Financial Supply Chain: Where Next?

Managing the financial supply chain (FSC) efficiently remains a vital part of the treasurer’s role. Although the financial crisis – and the accompanying scarcity of credit – show signs of easing, the focus for corporates remains on ensuring that cash is moved efficiently and as cheaply as possible around the the order-to-cash (O2C) and the purchase-to-pay (P2P) cycle. Corporates are examining each part of the process to see where they can streamline it, with suppliers under close scrutiny. Banks, meanwhile, continue to search for ways of eliciting more value from corporates, who are now using funding methods requiring less input from banks. However, there are signs that the bank to corporate relationship is changing – and will continue to do so after the crisis has passed – with technology playing a key role in this change.

“Sometimes people think of the financial supply chain (FSC) as a ‘thing’ – rather than a series of concepts which are applied differently to different parts of the supply chain and look very different to retailers and buyers,” says Arthur Vonchek, chief executive of trading platform Bolero. “Conceptually, the idea of managing the FSC is easy to understand. The devil is always in the details.”

Working with Suppliers

For food manufacturer Kelloggs, the fundamentals are very simple. “Our [suppliers’] priorities are ensuring an efficient company supply of goods into the market, keeping costs under control, and stripping out costs where they can,” says Kelloggs Europe treasurer Roger Blackburn. “Everyone’s wary – are we through the recession or not, wondering what letter of the alphabet the recovery is going to look like: will it be it a U, V, a W or a J? I think it will be a J – bottoming out followed by a long, slow recovery.”

The volatility of costs, particularly in commodities, has forced companies to become much more aware of, and focused on, their working capital management – a crucial aspect of FSC. For some firms, the risks are lower than for others. “We continue to prioritise working capital management and keep matters under review,” Blackburn adds. “The suppliers we’re dealing with tend to be the blue chip companies and the risk of our supply being interrupted is rather lower than it would be if we had a different supplier base. There’s no magic in improving working capital, it’s just knowing how your numbers work and how they relate.” The company uses turnover, operating profit and free cash flow – heavily driven by working capital – to determine supplier risk.

Changing Priorities

The banking crisis saw a huge change in corporates’ FSC management strategies. In the past two years, the trend towards open account and away from traditional trade instruments and the use of bank guarantees has been reversed in a bid to reduce exposure. “There has been a real resurgence in the use of traditional trade instruments, in particular guarantees, documentary collections, letters of credit (LCs) and a move away from pure open account,” Vonchek says. “We have seen an increased interest over the past 18 months because risk and management of risks across multiple banks and credit lines has become lot more centre-focused for both corporates and banks than 18 months ago,” he adds.

For Vonchek, this is part of a wider trend for the ‘tactical deployment’ of specific finance solutions for particular parts of the supply chain, rather than the use of a ‘one size fits all’ solution. “Everyone has come to the realisation that FSC management is much more complex than finding a silver bullet that allows everyone to do things in a fundamentally different way,” he says.

The New Bank to Corporate Relationship

One key characteristic of the past few years is the level of interest have in banks in selling additional FSC solutions, which could be starting to redefine the bank to corporate relationship – partly as a way to offet their falling revenues in this area, which have decreased significantly in corporates’ move away from LCs towards open account. But many believe that banks are not yet bringing enough additional value to the process while trying to exploit corporates’ advances in this area. “The banks are trying to come up with a new product to allow them to reintermediate themselves in that process. But they are trying to sell a product to solve a problem that banks are not necessarily banging on the door to solve,” Vonchek says.

“There has been a gap between corporates’ level of satisfaction with the way they are already organising their FSC and the banks desire to offer risk management and financing expertise to the corporate. They have been waiting to be invited to the party.” But, he emphasises, banks’ and corporates’ needs in this area have begun to converge, albeit slowly, partly because of the aforementioned return to traditional trade instruments. Receivables finance is becoming increasingly well-understood, to add to methods such as factoring and reverse factoring. But some firms have yet to be convinced. “The banks are pushing reverse factoring and things like that more, but so far we haven’t found any interest in our supply base in taking that up,” says Kellogg’s Blackburn.

However, some see the financial crisis and the ensuing move back to more traditional financing instruments as an opportunity for banks to re-engage with their customers – and if banks are focussed on studying corporates’ needs, this could serve both banks and corporates well when the markets reach equilibrium once again. Vonchek warns that this will only be the case “if banks do their job properly and really understand corporates needs… rather than being self serving.”

One difficulty when moving away from financing against collateral is that it limits the ability to finance unless the product has already been shipped. Banks, keen to become involved with the redefined FSC process, must therefore move ‘downstream’ and offer supplier finance pre-shipment and in transit, rather than on delivery. But this requires firms to increase the levels of transparency of their supply chain to banks – something they have traditionally been reluctant to do. Another approach for banks to take would be to offer more innovative solutions for product that don’t require collateral.

The tightening of credit has also allowed banks to become more involved higher up the FSC, as corporates look to streamline their FSC in an attempt to free up cash. “I think the trend will be for banks to become more providers of financial supply chain workflow based solutions, facilitating the purchase-to-pay (P2P) process, for example,” says Gregory Cronie, head of sales in ING’s payments and cash management division. “They are also developing the facilities to handle e-invoicing disputes and provide financing solutions for different stages of the process.” Financing products that are also designed to streamline the workflow by allowing the customer to handle the disputes process are becoming more popular. These include web-based platforms for the suppliers to send cleared invoices directly to their bank to finance their supply chain. “You will see this happening more and more,” Cronie suggests.

