Banking and the Supply Chain: An Unlikely Pair?
Despite the best efforts of the financial services sector to integrate with corporate supply chains, they have historically received an indifferent reception. It is often perceived that, thus far, the benefits of closer process connectivity between commercial corporations and their banks have only swayed in favour of the banks.
The key reason for the delay in progress was not the lack of available technology – the capability has long been in existence – it has largely been the caution of corporates about the way the financial services industry could abuse the benefits of access to the supply chain.
To explain this: if a bank had visibility of a consumer electronics manufacturer’s whole supply chain it might see that finished-product freight of a certain value was being exported to a specific country. If the two supply chains were integrated, the bank could use automated technology to contact the manufacturer and offer a suitable insurance quote, or even automatically apply insurance cover for the shipment. Equally, the bank might see that high-volume components were being imported from a specific country, giving rise to a future foreign exchange requirement, for which the bank could quote, or even automatically book and contract.
Both of these ‘services’ might, of course, save time for the manufacturer. Unsolicited quotes, however, may become nuisance ‘spam’ if the company has already made separate provision for these requirements. Automatically executed interactive banking services could realistically only be executed by a single banking provider, and therefore could become uncompetitive at any time. There is potential for the manufacturer to gain process efficiencies, but they may also experience some financial risks and consequently some new or modified overheads in administration and monitoring.
Although banks have had to become accustomed to increased operational transparency in order to comply with new financial services industry regulations, the majority of corporates do not want intelligence about their day-to-day business transactions exposed for examination, and this caution is not just due to security reasons. Additional concern often heard from corporates is that banks could use the visibility to be one step ahead in their sales operations, which would not always be to the corporate’s benefit.
The current climate hasn’t helped nurture bank-corporate friendships. The lack of due diligence that has come to light over the past year in the banking sector, leading to institutional collapses, government buy-outs, and a disappearance of commercial lending availability, has led to public mistrust reaching its peak. Many businesses are asking the question, “Which bank is safe?”. Loyalty is waning and companies will not hesitate to look for the best deal from a number of institutions, rather than continuing to trust their traditional, perhaps single, banking services provider.
The essential requirement is that supply chain interactivity evolves in a way that benefits both the banks and the corporates. There are two key factors that are making an impact on this evolution: the continuing financial crisis and the increase in globalisation.
The impact of the financial crisis has been felt as ripples slowly move along the supply chain. It has been discreet, and it may not be until manufacturers need that vital spare, or that vital new part, that they realise their preferred supplier has gone out of business, has changed ownership or the supplier’s supplier has folded.
The credit crisis has lead to both a lack of working capital finance and a depression of consumer demand. The impact on turnover and revenue has forced companies to slash their prices to compete and retain adequate market share. The resultant lower margins equal increased trading risk and compromised profitability. For many, for the time being, ‘flat’ has become the new ‘black’. It has become critical for manufacturers to shorten their order-to-cash (O2C) cycle to survive: they are looking for ways to trim the supply chain to make it leaner, more responsive and less clunky. This means providing goods when needed, rather than producing the amount that might sell.
The supply chain was increasing in complexity even before the credit crunch began. Many processes traditionally undertaken in-house, such as design and testing, are being outsourced. This, added to the fast-changing and competitive terrain, makes it harder for manufacturers to keep a track of the capabilities their suppliers have.
Globalisation goes hand in hand with outsourcing, and relationships with suppliers and customers in emerging markets such as the BRIC (Brazil, Russia, India and China) countries are growing. These markets have reportedly felt less of an impact from the economic crisis than more developed markets; their relatively young economies and lack of legacy investments give them better flexibility and a better chance of quick recovery.
To operate in these countries, however, requires knowledge of the local market or the engagement of trusted partners who have that knowledge. Although the cost benefits of working with suppliers and customers in the emerging markets are clear, one of the problems is that it’s harder to get timely warning of a break in the supply chain. For example, if a key supplier drops out it can be very difficult, without an in-depth knowledge of that market, to identify and engage a new alternative.
In response, supply chain relationships are changing. Invoice tracking is becoming increasingly important. In the retail industry, for example, payment was previously made on receipt of the goods. However, in this volatile marketplace there has been a shift towards payment in advance of receipt, in order for manufacturers to protect themselves against the impact the recession has had on the consumer retail marketplace.
As a result, suppliers and customers now need fast and secure credit references and trade services to support their trading relationships, and this is gradually bringing banks into the supply chain more and more – a resurgence, in fact, of international trade guarantee financial services that were commonplace before a buoyant global economy encouraged many recent years of relatively safe, open account trading. This supplementary business protection is especially important when trading with emerging markets such as the BRICs, as there are added layers of currency control and local tax legislation to deal with. The credit crisis has, in some areas, introduced new levels of exchange rate volatility, causing wide variations in international supply costs and in sales revenue opportunities.
With existing cost-cutting and ‘green’ pressures discouraging the acquisition of additional resources and paper-based communication in this expanding area of corporate-bank operations, the reintegration of the banks into these operations gives rise to a re-evaluation of the advantages afforded by automated trade services process integration.
Although many businesses are re-evaluating their supply chain in order to cope with the downturn, it is also important not to become shortsighted to the eventual upturn. At the time of writing, financial services regulators in France and Germany have already stated that their national economies are in recovery, and the Bank of England believes that the UK recession has bottomed-out, although UK recovery will be a slow process.
Those businesses that want to ensure growth on the upturn have gone back to basics and invested in the foundations they need to make themselves stronger. It is the companies that have cut too many expedient corners that will struggle to meet demand after scaling down so dramatically.
But the recession is not all doom and gloom. It does provide some opportunities. For many it has removed competitors from the procurement process when manufacturers look for new suppliers.
The strengthening of the supply chain is a key part of this, yet in order for the relationship between banks and business to grow there must be a return to comprehensive confidence and trust – a fundamental of the bank-customer relationship since the dawn of the financial services industry.
The individual supply chain cannot be a free-for-all, visible to multiple competing financial services providers. Access controls are essential. For corporates to feel comfortable, visibility needs to be restricted on their terms; to provide opportunities and benefits, not to pose a threat.
Banks already have the services in place to offer as part of the manufacturing supply chain but they need to take a closer look at the means of delivery and the quality of real added customer value that they are presenting. For manufacturers even to evaluate letting banks connect to their supply chains, they need to be very sure of what’s in it for them.
This debate is likely to continue for some time, as this does represent quite a substantial process shift for the two parties involved. Regulation, legislation, data confidentiality and the promises of widespread business efficiencies all feature as key elements. At present, however, trust and confidence in the financial system to add long-term and secure value to the process remain the main barriers to further development.