Going Beyond the FSC – KBank Supports a Well-oiled Value Chain Solution in Thailand

PTT Public Company is Thailand’s largest petroleum firm, as well as its largest conglomerate. It is a state-owned company listed on Thailand’s SET Stock Exchange and performs a vital role in the nation’s economy.

PTT operates across the entire spectrum of the oil and gas industry. It is an integrated player with upstream activities in exploration and production, refining and petrochemicals, and downstream activities of distribution and sales of its products through a retail gas station network.

PTT runs more than 1000 petrol stations in Thailand – most of which are privately owned and operated by dealers under PTT’s supervision.

The petrol station business in Thailand is very complex given the razor-thin retail margins and intense competition. Both PTT and the petrol station owners work together to find ways to be lean in their day-to-day business operations and improve their operating efficiencies.

Retail Distribution Challenges Faced by PTT

Previously, PTT would extend credit to its petrol station dealer network for their purchase of petroleum inventory. The financing facilitated the retail distribution business for PTT and expanded its dealer network, but also brought in operational overheads for PTT towards credit evaluation of dealers, managing collateral, paperwork and bookkeeping, reconciling receivables, etc.

Rapid and unpredictable oil price fluctuations added significant complexity to this process. PTT frequently faced the issue of insufficient credit limit with dealers. An insufficient limit could delay the entire process of inventory dispatch, as either PTT had to temporarily extend a higher limit to the dealer as an exception, or the dealer would have to make an off-cycle payment to free up room for additional credit. Either way, it created complexity that negatively affected business, and reduced PTT’s ability to service peak demand for its products.

If the above were not enough of an issue, the inventory ordering and payment process between PTT and the dealers involved a lot of paperwork, faxes, phone call confirmations, cash handling and frequent trips to bank branches. Dealers usually had to carry cash to their bank, make the required payment to PTT’s account, and then fax the pay-in slip confirmation to PTT. This process could easily be disrupted if the transaction is required to be done during non-banking hours. Demand for fuel and petroleum products is 24/7 and cannot wait for bank branches to open.

Cash Management Challenges for the Dealer

The core business of the retail petrol station in the competitive landscape that they operate in is to attract customers to their outlets, sell fuel and other petroleum products, and manage inventory so that they are always adequately stocked.

However, dealers found out that the cash management obstacles they encountered were a serious issue affecting their core business. There were several challenges they faced.

The credit terms provided by PTT did not come free, and there was a high interest charge as per the industry standard. Dealers tried to minimise this cost by maintaining minimal inventory, but this necessitated frequent re-orders as well as lead-time for dispatch. This in turn brought in additional costs, and sometimes resulted in the dealers being out of stock leading to end customer unhappiness with the dealer’s reliability.

Dealers also had to obtain a letter of guarantee from their bank, for PTT to sanction and maintain the credit limit, and this in turn resulted in the dealers incurring an additional cost.

Given frequent oil price fluctuations, the dealers were faced with another dilemma. They could either maintain a higher credit limit with PTT – which they may not always use – as an insurance against running out of limit, but thereby increasing their costs. Alternatively the dealers could manage within a tight limit to minimise costs, but they had to then face inventory disruptions and also suffer from lost business when oil prices are in an upward trend.

The petrol stations faced an associated issue that they had significant cash transactions. While usage of credit cards by customers has been growing in Thailand, it is still not the preferred method of payment in many locations. Handling cash brought in issues of physical management of cash, security and transportation. The cash also had to be banked before the dealers could use the funds for payment to PTT.

Credit cards when used by customers again brought in a challenge. Dealers had to forego a high merchant discount charge that makes the dealer’s margin non-existent in this low margin retailing business. This effectively reduced the incentive for dealers to promote usage of credit cards. Between cash and credit cards, dealers literally were caught in the horns of a dilemma.

Developing a Value Chain Solution

The business challenges facing both PTT and its dealer network were difficult. It put the onus on Kasikornbank (KBank) and PTT to work together to find a simple to use, but effective solution that would tackle each of the issues faced.

KBank had to come up with a customised value chain solution that addressed the challenge across the entire retail distribution chain, and also significantly improved business efficiencies for PTT and the dealers to give them a competitive edge.

The product team at KBank looked at several options, to structure a comprehensive solution that suited both PTT and its dealer network.

With the support of PTT, KBank reached out to individual petrol station dealers and directly established a relationship with them. After performing due diligence on the dealers, KBank directly signed them up as customers of the bank and extended credit to them in the form of an overdraft account.

