the goods cheaper and therefore make more money. Responsibility also lies with us banks to talk with the buying offices on the ground, to go and visit suppliers together, and to understand the dynamics. If we make mistakes at this stage, we don’t have a business. Our responsibilities will start to change as we develop new models.

RD, Citi I think some banks are better positioned than others to respond to the challenge of providing downstream solutions because they already have many of the elements that have been discussed so far. To name a couple, several have the geographic footprint required to provide solutions where they are needed and have the platforms to handle the data flows. What many are lacking is the ability to handle the credit aspect of the challenge and are instead trying to intermediate information flows so that they can someday have sufficient data to get comfortable making credit decisions. I think it’s important to stress that the answer doesn’t necessarily lie in intermediating information flows. A local presence and understanding of the environment is in many instances much, much more important to successfully structuring a downstream solution to support the sales growth strategies of corporates.

JL, J&W Associates And what will be the future role for banks?

DC, ABN Amro We’ve co-sponsored a study with Aberdeen that has just been published, and two-thirds of companies are looking into these various supply chain financing programmes to lower the end-to-end costs. It’s an agenda item for most companies. The market is growing and there are multiple providers but I’m convinced there’s a role for the banks. There are a few banks that are shaping the market, where they concentrate in certain business areas.

JL, J&W Associates Are banks becoming financial supply chain management support companies?

DC, ABN Amro Whatever you call it, it’s just working with this partnership approach. Where can we add value in terms of financing? We are focused on providing the best solution. Technology is key. You need to be able to leverage information at the right time, to make better decisions, and ultimately it has to be automated. Then you have critical mass.

LT, RBS I think where there is a situation in which buyers want to pay later and suppliers want to get paid more quickly, there’s always going to be a role for banks. Our customers are talking to us and looking at ways that we can not just remain intermediated into their trade but take a greater part of it. The challenge is that as conditions change, whether it’s Sepa [the Single European Payments Area] or something else, we banks have to change with it, otherwise we don’t have a business. The next five years will see a steady expansion of this discussion on new ways of financing that lower costs within the supply chain. Where we might lose on one bit of traditional business we will gain on the fact that we’re there to finance in new styles. So the future’s bright.

PR, HSBC I think banks do feel threatened. Understanding financial supply chain management and related customer requirements has forced banks to take a long hard look at the role they play now and will play in future. To be honest, it’s been a bit of a wake-up call for the banks. We have got to work a lot harder on our value propositions. Understanding what our treasury customers want is only part of the overall requirement or opportunity. We need to know what the CFO, supply chain director and procurement managers want as well. I also think it’s a good thing if we feel threatened, because it’s a great catalyst for change and forces us to make some very hard decisions about what will be required to be a leading player. We either sit and wait or take the challenges posed by the scruff of the neck.

RD, Citi Many banks have created dedicated supply chain units to provide a focused response to the market. This is certainly a very positive development as it may be a catalyst for the changes in credit decisioning that are necessary to fulfil the need. Platforms and the gathering and transmission of electronic data will no doubt play a very important role in the era of the supply chain. In the end, however, it seems to me corporate customers are by and large looking for a financial solutions provider that can be a trusted adviser and partner on matters of risk both upstream into the supplier base and downstream into the distribution end of the chain for both domestic as well as cross-border flows. I believe the winners will most likely be those that can successfully combine the traditional balance sheet lending approach with tools normally used in capital markets and commercial finance transactions and can do so across different regions.

DC, ABN Amro Banks and corporates work together in different ways. Yes, there are other players in the marketplace, but you have to be value-added to lead the area, and that’s where the banks are driven. The traditional bank approach, pricing models and service models are being modified. Banks at the forefront have programmes in place to adapt their infrastructure, organizations and systems to work better with corporates.

There are still a lot of companies where there is room for the banks to advise on improving cashflow management, to optimize their balance sheets and their P&L and those traditional banking products will continue to be used, particularly in emerging markets. So if banks expand our footprint and expand our client base we will have enough flow coming in to allow us to fine-tune the hub model and come up with the next generation of supply-chain finance solutions.

MK, Philips As the world will continue to grow, the banks are the natural providers of funding, and therefore their role will continue. They would be well served playing to their strengths and expanding where the world is expanding, so it’s right to move into China and the emerging markets. If I can find a bank to work with my company to finance the customer base, I’d sell double tomorrow, easily. That is the challenge I put to the banks.

KD, CCE I agree that the banks are the natural providers of funding and that therefore their role in that area will continue. They will need to work with corporates on structuring solutions that may not always be vanilla products but customer driven. And as Daniel mentioned there are still a lot more less-sophisticated companies where there is a need for advice and partnership in the discovery of working capital management possibilities.