Banking

Best Practice

Cash Management

Centralisation

Financial Supply Chain

Investment & Funding

Payments

Regions

Regulation

Risk

SEPA

Sibos 2011

Technology

sponsors

The objectives of supply chain finance (SCF) are to provide visibility and resolution of discrepancies in financial supply chain events, from source to payment and from customer order to cash. SCF also enables access to liquidity, while mitigating risk and unlocking working capital. Supply chain finance’s most compelling message is that it is a winning value proposition for all the parties involved. The original win³ (win-win-win) paradigm where the buyer, the supplier, and the bank are the beneficiaries is now extended also to SCF platform providers (i.e. IT vendors) in a win⁴ deployment. This highlights the importance played by technology in SCF. The innovative factor in SCF is that the mostly traditional financial instruments (for example factoring, reverse factoring, payables discounting) are delivered through technology platforms that build the necessary visibility of financial flows between parties, and ensure basic reconciliation features that accelerate the flows of cash.

Although all parties benefit, each one measures the results in a different way when comparing the returns with the investments required to initiate the whole programme. Criteria to identify investments are different depending on the party involved. So each player will measure the return on investment (ROI) of the SCF initiative using different metrics and criteria.

For the purpose of this article, the separation between ‘buyers’ and ‘suppliers’ is not indicative. At the end of the day, any corporation is, contemporaneously, a buyer and a supplier. It is best to refer to the company’s revenue size, in that large (i.e. revenue greater than US$1bn) and mid-to-small organisations have distinctive objectives that better characterise the way they assess the outlays and returns of their initiatives.

In the examples below, I am providing a quick outline of the distinctive investments and benefits that the players of a win⁴ SCF programme will most likely incur. In all cases, I have decided to indicate the qualitative elements that best qualify the value of the elements at stake. My research shows that, only once these more ‘intangible’ elements have been vetted and accepted, can the evaluation process proceed with more numerical (i.e. ‘tangible’) data for a quantitative assessment of the final ROI figure.

Large Corporations

Investments

Accept to handle liquidity differently: In the aftermath of the financial crisis, treasurers of large corporations today look at cash not so much in terms of where to find available sources, but rather on how to best use the free cash available. Using free cash to finance key suppliers is one of the options available, which demands the introduction of a liquidity management policy not always easy to accept at first.

Change management for education: Lack of awareness is cited as one of the top reasons of SCF failure. Corporate culture must be renewed through dedicated education programmes.

Open to financing partners: SCF cannot happen without the intervention of a financing partner, who must have equal negotiation and decision power. This requires a profound revision of the balance of powers so far achieved.

Benefits

Business continuity: Management of payables and inventory are the pillars of this new supplier relationship management strategy.

Cases histories:

• Siemens: Has applied for a banking licence in an effort to reduce its dependence on troubled eurozone banks for financing.
• Hewlett Packard: Offers to pay its bills faster, in exchange for an early payment discount, to provide liquidity to suppliers in trouble.
• Volvo: Defined its SCF programme as a groundbreaking securitisation of Volvo supply chain.

SMEs

Investments

Move from manual to electronic document exchange (e.g. orders, invoices): A prerequisite to reap the benefits of SCF.

Concede delays of DSO: Even though this is exchanged with immediate availability of cash, the decision can generate a rejection crisis among more old-fashioned finance directors.

Benefits

Improved working capital: Immediate cash and certainty of payment definitely improve the financial ratios.

Cash availability: Through an alternative source of funding.

Banks

Investments

Reengineer the internal reorganisation: SCF requires selling solutions and not discrete products. Internal organisational walls must be broken down through a change management effort.

Implement new technology: SCF results excel when technology is used to deliver solutions. Investments in technology are required.

Lose in some business areas: Profitability of the SCF portfolio will not be the sum of the single components but a balanced mix, where individual components might be offered at loss for an overall profitable result. ‘Islands of power’ will suffer.

Open technology versus proprietary: Technology itself is not a competitive differentiator, despite the fact that many IT managers will defend their position. Any change in the technology infrastructure must accommodate the corporate request for open and standards-based systems.

Benefits

Acquire new customers and customer loyalty: Wins in SCF pass across customer-centric service delivery.

Integrated global transaction banking: The need to move from products to solutions leads to governance that encompasses traditionally separated transaction-based business units (such as cash, trade, payments, FX, securities).

IT Vendors

Investments

Build platforms for integration: SCF platforms are the paradigm of effective, and efficient, SCF programmes. Siloed and ‘best-of-breed’ applications are not sufficient if they are not part of an overall open architecture.

Provide more functionality: Cash, trade and payments are only the first areas that must be managed through a set of integrated applications that are rich with features and easy to use.

Benefits

Strategic collaboration with banks: Financial institutions are conscious that technology solutions can be best provided by IT experts. The availability of a rich platform will attract more prospective clients among corporations, as well as financial institutions eager to white label their offering through the new technology.

Competitive advantage: Not all IT players will be able to service the market with innovative technology, nor they will all be able to close strategic partnerships with key financial players.