With the dealers having access to an overdraft facility, they could now use this as a source of short-term working capital. This simple and elegant solution allowed the dealers to use as much credit as they needed. Credit was also available as and when they needed it, and they had to pay financing charges only for the amount of credit actually used.

KBank evaluated the end-to-end structure of payments and collections for each dealer, and ensured cost-effective terms of financing for the overdraft, as well as appropriate collateral requirement. Dealers were now free from having to obtain a bank guarantee for PTT, and this helped reduce its cost further.

With the bank taking up the effort of evaluating and monitoring each dealer’s credit profile, PTT had no further need to extend credit to dealers. This significantly brought down effort and complexity for PTT towards dealer management, reduced its risks, and smoothened its business dealings and relationships with dealers.

KBank then used the overdraft account with each dealer as its anchor point for a comprehensive value chain solution. Cash collections that were credited into this account immediately reduced any usage of overdraft, and this helped optimise the cost of credit for each dealer.

KBank also provides its corporate customers in Thailand with a cash collections product to pick-up and credit physical currency notes and coins. This product was also extended to PTT’s dealers on a case-by-case basis, depending on the business case at the dealer’s location.

KBank then developed an electronic payment (e-payment) channel for the dealers, which worked in conjunction with PTT’s electronic ordering (e-ordering) system. The e-payment channel allowed the dealers to transfer funds to PTT towards purchase of inventory. Dealers could access the e-payment channel online from their retail outlet without having to go to a bank branch. E-payments were again linked to the same account with the overdraft facility. This facilitated purchase of inventory by drawing upon instant funding from the bank for the amount required.

For those dealers who were still not e-channel oriented, KBank provided the facility of a closed-loop corporate payment card that integrated with PTT’s e-ordering system and the overdraft facility. Dealers could use the payment card issued by KBank to make real-time payments to PTT.

KBank also helped PTT and dealers promote non-cash based payments from customers by implementing nationwide electronic data capture (EDC) at a competitive cost, and developed a closed-loop oil fleet card called the PTT Energy Card for corporate fleet usage. This helps customers obtain credit for their purchase of fuel, as well as making detailed usage and purchase information on their consumption of fuel available to them.

A Well-oiled Value Chain Solution

In addition to financing its customer’s supply chains, KBank focuses on providing a ‘value chain solution’ where all of its customer’s requirements – financial, transactional, and any related to operational efficiencies are taken care of, end-to-end.

The outcome of the solution set in place by KBank and PTT is that electronic collections (e-collections) received from customers are now credited to the dealers’ account with KBank immediately reducing any overdraft used by the dealer. In some locations, the majority of payments made by customers have now become non-cash, enabling dealers turnover of funds for inventory management highly efficient.

With the end-to-end cash management model that KBank has with dealers, the bank is now in a much better position to evaluate and extend credit to dealers at competitive terms, with zero to very low collateral requirements. The bank is also able to respond to dealer credit needs rapidly, with quick turnaround time for such requests.

This effectively minimises the working capital need as well as financing costs for dealers, and insufficient credit limit is no longer an issue. Dealers are able to increase their credit limit with KBank as their business grows.

Dealers are able to use their account with KBank as a concentration account wherein they obtain their receipts from customers, remit payments to PTT, and also obtain an overdraft from the bank towards funding. All these take place in real time.

Dealers and PTT have achieved significant benefits. It is estimated that dealers have reduced their financing costs by up to 24% with the solutions provided by KBank. In addition, transportation and logistics costs have also been reduced by up to 30% in some cases, with dealers able to optimise their re-order quantities and lead-time requirements.

PTT has been in turn able to reduce its accounts receivable (A/R) position by 15 days with dealer financing now being provided by KBank. This has improved PTT’s working capital position, benefiting its balance sheet.

There has also been savings in time and effort. At the dealer end, administrative staff at a typical dealer outlet has seen their efforts reduce by about two hours per day. There has also been a significant reduction in effort and requirements at the dealer management team at PTT. This has allowed both PTT, as well as its dealer network, to focus on its core businesses of distribution and sales.

The payments backbone for KBank has been delivered by Fundtech. This core cash management solution integrated with other systems at the bank created an infrastructure for KBank to provide customised solutions to its customers.

Customer demand for fuel and petroleum products will always be 24/7, and now with the systems implemented by KBank, PTT’s response to this demand is also 24/7. A well-oiled value chain solution is in place.


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