SUPPLY CHAIN FINANCE
Just a short while ago, supply chain finance was seen as a novel luxury. For many corporations now it could be the key to survival—and future prosperity.
Quinn: Credit is proving hard to find for non-investment-grade buyers
Supply chain financing helps ensure that a corporate’s suppliers and distributors have access to liquidity to guarantee the smooth flow of goods throughout the supply-to-distribution cycle, and it helps ensure that the corporate has good information flow to reduce costs and improve terms with suppliers and distributors. Both of these are critical to making it through the current crisis unscathed.
In addition, increased focus by banks on integration throughout the supply chain, though not yet a reality, holds the promise of better information flow and reduced risk for banks in providing both supplier and distributor finance, thus making SCF provision more appealing to trade finance banks.
Supply chain finance is still a relatively new field, and it is changing rapidly, partly because of the recent dramatic upheaval in the global financial arena. One big change is a sharpened focus on supply chain risk management and supply chain finance as a tool in risk management. Alexander Braun, global head of solution management in global transaction services at Swedish banking giant SEB, explains: “Buyers are beginning to understand how integrated the financial and physical supply chains really are. For example, buyers realize the importance of financially stable suppliers as well as the fact that costs of goods and services will increase when there is an unnecessarily high cost of funds for the supplier.” As such, enabling supplier finance helps not only a business’ suppliers but also the company itself to keep a tighter supply chain.
Now, rather than serving as an alternative to letters of credit, it is more about providing a source of liquidity for themselves and their trading partners, notes Jon Richman, head of North America sales for trade finance and cash management corporates at Deutsche Bank’s global transaction banking unit. “Big anchor clients are using supply chain finance as a way to get liquidity into the supply chain. They may use it to extend payment terms, but they are also very interested in making sure their suppliers and buyers have access to finance. This has become more critical in the past six months,” he says.
They also see it as a way of creating partnerships with suppliers and distributors, something that has become even more critical during the credit crunch, as the relative strength of anyone along the supply chain—from the smallest supplier to the largest corporate—can be suspect.
Mike Quinn, managing director of product management for J.P. Morgan’s global trade services unit, explains that investment-grade buyers are concerned that their supplier base does not have access to liquidity or, if available, it is not reasonably priced. “As a result, supply chain disruptions are increasingly probable as suppliers may not be able to fill orders in a timely or effective manner,” he says.
Non-investment-grade buyers are concerned for their own liquidity and then for their suppliers’ liquidity accessibility and pricing. “These buyers are finding less credit available and, if available, at much higher prices,” Quinn says. “As a result, there are order cancellations due to both constricting upstream demand as well as their inability to fund necessary purchases. It is in this segment that we see business flattening if not shrinking.”
Webb: Lack of trust is causing the supply chain to seize up
Those corporates that were not first movers or have not already invested in supply chain finance process re-engineering are not as likely to do so as they were a year or two ago, at the height of the open-account frenzy. And banks that do not already have strong relationships with a corporate client are also less likely to take on new clients looking for trade and supply chain finance solutions.
“At a high level what is happening right now is that the movement toward open account has slowed down, if not completely stalled,” notes Nancy Atkinson, senior analyst at research and advisory firm Aite Group. “That is because of the credit crunch.”
Although there has been some increase in demand for traditional trade finance instruments, there has not been a rush to move back into letters of credit and the like. Rather, corporates are sticking with what they already are using, be it traditional trade finance services or more sophisticated supply chain finance solutions. “Corporates do not want to be at the ‘bleeding edge’ of technology in an uncertain, higher-risk environment,” says Quinn.
This is not only from a desire at the corporate end to hunker down and simply improve existing processes rather than investing time and resources in new solutions, but also from the banks’ need to preserve liquidity and focus on risk management and risk profile enhancement—and thus not taking on new clients.
“Unfortunately, banks with liquidity issues are not as likely to extend the credit,” adds Atkinson. “They are going back through and re-evaluating their client base. Many are either reducing their trade finance programs or increasing the cost of it.”
But the top 40 banks globally that are the primary providers of trade finance will still continue to provide such services. “They are looking for ways to have better data and information so they can still provide trade finance services and do it as cost effectively as possible while having the assurance that funds will still be good,” notes Atkinson.
The top-tier banks are looking for ways to get greater visibility into the total supply chain. Michael Sugirin, who heads up supply chain finance sales for Deutsche Bank in North America, says, “This is where this industry is heading, toward the integrated end-to-end supply chain solution, with supply chain finance offered both upstream and downstream.”
For example, J.P. Morgan’s purchase of Xign, along with other organic and acquisitional investments across the payables and receivables processes and trade finance processes, are an attempt to bring elements together across the physical and financial supply chains. Citi is also focused on pulling together as many pieces of the supply chain as possible while leveraging off its global presence.
US Bank has acquired logistics provider PowerTrack, which provides payables and receivables management, freight payments and so on, to bring in information on transportation and logistics.
Open Account Slows Down
Braun: Buyers are realizing the benefits of financing their suppliers
However, Atkinson is skeptical that a fully integrated solution will exist in the next few years. “I still think it is several years off before we really see it,” she says. “I don’t think it is coming in the next six months because supply chains are so complex. We have had groups like Ariba, TradeBeam and TradeCard out there for the past 10 years trying to create electronic marketplaces to come together and share data.”
Swift’s TSU trade services utility is another example of the industry-wide initiatives that many of the big banks are involved with. However, the real value of such developments does not come about until there is a critical mass of participation, which simply takes time to build.
As Quinn notes, “Major global banks are working with governmental and global agencies and industry groups contemplating global initiatives that should free up trade finance resources on a systemic basis.” However, it will be three to five years until there are any real breakthroughs, according to Atkinson—“especially since the banks will be putting more focus and resources on regulatory compliance and better risk mitigation overall,” she says.
Regardless of what may come down the road, companies continue to take increasing advantage of the supply chain finance solutions that they have in place in order to help them successfully navigate the current market environment. Lawrence Webb, global head of trade and supply chain services at HSBC, says, “At the moment it is firstly about obtaining finance. And the second thing is trust: They are concerned about being able to trust buyers and suppliers.”
“Right now it is hard to have a high level of trust because it seems no one is safe,” Webb adds. “Suppliers have fears over whether buyers will be able to make payments, and buyers are worried about whether their suppliers will be able to deliver on time and as agreed. At the same time, the suppliers’ suppliers are asking for cash on receipt for raw materials, so that is putting a big strain on them as well.”
The current credit problems are prompting banks and corporations to develop habits that will last long after the credit crunch eases. “The only way to overcome that distrust is to increase visibility along the supply chain, to make it as transparent as possible,” Webb adds. “Even as we get through this period of uncertainty, people will continue to look at reliability among buyers and suppliers. The only way to achieve that desired stability is through improved visibility.”