The money-go-round

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As the MSC Napoli so obligingly demonstrated towards the end of January, there is a huge amount of value tied up in today’s supply chain. But while the looters helped themselves to motorbikes, electronics and even wine barrels from Branscombe beach, there are more legitimate ways of getting your hands on the value locked up in shipping containers, and goods in transit.

While it will be a long time – if ever – before traditional means of international trade finance like letters of credit or open account are entirely superseded, banks are looking at new ways of financing the global supply-chain. Tony Walsh, head of manufacturing at Barclays says: ‘We are looking at it from start to finish rather than just the manufacturing operation. Historically, we’ve funded for individual clients but we are now looking at ways of funding the entire supply chain – maybe from when the raw material comes out of the ground through to the retailer.’ The advantage for manufacturers is that it frees up working capital, while for the retailer the benefit might be lower prices.

Control of the asset
This thinking though is still at a very early stage, although Walsh says that Barclays is running a pilot scheme. The banks would not necessarily need formal title to the actual assets – a big retailer could, for instance, act as a counterparty, ‘but we’d need to be comfortable that there was control of the asset.’

But meanwhile, most participants in the global supply chain use methods like letters of credit or, where there is sufficient trust or confidence in the buyer’s ability to pay, open account; the latter essentially means that both parties are willing to proceed on the basis of a contract and invoice with no formal form of security.

Letters of credit are very secure but they are relatively expensive and generate paperwork. They do have one advantage for the seller – the bank can release the funds as soon as the goods are shipped, in return for a discount.

Andrew Betts, global head of supply chain business at international bank, ABN AMRO says that the banking industry is now beginning to focus on the extended supply chain, especially consumer industries like FMCG or retail. ‘We are working on innovative solutions for suppliers who are moving away from letters of credit to open account,’ says Betts. For instance, the bank could undertake to buy invoices (that would normally be paid in 90-120 days) earlier, structuring a solution that would be advantageous to both the buyer and supplier (post-shipment finance).  

‘We’re also looking at pre-shipment finance, where we go deeper into the supply chain and might engage with the tier one, tier two or tier three suppliers, in some cases going right back to the supplier of raw materials.’ It is a very fast-growing area, says Betts.
The banks of course will benefit from added expertise to gain a deeper understanding of supply chains and how they operate; ABN AMRO’s Andrew Betts himself was previously head of logistics giant DHL’s Global Trade Services division. What is important for supply chain finance is the knowledge of how the physical supply chain operates and how it is managed end-to-end. ‘We are interested in the underlying business transaction; however we’re not talking about taking actual ownership of the goods as we would in a traditional commodity market.’ Technology is also an important facilitator. ABN AMRO has a Supply Chain Business portal within its MaxTrad platform, which allows buyers and suppliers to exchange information online.

Nigel Woodward, head of financial services at computer chip giant Intel – who recently hosted a round table on the financial services supply chain – says that recent advances in electronic supply chain tracking and tracing technology could make it possible to ‘securitise’ invoices sent by a supplier to a manufacturer or retailer – in effect, allowing the supplier to unlock the value held in that invoice sooner and get their hands on the finance faster. This is especially true of transactions between the Far East and the Northern Hemisphere, where value can be locked up for anything up to 90 days, he says. And if the value of a transaction can be unlocked quicker, funds are ready for the next transaction and the supplier can make its money work harder.

The banks – providers of traditional trade finance – will not necessarily be the leading instigators of invoice securitisation, Woodward believes. ‘The hedge funds are also getting very interested. If we can get these “fundable invoices” into the right environment, different people might be able to fund them.’

Moving to electronic invoices
Other people have also been paying attention to making the invoice itself electronic, Stefan Foryszewski, OB10 director and co-founder says that there are around 15 billion paper invoices moving between businesses in Europe in any one year, and they cost anything between €5 and €24 to process – each. A big firm can easily generate a million invoices a year.

Electronic invoices are being increasingly recognised in the major trading nations of the world as having the same legal status as paper documents (China and Mexico are two exceptions, though) and the OB10 system is designed to respect each country’s rules on, for example, VAT and will check invoices as they are input for errors or anomalies.

This reduces the time spent checking errors subsequently. OB10 will work with SAP and similar systems at the buyer’s end, while suppliers can input from most business accounts packages such as Sage or Quick Books. Suppliers with no billing system at all can use the supplier portal. Transactions are then stored online and can be accessed any time, so eliminating the problem of the lost invoice.

Only a minuscule proportion of the world’s invoices are fully electronic at the moment, but Foryszewski expects the proportion to grow very rapidly in the next few months, particularly in the UK, Germany, Scandinavia and the US.

The huge amounts of value naturally turn peoples’ thoughts towards insurance and what happens when things go wrong. The TT Club, although primarily a transport insurer, does also provide cover for freight forwarders and logistics companies and, says marketing director, Ian Lush, cargo shippers are beginning to look at the adequacy of their cover. For one thing, the value of goods being shipped around the world is rising rapidly and the conventions used to govern most shipping contracts only pay a set amount per kilo, inadequate for a containerload of computer chips. ‘But we’ve also started to broaden insurance packages to take account of the full value of contracts,’ adds Lush. ‘For instance, if a shipper is liable if their truck gets caught up in traffic and the shipper ends up incurring a thousand dollar an hour fine for stopping a production line.’ It’s not a legal requirement to have such cover, but many people in the supply chain may not have fully evaluated all their risks.

