Building a Stronger Supply Chain
Increasing liquidity in a constrained environment: that
summarises the task that Standard Chartered Bank’s Ashutosh Kumar and his peers
in the banking world face. As he notes, while there was still sufficient
liquidity for a time after the 2008-09 global financial crash any excess
liquidity is now expected to steadily drain away and smaller distributors are
becoming concerned about whether they will continue to have enough financial
support.
To address this need for liquidity, companies want to
elongate days payable outstanding (DPO) by shifting from payment requirements
of 30 days to 45 days or longer, for example, without a major impact on their
suppliers. Furthermore, corporates want to move deeper into the supply chain
and enable funding for their Tier 2 suppliers – aka the supplier of suppliers,
such a company that provides rubber for a shoe manufacturer.
One
solution, Kumar suggests, is pre-shipment financing for the Tier 2 suppliers.
The challenge, however, is that those Tier 2 suppliers may not be sufficiently
creditworthy. What banks are then doing is to go beyond just those Tier 2
suppliers’ financial strength to look also at supply chain linkages, the
importance of the Tier 2 supplier to the larger company, their percentage of
sales to the larger company and the unresolved rejection rate between the two
firms. In an environment of sluggish growth, companies able to facilitate this
pre-shipment financing for their Tier 2 suppliers both create a differentiator
for their supply chain and also ensure their distributors are equipped to sell.
In an Asian context, two things are especially important for
financing a Tier 2 distributor, says Kumar. First, the distributor often needs
to make payment before goods are actually sold. An automobile dealer who needs
to pay the manufacturer within 15 days, for example, may not sell cars that
fast and therefore needs financing. Providing that financing ensures that the
Tier 2 company has the financial support it needs and also helps them sell more
products. Second, more financing means the Tier 2 supplier has more goods
available that it can promote and sell.
From a corporate
perspective, the current situation requires a different way of thinking.
Whereas companies financed their distributors with surplus cash – even though
they were not getting good returns in the past – now that liquidity is expected
to tighten they are looking at alternatives for stable funding for the supply
chain.
While a corporate’s channel partners are good at their business and
their products may be so strategic for the corporate that there will be
significant difficulties if the Tier 2 company defaults, the Tier 2 company may
not have a strong balance sheet. Pre-shipment financing offers an alternative
and while it requires both banks and corporates to understand the entire supply
chain better, from a long-term perspective the new model offers the advantages
of stable financing to the corporate.
Additionally, although it still is often difficult for a
corporate to determine whether a Tier 2 company requires financing, as the cash
management and supply chain divisions were separate, the bank has also enhanced
its technology to make access to that funding easier. With the enhanced system
that links the two divisions and suppliers together, suppliers can notify the
corporate when they want financing and the corporate can pass that information
to the bank for consideration of vendor pre-payment.
Making Cash
More Visible
Along with financing, Kumar identifies a further key
need for corporates as cash visibility and management so that they know where
the cash is and how to move it. One key part of this visibility is reconciling
payments.
When a company gets paid, it needs to determine what the
payment was for and which invoice it matches. Most companies set a limit on the
outstanding amount to a single distributor, so a delay in matching the payment
to an invoice may reduce sales because the company won’t sell more to its
distributor until a payment is confirmed. Since matching invoices typically
takes at least three to four days, cash gets stuck in the supply chain.
To solve the problem, Standard Chartered developed a two-pronged
solution. First, it offers a virtual account, whereby a company has one main
account and then creates virtual sub-accounts for each invoice so that the
distributor can reference the sub-account and enable the company to match the
payment with the invoice more quickly. Second, it has created an advanced
reconciliation management system to match invoice details with payments and
inform the company of the level of match it has identified. The two solutions
combined can help a corporate increase sales by freeing up part of the limit
faster.
Kumar offers an example of how the process works. The bank
is working with a large manufacturer of farm equipment that sells equipment
through nearly 500 distributors in small cities in rural areas. Upon analysing
payment flows, the bank found that when distributors paid the company at a
small local bank in a small town, the payment would travel through a series of
smaller-town banks to the larger city where the company had its account. During
this extended process, much of the invoice detail would be lost along the way.
When payments arrived the manufacturer could, at best, know who was paying but
often could not match the payment to a specific invoice. When a distributor
wanted to order more, the manufacturer would then retort that the distributor
had not paid.
The bank addressed the problem by working with the
company, linking its system to both the manufacturer and the distributors, and
then giving the distributors a unique account number for each purchase order.
This enables the distributor to pay into a dynamic virtual account, which the
manufacturer uses to know who paid and for which invoice.
Given
the challenges of unstructured information and the manual processes for
reconcilement, Kumar reports that the next major challenge the bank is working
on is artificial intelligence (AI) in receivables to enhance reconciliation,
produce rich analytics, recognise patterns and reduce dependency on human
experience.
Conclusion
While liquidity may be
tightening, leveraging new solutions can enable corporates to keep their supply
chain functioning smoothly and free up cash in their own system faster so that
they can increase their sales.