With all the talk of borrowing squeezes and high interest rates, perhaps financial directors need to look at some of the assets locked up in company supply chains. When goods commonly spent no more than a few days in transit, financing the supply chain was not really an issue, established instruments and business methods like letters of credit were adequate.
But now, with more goods being shipped over longer distances, more firms are thinking seriously about how to finance their supply chains. Interest has been further heightened by the growth in trade with companies in less developed parts of the world, where the sophistication of the banking system has not yet caught up with the headlong growth in exports.
As the Aberdeen Group”s report, Working Capital Optimization, points out, ”smaller emerging market suppliers to large corporations are being pressed to extend payment terms.” Many are operating in a climate of financial uncertainty, as they struggle to accurately predict cash flows.
A lot of work has gone into increasing visibility of the financial supply chain, but what about the financial aspect of what could more accurately be termed the value chain? As Aberdeen”s authors point out, changing inventory management and supply chain finance practices might be complex but it is also worthwhile. Significantly, they say, the companies that manage their working capital best are those that let their supply chain people take a part in the process.
Tools to help companies take charge of their complete chain are now becoming available, such as Demica”s Citadel platform, explains Avarina Miller, senior vice president, at the working capital management specialist. What Citadel does, she says, is take all the invoice data and makes it available in an easy to understand form.
That, in turn, makes it possible for a bank, or similar, to use that information to help an exporter realise the liquidity locked up in an invoice that has been approved by a buyer. This might well be a cheaper source of working capital than a bank loan; in any case, the latter may not be readily available in some countries. It also helps suppliers reduce the ”exposure” on their balance sheets – in other words, reduce risk. Buyers like the concept too, says Miller, as it enables them to help their suppliers manage their capital requirements without extending credit terms.
However, she says, ”the market is developing fairly slowly at the moment.” One problem is that, for the idea to work, procurement as well as financial people must be brought into the process. It is also a fairly new concept, though it is starting to be talked about at conferences, says Miller.
From a financial point of view, it is not exactly a new idea – factoring invoices is in fact one of the world”s oldest forms of finance, says Miller – but she believes that the Citadel platform can automate and streamline the process.
A basis for credit
Some people have suggested taking the process a stage further and actually using the physical inventory in the supply chain as the basis for credit. This might though be tricky to arrange, as it could be difficult for a bank to put a true value on many goods, particularly items like high fashion or obsolescence-prone computer chips. (However, this approach has been successfully used in commodity exchanges for centuries, as it is relatively easy to draw up agreed quality standards).
Ronald Teijken, manufacturing industry executive at Sterling Commerce says that interest in information sharing, including financial data, is growing across the board, but that there are a lot of issues to solve, including systems and formats, trust issues and the fact that ”bankers” language is different from manufacturers” language.”
One other problem with supply chains, he adds, is that no one entity ”owns” them, or at least no one thinks of themselves as the supply chain owner. ”We always try to find who is taking the lead, who is making the decisions on connectivity standards,” he explains. His view is that it is the logistics service provider who might be best placed for this role.
Getting a view over the modern, rapidly changing supply chain can be difficult though. Just consider how many times electronic goods manufacturers switch suppliers, for instance. ”Modern supply chains can be a financial as well as a manufacturing headache,” he says.
Perhaps, though, companies will have to bring a measure of stability to the process, and there is evidence that people are willing to sign longer term contracts – recognising perhaps that the cheapest manufacturer of a component is not necessarily the one that brings the most value to the business when all external costs are taken into account. This can only be good for long-term planning.
Sterling Commerce is working on an e-invoicing product that it plans to bring to market next year. More than just the simple digitisation of pieces of paper, it promises a data achieving function that will make retrieving information much easier, promises Teijken. It should also make inter-enterprise communication on financial issues much easier.
Sterling Commerce already does a lot of work in the banking sector, so it should be able to offer financial world levels of security.
People at logistics giant DHL have been reading Sterling Commerce”s mind, because through its ISC (International Supply Chain) subsidiary it sees itself getting more involved in the financial aspects of its customers” supply chains – or the value chain as many call it.
Partly, it”s in response to supply chains getting physically longer, says managing director of ISC in Europe, Mick Jones, though another factor would be the increasing sophistication of many supply chain managers, able to see the fiscal as well as the logistics aspect of their company”s activities.
Many of DHL”s customers are using concepts like vendor-managed inventory in quite a sophisticated way to keep assets off-balance sheet for as long as possible. More sophisticated IT systems and better forecasting are making it easier to keep track of assets in the chain and optimise the fiscal as well as the physical aspects of inventory.
DHL is getting involved itself, for example by acting as an intermediary by taking ownership of stock and ”selling” it to the retailer on dispatch, for instance. ”It helps the retailer because they”re not having to buy inventory in big lumps,” explains Jones. And in case any bankers and financial services people are worried that DHL is setting up in competition with it, Jones adds that many of these products are being developed in conjunction with leading banks such as ABN-Amro.
Linking physical and financial
Bankers are much more interested in the world of supply chain management than they used to be. There are even people with job titles such as head of supply chain, like Tony Pinn, at Barclays” international trade group. He says; ”There is a drive to link the physical and financial aspects of the chain, and there is a blurring of responsibilities. For instance, a logistics manager may have financial as well as physical objectives. Not only might he have to get the right goods to the right place at the right time, but he might also have to do it in such a way that the amount of stock held is minimised.”
Some third party logistics service providers, too, are changing their role, in many cases taking on ownership of the goods and providing essentially a stockholding role. Like, financial institutions are providing a data management role or manage licences or quotas, in much the same way as freight forwarders.