Evan Puzey, VP sales and marketing at software solutions business Kewill – which specialises in global trade – explains that while efforts in the past few years have gone towards ‘electronicising’ the physical supply chain, companies are now showing interest in extending this to the point of payment. There are many arguments for doing so – increased efficiency, speedier payments and quicker resolution of queries.

For big firms, the spur has been the adoption of ERP systems like SAP or Oracle, but the Internet has also revolutionised access to electronic information for smaller players, including those based in distant overseas countries. ‘Obviously in retailing there is much more overseas sourcing, and we’ve responded with the development of systems to determined full landed cost’ – to ensure that purchasers aren’t left with too many nasty surprises. It will not be long, he adds, before we start to see things like electronic reconciliation of Letters of Credit or automated quotations for freight insurance.

Finance remains a difficult area, though – rather akin to a tug of war. The bigger companies of course have got very clever in deciding where they take ownership of the goods.

The ‘perfect order’
Companies are also working on concepts like the ‘perfect order’. ‘Every time someone has to touch an order in the supply chain, it costs you money.’ They’ve also got a lot more sophisticated in areas such as total landed cost analysis – particularly with the stretching of supply lines to places like Asia. ‘There are a lot of intangibles, here, for example things like political risk and currency factors.’

Many companies are getting sophisticated in deciding where to pay tax and VAT. Shaving a couple of percentage points off the VAT paid can save millions – and the European Union is getting more flexible in allowing importers to decide in which country to declare imports.

The conventional view of finance in the supply chain is that buyers like to delay paying for stock as long as possible while suppliers want to get paid as quickly as they can. In fact, says Harjot Sachdeva, solutions director at i2’s high tech industry group, the more savvy operators are recognising that more might be gained through partnership than the traditional ‘tug or war’ model.

He cites the example of electronics manufacturer Panasonic and US retailer Bestbuy who switched from a system of simply stuffing the retailer’s supply chain weeks in advance to one where Bestbuy shared its granular SKU and store data with the manufacturer – which was then able to predict which stores needed replenishing with which stock. ‘With Panasonic owning the inventory, that freed up cash for Bestbuy, while Panasonic enjoyed a higher premium because they were taking the risk.’

For decades, company finance people and supply chain people have barely acknowledged each others’ existence, but there are signs that the two worlds are converging. Eric Sepkes, director EMEA for cash management strategy at Citi, also sits on the board of the ‘Twist’ supply chain automation initiative. It’s time to stop talking in terms of separate systems and standards for finance and supply chain systems and recognise that, with XML, it’s perfectly possible for systems to talk to each other – if the will to do so is there.

Avarina Miller, senior VP at finance specialist Demica, says that while companies have long co-operated in the physical supply chain, some are now turning their attention to their financial relations. ‘In any buyer/supplier relationship, there are usually two incompatible requirements – the supplier’s desire to be paid as quickly as possible and the buyer’s desire to hold off paying for as long as possible.’

Until now, suppliers have been forced to resort to traditional loans and similar finance to bridge the gap, but by involving financial institutions and its software, a more effective instrument can be produced that satisfies both parties’ aspirations. Provided effective systems are in place, the financial institutions could buy invoices from the seller. While this will be at a discount, the cost could be lower than conventional loan finance, says Miller.

Sometimes known as reverse factoring or reverse securitisation, while it bears some resemblance to conventional factoring it differs in that it takes a more comprehensive approach, perhaps covering all or a large proportion of a major buyer’s invoices.

One of the beauties of it, Miller continues, is that a properly accredited invoice to a major buyer in Europe or the US – typically, an automotive manufacturer or major retailer may be a much better credit risk than a bank lending money to a small supplier in the developing world. Finance in developing countries may also be expensive and the banking infrastructure relatively unsophisticated. And if the risk is lower, the cost of the finance will generally be lower. It’s therefore ideal for international transactions.

Kevin Cook, head of manufacturing at BDO Stoy Hayward, the world’s fifth largest international accountancy network, says that while developing countries may be low-cost in terms of labour, finance might be more expensive than in Europe or North America and there also may be a lack of sophisticated financial instruments. ‘That means that in some cases, the buyer in Europe or North America is looking to provide funding to the supplier.’ Or they could provide an introduction to a suitable bank or help finance the purchase of new machinery.

‘I think the concept is starting to capture imaginations,’ Miller continues. ‘But we emphasise that we must have all invoice data in very “granular” form and at very high frequency, so that we can distinguish between eligible and ineligible receivables, and you need a system that can collect that data.’ This is where Demica comes in. The system dovetails with SAP, and indeed pretty well any finance system. It also has the merit of encouraging the finance, supply chain and procurement departments to work together – never a bad idea in most companies.

One of the problems would be putting a value on assets in the supply chain – how would you deal with high fashion items that might be worth thousands one week but only hundreds the next, or the latest – but soon to be superseded – design of computer chip? The problem has been addressed in commodities markets like metals or coffee and cocoa, where the goods are valued according to laid-down criteria.

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