Effect of Centralisation on the FSC

Many corporates have found greater centralisation has given them a much better view of their cash, which in turn has made their FSC more efficient. Since 2004, British American Tobacco (BAT) has been moving from an extremely decentralised company structure, which at one time had more than 60 enterprise resource planning (ERP) solutions in place, to just four shared service centres (SSCs) covering the different world regions.

In terms of day-to-day cash management, it allowed for a review of processes such as payment runs. “We thought: how often do we do payment runs?” says Valeriy Zubkov, treasury controller at BAT. “Would it make sense, rather than paying every single day, to make sure that it happens once a week, as we can easily predict the cash outflow on that particular day, based on the credit terms and the invoices outstanding?”

This approach, as well as reducing overheads and administration, can reduce the number of difficult and costly to process exceptions. “If you do it every day it means almost every payment is an emergency payment and those, by definition, you need to push through, especially when the supplier starts complaining that you are not paying on time,” says Zubkov.

This approach is also valuable from a risk perspective, allowing firms to identify where the exposures are – be they in credit, foreign exchange (FX) or liquidity – which can much more easily monitored and managed.

Internal Integration

One issue that is still holding back the efficiency of the FSC for corporates is its lack of integration with the physical supply chain, with costs associated with the supply chain being perceived as the domain of the finance department – the treasury in particular. Vonchek says that although the initial steps have been made, there remains a lack of board-level drive to change this. “Some corporates have started to get a bit more joined up and work more closely together,” he says. “But you don’t see board initiatives in corporations looking to optimise or effectively link together financial and physical supply chain.”

However, awareness of cash and credit has increased alongside a general focus on the health of the supply chain – especially in an environment where many suppliers have gone out of business as a result of firms extending payment terms.

Even though the FSC has not yet reached the level of significance for a full-scale focus from corporates to look at this area other than in specific departments, Vonchek believes interest from corporates in managing treasury and working capital, as well as cash around the supply chain, will continue to increase. “Is management of the FSC something which is on the list of the top four priorities in the boardroom? Probably not, but it is going up the priority list.”

FX Efficiency

Another area where the efficiency of cash is paramount is in import/export where, in the current volatile market, delays can result in an erosion of funds. “The key challenge is to make sure there isn’t money sitting around doing nothing,” says Mark Frey, regional director, Canada, at FX solutions provider Custom House. “The goal is to make the process as efficient as possible, and facilitating the payment to beneficiaries as quickly as possible, whether sending the money, in the case of importers or receiving, it in the case of exporters.”

Credit facilities are an important part of this. Setting up direct debits for customers making payments abroad, while the intermediary sends the payment on to their beneficiary, can make payments near-instantaneous.

Avoiding making cross-border payments where possible is a key part of making the FSC as efficient as possible – sending a domestic payment where possible avoids transferring the payment through multiple correspondents, each of whom deduct their own fees. Setting up accounts in the customer’s currency avoids these lifting fees, as well as greatly improving the straight-through processing (STP) rate.

Here, too, technological advances have changed the process, with FX markets now open 24 hours a day, six days a week and can be tracked online. The increase in anti-money laundering (AML) measures has also been a factor – opening banks accounts has become more complex. “We have really seen a move away from holding multiple foreign currency accounts, as companies can now leverage off the provider’s account rather than their own. This has been a big shift in the UK, in particular,” says Frey.

Centralisation has also played a part in reducing cash loss across borders. Where in Western Europe some transactions can be made same day value basis, preventing any loss of liquidity, this is not true of certain other countries. BAT’s Zubkov explains how this reduced flexibility: “In Brazil, for example, that would not be possible because you’d have to declare your transactions to the central bank. There are lots of controls, lots of paperwork and, most likely, you will only be able to use their limited number of instruments, such as dividends, for getting access to cash.”

However, for the largest corporates, the benefits of centralisation to the financial supply chain have to be weighed against the benefits of local access to consumers’ cash. BAT has evolved to have a large number of banking relationships at the end market level. Zubkov explains that a trade-off exists between convenience – making sure that the bank has a footprint in the required geography on the one side – and ensuring BAT works with just a core group of banks which it can share its transactional business.

“This is simply because big banks may not be present on the ground where we need them. For example, we work with farmers in Malaysia, and need branches on every corner for the trade force to actually bank the proceeds from the sales.” BAT offers daily cash management, collections and payments “ …and in return we can expect some kind of support when we need the credit – kind of central credit facilities. There is a degree of balancing the equation involved.”

Moving Forward

In terms of how the FSC will continue to evolve, Vonchek predicts the deployment of other financial supply chain solutions outside traditional trade – once the focus has shifted away from its current emphasis on cost. “They are likely to be more tactically delivered [than previously], and will look at post shipment, receivables financing, purchasing financing,” he says. “There are specific solutions that will start to be deployed as everyone gets more confident about looking for real opportunity rather than trying to cost and rescale the FSC.”


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