The initial question raised on this online forum was why the physical supply chain (PSC, or the flow of goods) has reached an extremely high level of electronic efficiency (e-efficiency), but the same cannot be said for the financial supply chain (FSC, or the flow of money)?
The responses and suggested reasons identified can be categorised in the following areas:
1. Operational Efficiency
- Logistics and PSCs have always been considered a cost centre and have therefore been under consistent pressure for years to cut costs and increase efficiency.
- A point in case is the example of containerised shipments. Two related factors for the greater level of e-efficiency in the physical liner supply chain are, firstly, cost savings from standardised, electronic shipping instructions and secondly the creation of the liner portals.
- Solutions for the FSC, on the contrary, have traditionally been presented as a risk mitigation exercise.
2. Risk Mitigation
- Financing of trade, which falls in the FSC space, has always been looked as risk mitigating exercise by most of the corporate credit officials in commercial banks.
- Risks relating to the entire trade process are considered as if corporate credit officials in commercial banks were granting a term loan for a particular period.
- Since the risks change at different stages of supply chain management (SCM) and the FSC has its own risks, a combination of the two is not easily acceptable to the banks. Hence such lines are controlled through receivables finance with specific requests and there are no ready products offered by the banks.
- The PSC vs FSC disconnect is probably a result of how corporates ‘perceive’ the inherent risks of PSCs and FSCs.
i. In the absence of optimal PSC dynamics there is a non-continuity risk to the business.
ii. In the case of optimising FSC people see various alternative options and ‘optimisation’ in its true sense might take a back seat.
- The difference between PSCs and FSCs is between the corporate’s and banks’s views of what is important.
i. Corporations’ biggest risk is supply chain disruption
ii. The banks think it is about money and should recognise that supply chain finance (SCF) is a tool for minimising the risk of supply chain disruption and not only for improving cash flow.
3. Business Process (mis)Alignment
- In the PSC, risks change from the order stage to the final delivery very rapidly and financial institutions should look at the whole PSC and structure their SCF facilities accordingly.
- In a PSC once the relationship and trust between the buyer and the seller is established supply chain transactions take an almost automatic route. Buyers need the commodities to manage their enterprise.
- In the case of an FSC the party may or may not need the finance against some sets of orders and if it is setup for automatic financing – assuming the bank agrees to set up such credit lines – the party may be incurring undesirable cost in case they do not have fund requirements. The Bank Payment Obligation (BPO) is seen as a good start to facilitate auto-FSC.
- There are new and strong interests from corporations into the risks that can impact their supply chains. These new practices are related to solving problematic risks with predictive analysis.
4. Network Connectivity
- The networks of companies like Ariba, GXS, Tieto, Elemica and Covisint, are increasing their connections with corporations and the financial world.
- The best network piping out there already exists and is in daily use. This piping is already connected to just about every bank and every corporate – it is the credit card network.
i. However, credit card companies have never figured out (and may never do) how to service corporates buying and selling from each other which is where the real dollars are. The greatest penetration they have managed is in the travel and entertainment (T&E) and purchasing card (P-card) businesses of the corporations.
ii. This goes back to item 3 above.
- The bank-corporate side is how funding can be more quickly delivered to those small and medium-sized enterprises (SMEs) riding the existing rails already in place for credit/debit card processing.
- Changes will be needed, such as adding to the amount of data corporations require and to the fee structure of the credit card model from a percentage to a flat fee.
5. Processes Management (in)Efficiency
- Current SCF structures leverage the liquidity of rated companies in order to capitalise or add cash flow to their vendors. This is a great way of financing multinational corporations (MNCs).
- When SCF becomes more democratic and ceases to limit its largesse to MNCs and their supply chains, the financial flow of liquidity will catch up with the physical flow of goods in an unrestricted supply chain.
- The working capital guarantee offered by the Export-Import Bank of the United States (Ex-Im Bank) is the primary tool used to deliver bank-supplied working capital to SMEs and their vendors. The Ex-Im working capital guarantee programme is a guaranteed line of funding versus a transaction based funding approach. The problem is that delivery of this product is too slow and by the time money and liquidity is delivered, the deal is long-gone.
- Ex-Im could, or should, use some of the principles of SCF, which is transaction-based, to speed up the distribution of capital to the SMEs.
- There is a need to fast-track the delivery of working capital guarantees, so that banks can truly act as ‘delegated authorities’.
- Any slow-own is in the whole process of funding and not the actual payments.
All the above elements lead to the conclusion that there is still a wide gap to bridge between PSCs and FSCs. However, I believe that the responsibility for the five lines of separation must be equally distributed between banks and their corporate clients.
Banks must work hard to properly understand the factors behind operational efficiency and risk mitigation. Financial institutions must have clear understanding that what a corporate wants is not necessarily what its treasurer wants. Although the treasurer is the traditional counterpart of a bank relationship manager, other corporate executives act as ‘influencers’ and must be allowed their input. It becomes important for a bank to ask the right questions and identify pockets of opportunity that create value also to “non-finance” (i.e., operations-based) corporate lines of business.
Companies, especially SMEs, must work hard to minimise the effects of business process (mis)alignment and processes management (in) efficiency. Admittedly banks should be more prepared to offer support to financially-distressed SMEs by being more capable of ‘reading between the lines’ of its business processes and identify areas of prospective growth. At the same time – and contrary to a general consensus that responsibility falls on the banks as they are incapable of knowing ‘what their customers want’ – my conclusion, based on the findings of the discussion, is that corporates’ behaviour also contributes to separating the two chains. It is not uncommon for companies to have internal ‘silos’ with lines of business (LOBs) such as sales, procurement, logistics, treasury and IT each having various goals that conflict, making it almost impossible for a bank to provide a holistic solution that addresses each LOB’s requirements.
Network connectivity, or the lack thereof, sits equally in both sides. Banks must drop the temptation to think that the only effective network is their own. The experience of unions between JPMorgan and XIGN and (more recently) the USBankcorp-Visa launch of Syncada have demonstrated that bank-owned networks are not necessarily guaranteed success. Corporates – again, principally SME – for their part must steadily transition to a paperless world of business-to-business (B2B) data exchange where electronic invoices, electronic bills of lading and electronic procurement processes represent the norm of their daily operations.
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