Innovative Financing for Strategic Procurement
Sourcing and supply strategies have become increasingly sophisticated in recent years, with companies across industries taking a more strategic approach to procurement in view of shifting ecosystems.
Corporate procurement functions aim to improve the resilience, transparency and responsiveness of their supply chains. This is to ensure quality products are supplied on a timely basis, but also to allow dynamism in the face of industry changes.
To achieve this, corporations need to establish long-term, trusted relationships with key suppliers. This is where a partnership between procurement and treasury functions can reap rewards. In particular, treasury can support strategic procurement efforts through innovative supplier financing mechanisms – both pre- and post-shipment – to strengthen relationships, reduce supply chain friction and ensure a company can meet the needs of its customers.
Various factors have coalesced in recent times, prompting a focus on strategic procurement. Globalization is cited most, bringing new customer and supplier opportunities, but also driving pricing pressures via greater competition.
Digitization is also disrupting large buyers and their suppliers, increasing the need for flexibility and investment along supply chains. Some industries are beyond the disruption phase and already under transformation, which is dramatically altering procurement strategies and supplier relationships.
In the automotive industry, for example, we are seeing a rapid shift towards autonomous vehicles, electrification, connectivity via the internet of things (IoT), and shared mobility. As a result, automotive manufacturers are now working with suppliers to encourage innovation and to secure supplies of new components and services including telematics, sensors and semi-conductors, and energy storage technologies.
The development of reconfigured ecosystems is not restricted to the automotive industry: manufacturing, retail, healthcare, media, transport and many others are experiencing transformations. Consequently, it is becoming more challenging to maintain the quality and sustainability of supply in complex, large-scale supply chains – and these need to be flexible in order to adapt to changing customer needs, competition and cost pressures.
Building stronger networks
Ensuring suppliers have appropriate access to financing will be key to achieving this flexibility – not simply for tier-one suppliers (i.e. those that have a direct relationship with the buying organization), but throughout the supply chain. This will include a variety of small and medium-sized enterprises (SMEs), which typically find it more difficult to access financing. According to Asian Development Bank (ADB) figures, 74% of SME trade finance requests are rejected, compared with 7% among multinational corporations. ADB has calculated that a trade finance gap of USD1.5 trillion exists among SMEs globally, constraining growth and job creation.
Most banks traditionally offer post-shipment financing to tier-one suppliers. This brings working capital benefits for the buyer and supplier, but does not support financing needs across the wider ecosystem. This finances invoices on goods and services that have typically already been produced and shipped, but does not provide liquidity support to suppliers to enable production of those goods and services.
One alternative is pre-shipment financing. This involves financing suppliers to enable them to source raw materials, manufacture goods and maintain inventory before goods are shipped to buyers. Pre-shipment financing can be challenging for banks, as assessing performance risk using traditional methods is not easy, particularly in countries where credit data agencies are absent, or where data is incomplete.
Standard Chartered has developed a unique pre-shipment financing proposition for the suppliers of large corporates. The bank’s relationships range from the largest corporations through to SMEs, and it has a deep knowledge of, and long-standing presence in, many of the world’s key sourcing markets. The bank’s detailed understanding of industry, country and supplier risk profiles in these markets has further enabled it to bring pre-shipment financing solutions to the table.
Pre-shipment finance enables buyers to achieve their strategic procurement objectives whilst also bringing value to suppliers across their ecosystems. Pre-shipment finance based on a buyer’s ecosystem also strengthens key relationships, further enhancing sustainability and reliability of supply, particularly in the event of competing buyer demands.
One of the challenges of financing complete ecosystems is a lack of visibility over the diverse and numerous participants within it. For example, a clothing retailer buys shirts from a manufacturer, but that supplier will need to buy textiles, thread, buttons, cutting and sewing equipment etc. from other suppliers. These suppliers too will have multiple inputs in terms of raw materials and equipment to produce their goods. Consequently, when the retailer presents an invoice to the bank for post-shipment financing to a supplier, that invoice effectively reflects multiple invoices that have been paid, or are due to be paid, throughout the supply chain.
Given that suppliers choose when to make payment based on their liquidity position and bargaining power with their own suppliers, providing post-shipment financing to tier-one suppliers alone will not support a buyer’s objective of ensuring stability and liquidity across a supply chain. Increasingly, corporations are leveraging solutions such as blockchain-based smart contracts to enhance visibility over the suppliers that comprise their supply chains. Banks too have a growing opportunity to leverage these technologies and enhanced visibility to offer solutions that provide access to liquidity through the multiple tiers of a buyer’s procurement chain.
Drawing on strategic partnerships
The most successful procurement operations over the next few years will be those that are able to make transformational changes in the way that they structure and support their supply chains, including how they harness new technologies, invest in digital ecosystems and leverage data. The focus will not simply be on reducing cost, but increasing value and flexibility within supply chains to improve the quality, competitiveness and nimbleness of supply. Treasury and partner banks have a vital role in supporting strategic procurement in this regard, by providing finance at the right time and to the right counterparts, as a catalyst for innovation, digitization and industry change.
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