Supply Chain Finance (Open Account trade) Trends in Asia/Africa

By – Amit Bhushan (with Comments & Notes)

Contact: amitbhushan@rediffmail.com

International Trade Basics

• Globalization is driving fundamental changes in business models that heighten the importance of Supply Chains:

– Outsourcing & Low-cost country sourcing– Longer, more complex supply chains– Increased compliance and security Requirements– Technology is altering business models

• Globalization increases opportunities:– New markets & channel– Supplier innovation– Lower costs

• While accentuating the risks:– Delivery risks– Performance risk– Compliance risks – Payment risks

Going Global

The Trade Dilemma• As in any International trade scenario (i.e. between and importer and

exporter) the need exists to work around fundamental dilemma that:– They live far apart– They speak different languages– They operate in different political/regulatory environments– They have different religions– They have different standards for honoring obligations

• In essence, there could be distrust, and clearly the importer and exporter would prefer two different arrangements for payment/goods transfer.

International Trade Relationships

• There are three categories of relationships in International Trade Relationships (see exhibit):– Unaffiliated unknown– Unaffiliated known– Affiliated (sometimes referred to as intra-firm/intra-group trade)

• The composition of global trade has changed dramatically over the past few decades, moving from transactions between unaffiliated parties to affiliated transactions.

Exhibit : Alternative International Trade Relationships

UnaffiliatedKnown Party

A long-term customerwith which there is an

established relationship oftrust and performance

UnaffiliatedUnknown Party

A new customer which with exporter hasno historical business

relationship

AffiliatedParty

A foreign subsidiaryor affiliateof exporter

Requires:1. A contract2. Protection against non-payment

Requires:1. No contract2. No protection against non-payment

Requires:1. A contract2. Possibly some protection against non-payment

Exporter

Importer is ….

Possible Supply Chain Financing Scenarios

Steady Growth in Open Account Trade, Greater bargaining power of Buyers due to enhanced Competition

High Trade Growth Area

Global Supply Chain & Supply Chain Finance Basics

The Evolution of Global SCM

Consumer Needs

ProductDesign Product

DevelopmentRaw Material

Sourcing

FactorySourcing

ManufacturingControlShipping

Consolidation

ForwarderConsolidation

CustomsClearance

Local Forwarding

Consolidation

Wholesaler

Consumer

Supply Chain

What is Global Supply Chain : An Integrated Process where several Business Entities such as Suppliers, Distributors & Retailers work together to plan, coordinate and control, Materials, Parts and Finished Goods supplies to the customer/end user. One or more of these entities operate in different countries.

$1 $4

Product Design

Sourcing Logistics WholesaleRetail

Information Management

The cost that is spread throughout the distribution channels – the “Soft $3”

Designing the Supply Chain & Defining Roles of each Unit (Geographical/Physical) helps bring tremendous clarity across the value chain on meeting the “End Customer’s” demands.Supply Chain Captures the “Soft $3” by looking beyond the factoryFor example:

Boosting efficiency: containers and flawless execution Improving coordination: minimizing markdowns Onshore business of the Trading Group Selling to the source: Global synergies

Some SBUs in a Supply Chain

Manufacturing End Consumer

Since various Suppliers (Affiliated group cos. Or Vendors), main Operating Entity/Lead & the End Customer are now located geographically far apart (usually in different countries), the Supply Chain Finance has also evolved as a tool to engage with these entities on a single platform, besides seeking to bring down financing costs.

Global Supply Chain is not without Operational Challenges

• Inability to accurately calculate promotional ROI • Communication gap between sales and supply chain lead to out-of-stocks • Low visibility into promotional liabilities • Slow, inefficient claims resolution

• Inability to accurately calculate promotional ROI • Communication gap between sales and supply chain lead to out-of-stocks • Low visibility into promotional liabilities • Slow, inefficient claims resolution

How do I increase Brand Equity

What are Sales versus Quotas/ Budget

How/Where do I plan production to meet Demand

Where did the money go.

Marketing Sales Production Finance

Global Supply Chain: Pros & Cons

Advantages• Reduce Total Costs/ Improve

Profitability• Improved Fulfillment Cycle Time• Productivity Increases• Improved Capacity• Expand International Connections• Increase Intellectual Assets • Expand reach to New

Markets/Penetrate in Existing ones (on the back of Lower Pricing enabled due to cost reduction) …..

Disadvantages• Inefficient Transportation &

Distribution Systems• Language Barriers• Local Customs & Practices• Political turmoil & Trade Imbalances• Market Instability of the New

Markets ….

Why Global Supply Chains and Finance

Global Trade Management (GTM) and Supply Chain Finance (SCF) are emerging as increasingly critical areas of focus as supply chains evolve in terms of global reach and complexity.

A Supply Chain Finance (SCF) solution combines trade financing provided by a financial institution, a third-party, or internal funds; and a technology solution that unites the buyer, supplier and the trade financing source electronically and provides financing triggers based on one or several supply chain events.

•SCF improves cash flow and access to capital for a company’s supply chain •This results in a lower-risk supply chain, lower unit costs, and better financial metrics •The end result is a strategic cost advantage for a company

Buyer Pressures Supplier Pressures

• Pressure to lower cost of goods sold – 64%

• Desire to work closer with strategic suppliers to reduce costs and improve processes – 36%

• Pressure to lower costs of goods sold – 54%

• Pressure to shorten Days Sales Outstanding (DSO) – 46%

Source: Aberdeen Group. December 2007.

What Supply Chain Finance seeks to achieve?

• The primary Financial Supply Chain trend in the past decade has been the growth in Open Account (O/A) transactions, or “trading on O/A terms”

• SCF seeks a Combination of financial services and technology solutions that – Links Buyers, Suppliers & Financing providers– Reduces financing costs – Increase credit availability throughout the supply chain

• Links logistics and goods tracking to financing decisions• Leverages visibility into supply chain events to mitigate risk

Reducing Total Cost and Working CapitalAccelerating Cash Flow

Reducing Supply Chain Risk

What Does SCF mean to various Industry Segments?

• Supply Chain Finance & Supply Chain Risk Management lead to:– Integration of Financial & Physical Supply Chains focused on delivering cost efficiency– Accelerated by technology and inter-corporate process integration– Importance heightened by off-shoring and increasing complexity of SCs

What does it mean to:

• SC process integration drives out cost and creates competitive advantage

• Fewer, but deeper supplier relationships

• Use visibility (technology) to reduce risk

• Untie capital locked in SC (inventory optimization & DPO increases)

Large Corporate Buyers

• W/C challenges

• Longer cash conversion cycle

• Assuming greater risks

• Limited negotiating power

Mid-Market & SMEs(Tier 2, 3 etc.)

• Elimination of L/Cs in favour of Supply Chain Finance

• Focus on transactional finance models required

• FIs key integration / services hubs for SC processes

• Data-triggered financing

Financial Institutions

Supply Chain Management/Finance and SMEs

• Procurement / supply chain management remains a buying function for most SMEs– Limited view of strategic role of supply chain management– Many manufacturers live in the “area code” supply chain model

• Going offshore seen as important, but..– Limited skill and capacity engage in global sourcing– Inventory investment required due to long lead times– Fear of quality / performance / delivery risk

• Most are underinvested in technology, yet recognize its value in participating in global supply chains.

PrioritiesPrioritiesSMEs = People & Cash FlowMid-size and larger = People, Process, Financial Efficiency

PrioritiesPrioritiesSMEs = People & Cash FlowMid-size and larger = People, Process, Financial Efficiency

Orchestrate & discover value along the supply chain in Asia/Africa Global Corporations and Mid-Tier Corporates in the Developed World & Emerging Economies are increasingly

aware that Asia & increasingly Africa is not only a cost-effective supplier of Raw Materials, Components & Sub-assemblies; but also Finished Goods as well. Also their importance as a market for their widgets is growing by the day.

Global Corporations & Mid-tier Corporates are already having Global/multi-country manufacturing/operations/assembling as well as vendor and dealer base. Now they are looking to move various other components of supply chain to off-shore locations where these tasks can be performed more effectively & efficiently (read: offer cost advantages, but without loosing control). This so as markets have become ever more demanding/competitive, even as they explode to absorb newer and more of the existing widgets & services at an astonishing pace.

Corporate are increasingly looking at tools such as Strategic Sourcing for development of Future Vendor Base or to hedge Main Supplier Risk in order to preserve their competitive advantage & hedge risks which has primarily benefitted small Asian & now even African nations. Similarly, to develop new Markets in the geographies, lot of experimentation in terms of Product tweaks/Servicing models are made to suit the market requirements and meet the ‘Cost of Delivery’ challenge considering affordability of products. Increasingly Counter trade measures like Barter etc. are also employed to develop these markets/supplier capabilities.

Outsourcing/Off-shoring of Manufacturing & Services, Global Materials Management, Global Production Planning/Operations and Global Sales & Distribution; have heralded new era in Supply Chain Management where increasing sophisticated skills & capabilities are deployed for effective management & acquire strategically advantageous position in Business/Industry.

Complexity of Legal Frameworks & Socio-cultural dynamics, Politico-economic settings in various countries plays its part to make the overall structure even more complex, however as Global Corporations have realized; mastering the same is now a necessity, not only for growth but for survival as well.

Corporations are looking Global Servicing capabilities (through their own network or via correspondent network) from their Financial Services/Banking partners who can guide their market entry strategies in these markets by developing suitable Financial structures for Dealer Financing, Support their local operations and Provide support to their Vendors in local markets to develop the required capacities as well as capabilities; and facilitate them integrate with the overall system of the corporation in an effective manner.

As Global Banks stumble upon each other to retain the Corporate’s Business even as they are looking to either reduce Risks or avoid taking undue/uncaliberated Risk of their Supply Chain partner in unchartered/obscure Geographies, they are increasing turning their Correspondent banking network to devise appropriate Financing solutions.

These solutions seek to bring down cost of Finance for the Supply Chain, Identify & Reduce Risks, Improve reliability & information flow; with real time monitoring, Improve liquidity for all actors the System and seek ways to mitigate Credit Risks appropriately.

Banks in Asia & Africa are concerned about Clarity on the Commitment of the Corporate towards local market development, appropriateness of their Market communications/Branding, Demand forecast & demand management,

Client Relationships(win-win??), After Sales service; Dealer’s Management & Technical capability in Demand & order management, Inventory & After Sales, their experience & capability for meeting market’s needs ad in line with

corporate expectations. They also desire clear policy framework & track record on development of Vendor’s Technical & Management capabilities to enhance productivity & quality of widgets, skill enhancement through training & technology transfers, Joint efforts in R&D, clear matrix for ranking vendors/channel partners with well defined relationship exit policies & processes. Information on counter-trade practices such as barter, compensation etc.; their likely impact on payments with effective identification of Channel conflicts & resolution.

Basically, a level of comfort is sought in terms of level of integration of the Supply chain partner and assimilation of relationship in the value chain. Level of Cross-investments for the Corporate & Supply Chain partners towards each other as well as Vendor/Dealer’s level of interest in the value chain is sought to be measured including information on opportunities & rewards for all partners in the value chain. A mature Supply Chain partner in a seasoned Supply Chain is also sometimes seen as Low Risk resulting in low cost financing.

The usage of internet based Supply Chain Finance tools offer the bank and opportunity to peek into the transaction level data & link the same with provision of Financing thus improve the comfort of the bank as well as flow of information across the value chain. This allows for supply of enhanced liquidity in the system (without any other additional collateral, generally), clearer Risk mitigation for the transacting parties, lower cost of Finance (as comfort of the bank increases with clearer understanding of the risks).

Net Results = Savings in Financing Costs

Orchestrate & discover value along the supply chain in Asia/Africa

Supply Chain Finance - Benefits

Supply Chain Finance: Benefits - Today• Cost Savings

– SCF seeks to eliminate cost from the supply chain – NOT shift it (unit cost reduction)

– Utilizing a SCF solution can automate manual processes (Lower end-to-end cost; shorter Cash-to-cash cycle)

– SCF solutions are often cheaper than traditional trade finance solutions• Service Improvements/Risk Mitigation

– Sharing of data provides visibility to mitigate risk and speed responsiveness (increased cost transparency)

– SCF solutions help customers share or mitigate risk by re-introducing trade banks into the supply chain equation (improved cash flow uncertainty)

– Bank trade services are now offered on web-based platforms reducing the need for expensive ERP solutions (working capital optimization)

– Automated trade transaction processing and reporting capabilities• Financing Solutions

– Financing solutions can be offered at each step of the trade transaction

Supply Chain Finance: Benefits - Today• Already almost close to 65% of the business is with Channel Partners in Emerging economies that are

deemed as ‘Unbankable/Not-so-Creditworthy” by the Global Banks on a standalone basis and this share seems to be rising.

• The above perception of the Global Banks is basis Questionable Financial Disclosure standards, weak Corporate Governance culture, complex Group & holding structure, lack of written policies & procedures or track record; little delegation of authority to professional management, low staff motivation resulting in poor commitment & integrity levels, lack of productive ideas to progress the line of business, execution skills/energy levels & knowledge management; no known history or verifiable track record; among a host of other issues.

• Thus when it comes to SCF, the Global Banks are shy to directly underwrite the risks and look for either Corporate to offer some form of mitigation directly or via Export Credit Agencies

Adequate availability of Funding as well as its cost, are certainly an issue.Adequate availability of Funding as well as its cost, are certainly an issue.

The Global Banks seek to team with local correspondent banks; which have greater experience in understanding & dealing in the domestic environment and to mitigate the Risks. They offer support through sharing of technology platform to monitor SC events & link financing largely to performance track record, also facilitating much closer & strict monitoring. It also facilitates in storing historical information, analysis among other supports. The local banks can devise/ negotiate financing structures to mitigate their risks with dealers/suppliers basis local factors in return for ‘adequate’ financing at ‘preferred’ pricing terms.

Supply Chain Finance: Benefits - TodaySCF:A big problem:  4% of finished goods cost relates to financing – more than transportation, logistics.Suppliers uncertain about payment:  1/6th of accounts receivable (AR) hedged against payment. Suppliers are cautious, react by idling cash.Traditional Solutions have included:

Letters of CreditFactoring“Early Pay” or “Dynamic Discounting”Asset Based LendingP-cardsEIPP

Problems with these traditional solutions are:Limited connectivity among buyer, supplier, FICostly for the suppliers Inefficient & cumbersomeTime consumingAffects the balance sheet Limited controls for the supplierNo Certainty of payment

Source: PrimeRevenue

Given the environment, there exists huge scope to reduce the cost of Finance and improve liquidity/credit flow.

At an estimate of approx. 4%, Cost of Funds constitutes among some of the larger Cost components of the Finished Goods for the end customer and Global Corporate see an immense scope of pruning. This is even as they realize that this is not a direct cost in their own books but rests on the books of their Suppliers. This cost is seen as some what higher than the cost of Logistics at about 2.5-3% (again, often on Supplier’s Books).

The corporate are looking to strengthen the Value chain to improve overall performance and reduce costs for the end customer. The are seeking visibility of the entire supply chain preferably on a single platform, monitor activities & performance, improve order fulfillment through Quick response manufacturing, reduction in response time & better cash-to-cash cycle for the entire value chain. SCF Visibility Platforms offered by Banks/SCF Technology platform providers especially those with linkages to physical SC have a key role. Corporate estimate to bring down SCF cost by a third and Logistics cost by a forth by exploiting synergies, which are latent as Supply Chain is not so ‘visible’. For a Corporate which has approx. USD1 billion sourcing budget, these savings can be to tune of approx. USD 22 million (approx. USD 16 mio. from finance & USD 8 mio. From Logistics) in Direct savings. Possibility of bringing down Inventory holding & Insurance (Cargo) costs. Also, a robust SCF program (offering improved liquidity) leads to better negotiating power/sourcing advantages for all members of the value chain, better financing of cost cutting plans/investment in efficient technologies & process by vendors; leads to further cost cutting by 1-3%. (Advantage of USD 10 – 30 million for a Billion USD company) SCF also opens up new vistas in terms of new markets, ability to service new customer segments, better fill rate, goodwill of dealers among other similar benefits which may not be easily quantifiable.

Usage of visibility platforms can help in streamlining & deriving efficiency from the physical supply chain. The savings are enough to prompt corporates focus on such projects in the face of emerging weakness in global economy; to hire experts and deploy qualified resources towards such projects as this has a clear and short Pay back period. Since these projects have the potential to strengthen corporate balance sheet & improve franchise value of the corporate and possibly a repercussion on their banking relationships; the banks tend to indulge the corporate on such projects. Best-in-class companies are more likely than their peers to have a cross-functional team of purchasing, supply chain, and finance professionals managing their GSCF programs.

The banks see opportunity to push Transactional products (deemed as less risky), develop futuristic platforms, bank the supply chain or acquire greater cross-selling potential (i.e. to SC partners).

For FI:•Higher Return/Spread on Corporate Risk than other Products •Short Lending Periods•Uncommitted Lines•Annuity Stream •Cross Sell Opportunities•Open Account Offering•Reduce Risk

•Country•Supplier

•Increase Lending Opportunities•No Technology or Services Needed•No KYC for the suppliers required

For Supplier• Advantage in days sales outstanding (DSO) 2-4% advantage in average rate of trade financing Lower cost of goods sold • Improved cash forecasting •Leverage SCF generated supplier cost reductions •Negotiate better terms and conditions with suppliers•Opportunity for major working capital benefit•Cost of good sold reduction•Use cash flow/savings to fund “other” programs•Store renovation/expansion, share buybacks, etc.•Rate

•Cheaper Access To Capital •Reduce Costs

For Buyer:• Advantage in days payables outstanding (DPO) – free cash flow• Advantage in average rate of short term capital, Lower cost of goods sold for buyer and suppliers• Less risky supply base, preferred client status for buyer Lower invoice and disbursement processing costs •Strengthen Supply Chain

Assist SuppliersLow Cost CustomerStrengthen RelationshipOpen Account Financing

• No Cost Payables Presentment & Settlement Solution• Limited IT and Process change for meaningful results• Non-Rate

Off Balance Sheet FinancingVisibility of ReceivablesDate Certain PaymentsAccess to Capital FasterIncrease Efficiencies   Easy Of Use (Net Banking)Reduce DSOs

Supply Chain Finance: Benefits - Today

Corporate Leadership in Supply Chain FinanceEarly adopter of Supply Chain Finance (SCF) solutions realize significant benefits

43%

38%

43%

52%

33%

48%

57%

0% 10% 20% 30% 40% 50% 60%

% of respondents actively using SCF techniques

Obtained trade financing at a lower rate

Improved business continuity

Lower DSOs

Lower production costs

Extended payment terms / Increased DPOs

Less risky supplier base / fewer disruptions

Lower unit costs of procured goodsBuyer-specific Improvements

Supplier-specific Improvements

Both

Source: Aberdeen Group. December 2007.

The problem is traditional forms of financing haven’t kept pace with the transformation of the “physical” supply chain• Advances in connectivity (internet), technologies (applications), and the capital markets (legal, regulatory, structured finance) enable solutions that move us from a zero sum game to a win-win for all participants;

Buyers, Suppliers & Financial Institutions• These services solve the underlying problem by reducing costs in the supply chain and providing visibility and certainty reducing overall risk• A number of banks today are offering a SCF solution or evaluating a service like this for their customers• The market is still young but an estimated 13% of companies deploying an SCF service today while 56% are investigating options*

Scores of New SCF Products Offerings

Pre-Shipment Financing

In-Transit Financing

Post-Shipment Financing

• Raw materials financing

• Raw materials purchasing programs

• Purchase order financing

• Work-in-progress financing

• Extended supplier payment terms

• Vendor Managed Inventory

• 3rd Party Inventory Ownership

• Goods in Transit Financing

• Inventory Finance

• Open Account instead of L/Cs

• Extended Payment Terms

• Receivables Factoring

• Supplier Payment Programs (a.ka. Reverse factoring

• Vendor Managed Inventory

Primarily on below lines but with variations

Supply Chain Financing – And The Basics for FIs again

The Basics - Corporations are demanding Global Servicing capabilities from their Financial Services/Banking partners who can support their market entry strategies in Emerging markets by developing suitable Financial structures for Dealer/Customer Financing & help to mitigate risks. Banks should also be able to support local operations as well as be able to support Vendors (in local markets) to develop the required capacities as well as capabilities; and to facilitate their integration with the overall system of the corporation in an effective manner. The Global Banks frequently rely on their correspondent banking relationships in these markets to develop such solutions as local banks are better placed to assess risks in these markets & develop solutions to mitigate them. This is because if there exists a large Vendor/Dealer base of the Corporate in the country, then the Local Bank may already be banking quite a few of them & would have an assessment of the Credibility & track-record for these entities. This assessment may help it in better structuring of the program as well as in easier execution.

While Global Banks of the Corporate draw comfort from their knowledge, experience & understanding about the unique capabilities of the corporate; its proven skills of operating in various countries which they may have supported previously. They also have comfort of having a decent revenue stream from the corporate through services from various product categories, advisory fees & having multi-product, multi-country relationship. So they are relatively more open to Financing the Supply Chain even at the cost of absorbing somewhat higher risk. They also have a much greater awareness of Client Processes, policies, structure & system and ability to approach decision-makers and make their stance known regards corporate decisions, their policies, procedures, operations & practices. The global banks approach their correspondent citing their corporate’s proven capabilities and track record to generate interest in the Supply Chain Financing program and try to “Sell the Risks” involved in the program to the extent they can Part-out with such risk within an acceptable cost.

The Local bank assessing participation in such Supply Chain (Dealer Finance) structure should carefully ascertain the level of commitment of the Corporate to support customers/dealers in their local country/ies; their detailed investment plans/resources deployment to support the market; past track record (in similar markets) of the entities involved to deliver/support the “Customer promise”, ability & motivation to customize product/services in tune with local preferences and also to adjust and be in alignment with the local trade/industry practices and manage associated risks.

The Basics The Local Bank assessing Dealer Financing program must also consider the adequacy of incentives & motivation for the corporate as well as for all other associated entities involved in the value chain to understand and deliver upon their specific roles in the order generation & client-delivery process consistently. Assessment of the value chain’s robustness to meet the client requirements adequately & sustainably over the long term must be studied along with projection for demand for the various products offered by the corporate to the market through the channel including any potential conflicts of interests in/with the channel.

Local Banks assessing participation in Supply Chain (Vendor Finance) structure should assess Engineering capabilities, Quality Controls & maturity of the Vendors; Availability/adequacy of resources to expand alongside the product plans of the corporate with which they are involved. They should also have adequate incentives & motivations to deploy adequate resources to support the Corporate’s requirements over a period of time & be able to understand the new & emerging requirements & opportunities. The detail plans of the corporate to grow the product lines, Basis of their assessment of the projected demand, past experience of the corporate in various markets etc. should be assessed.

The Local bank analyzing Vendor Financing opportunity should also assess, if adequate Technology-transfer & training support policies are provided & followed upon by the corporate as well as across the vendor base to develop understanding of the requirements, quality measurement procedures, packing & delivery standards, enquiry & ordering policies & procedures, payments terms & clarity of the commercial risks across the supply chain regards transactions. The vendors should be able to understand policies, processes, systems & structure, commercial documents, information & other requirements of the Corporate as well as those of the other relevant participants across the Supply Chain and should develop & maintain multiple but harmonious communication lines at different layers of management at Corporate as well as with relevant Vendor’s Management so that requirements are clearly understood and there is clear demarcation/understanding of performance & commercial risks & rewards. They should also clearly understand various Cross-linkages that exists at different layers through the supply-chain, payment netting policies of groups, and similar other commercial exchanges & their impact of individual entities across the supply-chain.

The above study of Risks are in addition to the normal Credit Assessment procedure of the Local Bank for the Vendor/Dealer Client Risk Category since in such transactions Banks are normally required to provide additional/increase Liquidity support to Vendor/Dealers over & above what a normal Credit Assessment activity for the Vendor/Dealer client shall permit under the regular/normal credit program of the bank. More so, because generally Credit facilities under such programs are not secured by any other additional collateral requirements.

Some Tenets of Effective Supply Chain Finance

Managing Successful Supply Chain involves• Trust among Trading Partners• Effective Communications• Supply Chain visibility• Event Management Capability

The ability to detect & respond to unplanned events• Performance Metrics

Creating Effective Supply Chain involves• Develop Strategic objectives & tactics• Integrate & Coordinate activities in the Internal Supply Chain• Coordinate activities among supplier & customers.• Coordinate Planning & Execution across theSupply Chain • Form Strategic Partnerships

Financing a Supply Chain involves• Making an objective assessment of the above in quantum with the risks

being underwritten.

Global Supply Chain Management : Metrics to measure effectiveness

Perspective Metrics

Reliability • Order Fulfillment Lead Time• On Time Delivery• Fill Rate (Fraction of Demand met from Inventory/stock)• Perfect Order Fulfillment

Flexibility • Supply Chain response time• Upside Production Flexibility

Expenses • Supply Chain Management Cost• Warranty Cost as a percentage of Revenue• Value added per employee

Asset Utilization

• Total Inventory days to supply• Cash-to-cash cycle time• Net Asset turns

How does each of the member of Supply Chain fare on the above measures.

Supply Chain Performance Drivers

Quality

Costs

Flexibility

Velocity

Customer Service

An objective assessment criteria with the mentioned factors should be developed.

Supply Chain Issues

Strategic Issues Tactical issues Operating Issues

• Designing the Supply Chain• Partnering• Managing Change

• Inventory Policies• Purchasing/ordering Policies• Production Policy• Transportation Policy• