Innovation is driving improved solutions in supply chain finance (SCF), from funding for farmers to hi-tech blockchain solutions. Participants in the inaugural Supply Chain Finance Community Forum Asia, held earlier this month in Singapore, gained excellent insights into the wide range of new opportunities. The new event, which launched from the well-established European event, was developed by the non-profit global Supply Chain Finance Community in partnership with the National University of Singapore.
Case studies: from beer to coffee to shampoo
A key goal for the Forum, SCF Community executive director Michiel Steeman explained as he kicked off the event, is to bring corporates and universities together to improve understanding of the supply chain and address key issues. He provided three case studies to illustrate the range of solutions underway.
The first case focused on barley, a key ingredient for the beer brewed by Heineken. The Dutch multinational had not been directly involved in the lower end of the supply chain, Steeman said, because barley went from farmers who harvest the crop to cooperatives that put it in their warehouses to malteries which convert barley to malt.
Since 8% of the cost of goods results from financing expenses, however, cheaper financing for famers and cooperatives can reduce the cost Heineken pays for the €1.5bn of malt it buys annually. The brewer started by buying barley from the cooperative and turning malteries into contract manufacturers, then went a step further by buying barley from farmers in some markets, which reduced working capital costs for both cooperatives and malteries.
Heineken is even buying seeds or the land for farmers in some regions, which reduces working capital needs even further. While there are risks, the group can also work with a bank to reduce risk by creating special purpose vehicles, which would have ownership of the barley and malt.
The second example is Senseo coffee makers produced by Philips. The Dutch tech company, which focuses on electronics, healthcare and lighting, had a Tier 1 supplier, who made the packaging and a Tier 2 supplier to put the plastic around the electronics. While the Tier 1 supplier was paid within one week, the company didn’t pass that benefit to the Tier 2 supplier, whose payment terms exceeded 90 days.
Philips used a “Buy-Sell” model to start buying from the Tier 2 supplier and selling immediately to the Tier 1 supplier, to drive down cost. The “flash title” for the instant purchase-and-sale means that the group has no inventory on its balance sheet. The process enabled Philips to reduce outstanding receivables for the Tier 2 supplier by nine weeks, which helped with their financing and resulted in a lower cost for the products that the group buys.
The third case study was another Dutch multinational, the consumer products giant Unilever, which provides up to €2.5bn (£2.2bn; US$2.8bn) in reverse factoring for its supply chain. Most of this money went, however, to the 20% of suppliers who made up 80% of the group’s spend. Unilever also took advantage of dynamic discounting with middle-size companies.
Many of the smaller suppliers were of tremendous interest to local politicians in each country who were starting to put pressure on large companies to support small enterprises that are hampered by more limited access to financing. Unilever joined with 50 other corporates and agreed to pay suppliers with less than €100,000 in sales within 30 days. While the effect on Unilever’s working capital is low, the impact on small suppliers is huge.
Technology is further building block for enhancing the supply chain finance, according to Windesheim University research fellow Bart Ras, and blockchain is a solution that will likely become a reality faster than many people expect. Rather than being a technological disruption, Ras explained that blockchain is a game changer because of the trust shift it facilitates. Trust is critically important, because there is no movement of assets without trust.
To create trust, corporates and individuals alike need to have confidence in the product or service they’re buying, the platform – whether it’s Uber or a bank – and the counterparty. Whereas the basis for trust for more than a century has been institutions such as banks, very recently it has shifted to “distributed trust” based on platforms. In their personal lives, for instance, individuals are using platforms such as Uber or Airbnb as new trust models, without any hesitation. Blockchain will similarly offer a new platform for trust, based on an event ledger that will provide certainty about the counterparty and the transaction.
A key benefit of blockchain in the financial supply chain, Ras said, is that it can reduce the friction in the movement of goods, which leads to costs that can reach double-digit percentages of total expenses at multinationals such as Philips. He expects to see pockets of usage before long and expects the word “blockchain” will largely disappear within five years, because the services it enables will become as common as email is today.
Leading SCF trends and next steps
Other speakers at the Forum highlighted trends in SCF that can benefit financial institutions and corporates alike.
Leveraging the financial strength of large buyers introduces specific financing for suppliers, said Rabobank’s director of asset-based finance Wouter Sleegers, and helps with financing for weaker suppliers. To bring the full benefits of SCF to suppliers, banks are giving tools to buyers to support their suppliers, helping them to work with different regulatory frameworks in each market, and working with them to ensure that there is appropriate documentation for the local requirements.
Asked about companies such as Alibaba and Amazon that offer financing to small to medium enterprises (SMEs), Digby Bennett, regional sales director at trade finance software vendor China Systems said that he sees them as competitors to banks. Sleegers disagreed, saying that Rabobank has an open model that makes them both a threat and a partner. Sarat Mohanty, head of global supply chain finance implementation, transaction banking at Standard Chartered, similarly said that the bank is trying to develop alliances with them.
While SCF solutions vary by region and institution, the clear trend is that innovation is driving changes that may well cause significant disruption. Financial institutions that want to stay in the game will need to step up so they can compete effectively against existing players as well as a slew of new – and perhaps unexpected – market entrants.