Whereas in the past, when most trade was between businesses in the same country, simple instruments like overdrafts might have sufficed or, where international trade was involved, traditional means like letters of credit, but financial services providers or insurers are now becoming more deeply involved in managing the entire supply chain, says Pinn.
It”s a more complex affair than doling out letters of credit, but it”s also more rewarding. ”As more technology is introduced, you can more easily assess the cost of a supply chain. In the past, a lot of information was in different silos, but now you can make much better decisions.”
This blurring of roles is reflected in modern IT systems. ”ERP systems, for instance, are better at dealing with supply chain aspects. Companies know that they need to take account of information that isn”t held on their own systems, but someone else”s, like a 3PL.” Such companies could in fact play an import role as a global data integrator, Pinn believes.
The day is not so far off when an event in the physical supply chain, like goods being despatched from a factory gate, triggers an automatic response in the financial chain – payment of a supplier, for instance. That might be a slightly scary scenario to some people, mindful of the cash flow implications but it needn”t be. Tony Pinn sees an important role for services such as Barclays Supplier Finance as an intermediary, ensuring that people get paid, or pay out, at a point in the process that suits them. ”We could for instance say to a supplier, if you need cash we can pay you now, and this is what it will cost.” Services like factoring or invoice discounting have always existed, but they have tended to be inflexible, clumsy and often expensive. ”This is more about giving people total control.”
It would also be possible to take a much more global view of the chain. ”The bigger the picture, the more accurate a view of the process you can take. Many of the problems faced by the so-called Asian Tigers in the late 1980s were caused by the much more localised financing then available.
”As more technology is introduced, you can more easily assess the cost of a supply chain. In the past, a lot of information was in different silos, but now you can make much better decisions”In any case, developments like the Sarbanes-Oxley accounting standards, introduced in the wake of the Enron collapse and other accounting scandals, require everyone – companies and banks – to take a much more global view of risks in the supply chain. ”In fact, you could say that visibility is a prerequisite of Sarbanes-Oxley. For instance, it”s no longer acceptable to hold information on spreadsheets.”
Lengthening supply lines as more goods are produced in distant places like China has led to new financial solutions. Karl Alomar is CEO of China Export Finance which, as its name implies, provides specialist financial solutions for manufacturers in that country and their customers.
”Availability of finance in China is getting better but it”s still relatively limited,” he says. ”What we are offering is a new approach to transactional financing.” While Chinese manufacturing exporters have a reputation for being all-conquering, they do in fact face strong pressures from buyers and face stiff competition from other exporting countries. ”They”ve therefore got to be able to offer the same 30, 60 or 90 day credit terms as other suppliers.”
CEF offers a very specialised invoice discounting service, which allows the Chinese exporter to get paid quickly, while giving the importer the comfort of knowing that, if the goods aren”t delivered or are unsatisfactory in some way, they too are covered. Such services are not new of course, but CEF feels that its strength is that it has specialist staff in China as well as in the US and Europe, giving it an insight into the many ”cultural” and linguistic issues that can sometimes make commerce difficult. In some cases, CEF has found alternative buyers for goods that buyers found inappropriate, the sort of service that someone with a purely banking background might find difficult to provide.
Also, by spreading the cost of the transaction between exporter and importer, charges can be lower than for conventional bank solutions, claims Alomar. It”s also a more complete solution than that available from export credit insurance agencies, he says.
Getting rid of paper is a worthy aim, but how easy is it to achieve? Stefan Foryszewski, senior vice-president of electronic invoicing and supplier payments solution specialist, OB10 says that, despite the manifest advantages of automated, electronic systems, only three per cent of business-to-business payments in Europe and North America are paperless.
Avoid re-keying of data
The OB10 system works, essentially, by scooping up all the information from suppliers” accounting systems and, using its sophisticated mapping engine, turns them into a data file that can be input directly into a large buyer”s ERP system like SAP. It gets rid of the need to re-key data (many firms currently have small armies of staff doing just that) with all the potential for error that implies but without all the parties having to agree standards and formats with each other. The system also deals with VAT, currency conversions, if required, and there is no need to store paper invoices as everything is stored in an online data warehouse.
Foryszewski is pretty confident that the system can cope with virtually any suppliers” systems in around 95 different countries. The only requirement as far as suppliers are concerned is an internet connection. Paper invoices can also be directly input into the system relatively easily.
According to OB10”s own customer surveys, 96 per cent of invoices on OB10 get paid on time, compared with only 52 per cent of paper invoices.
The service is also being extended, in conjunction with bankers Abbey Santander to provide a factoring-type service which, says Foryszewski, is very competitive compared with most other products currently available.
One might have thought that the arguments in favour of electronic invoicing would be pretty compelling, even without taking into account the carbon-and tree-saving potential that is currently so fashionable among big corporations. However, even in the US take-up has been quite slow; probably, a larger proportion of business to consumer transactions than b2b are fully electronic. ”That”s probably because consumers don”t have to do things like account for VAT or input transactions into an ERP system,” says Foryszewski. It”s only comparatively recently that systems that can do that reliably have become available.
Another block to progress is that the tax authorities in some major exporting countries – including China and Mexico – still insist on their companies raising paper invoices. However, that may start to change – Foryszewski confidently expects Beijing to allow electronic invoices in around six months” time.
Information sharing is growing fast but there are issues: formats, trust issues and language differences between bankers and manufacturers
By acting as an intermediary we help the retailer because they”re not having to buy inventory in big lumps
Availability of finance in China is getting better but it”s still relatively limited. We are offering a new approach to transactional finance
China Export Finance
Despite the advantages of automated, electronic systems, only three per cent of B2B payments in Europe and US are paperless