Keeping Up to Date With Financial Metrics
Methods for corporates to improve their financial metrics and to lower their end-to-end costs have traditionally centred on the physical supply chain. These initiatives usually consist of better inventory management to improve working capital, incremental operational efficiencies such as better logistics or operations management, and major systems implementations aimed at delivering lower cost to serve. Overall, these ‘improvements’ have not only been extremely disruptive within corporates and their supply chains but have also delivered mixed results. In general, these approaches typically create a lot of noise within corporates with stock reductions, process efficiencies and systems implementations but proportionately less in terms of long-term cost reductions.
Supply chain finance (SCF) has the potential to deliver many of the same outcomes but without the negative impact on product availability and customer service, which has tended to negate any benefit delivered by re-engineering the physical supply chain.
SCF works by enabling information from the extended supply chain to be channelled into banks and other finance providers. These SCF providers can then leverage this information to generate offers of trade finance to suppliers at various stages within the supply chain. This process mirrors the ‘just-in-time’ approach used by large corporates to optimise inventory holdings. Not only is the SCF provider’s risk substantially reduced given the visibility of information throughout the transaction, but the finance provider is also able to leverage the credit rating of the buyer typically enabling supplier financing at lower rates of interest.
The major benefits seen by the corporate include the capability to increase supplier payment terms with the consequential improvement in working capital without the pain of major inventory or cost reduction initiatives. Equally, the supplier is in a much better position to accept longer payment terms without increasing costs or losing the vital cash-flow required for their business.
A ‘day in the life’ scenario would see a purchase order being sent from the corporate to the supplier with the information being passed automatically to a bank. The bank would analyse key data in the document such as the credit ratings of both the corporate and supplier and or the classification of the goods and then decide whether to generate an offer of trade finance to the supplier. The supplier can then decide to accept this offer electronically, at which point it becomes a rolling loan. This offer of finance would be for a specific purchase order, with additional offers of finance being generated as the transaction progresses.
From a technology perspective, there are some key requirements to make this happen. The corporate needs to electronically capture his trade documents to allow this information to be provided to the banks. Similarly, banks need to have the capability of processing data in multiple formats from corporates, suppliers, inspection agents, logistics providers, customs and other parties in the supply chain. Leveraging this information is the next most significant challenge for banks. For example, a corporate sending 50,000 purchase orders a year could generate as many as 350,000 documents with supplier information, customs codes and values that would need to be analysed by banks for risk or revenue generation purposes.
Today’s main industry initiatives to help corporates and banks to leverage these opportunities include the SWIFT Trade Services Utility (TSU) and an initiative from Intel.
SWIFT’s approach has been through its banking members who are becoming increasingly disintermediated from the supply chain as a result of the reduction in the use of letters of credit (LC) by corporates who are increasingly opting for open account as a lower cost alternative. Without a financial instrument in place, banks have been relegated to the corporates’ payment partner, with increased risk as the banks’ visibility of transactions usually associated with an LC/DC no longer exists. The TSU initiative enables banks to offer SCF solutions on a bank neutral basis. The solution provides a vital document checking role within the supply chain ensuring that the corporates exposure to delays and costs caused by erroneous documents is minimised. As with all banking programmes, the opportunities for revenue are greater for the early market adopters, with the TSU providing a service that can be leveraged to provide increased bank revenue in a stable international trading market unlike the current sub-prime mortgage situation.
Intel’s initiative is gaining an increased profile, as it brings together the main technology players required to enable SCF. The benefits of this initiative include a mass market global e-document solution which is low cost, multi-standard, and multi-language. Links to the SWIFT TSU are through the corporates’ preferred bank(s). The e-document solution provides a complete range of domestic and international trade documents that can populate the SWIFT TSU with the information needed for document matching to take place. This fully supports the requirements for corporates who want to move to e-documents in their supply chains to enable full SCF benefits.
Included within this initiative is a capability for banks to process the large volumes of data received from corporates’ supply chains and to generate trade finance offers to suppliers, thus delivering on one of the key objectives of an SCF programme. Given the ever increasing information requirements from government and regulatory authorities, Intel’s initiative also includes the capture of information relating to CO2 emissions and the increasingly important corporate and social responsibility (CSR) metrics on product origin.
Supply chain finance solutions are now moving rapidly beyond the world of simple factoring and invoice automation. The next generation of SCF solutions embraces the use of large volumes of data to reduce risk and indeed introduction of new metrics which add value to the supply chain. The opportunity to embrace these new value metrics such as CO2 emissions and elements of CSR provide a key insight into how trade finance metrics can and will change in the years ahead. In parallel to this, the benefits to corporates and their extended supply chains are significant and can be achieved with considerably less business disruption than that caused by implementing a new ERP system to achieve marginal net profit improvements.
It may have taken some 600 years for trade finance to advance from the last great invention with Francesco Datini’s Bill of Exchange, but SCF may finally be offering the next breakthrough in trade finance.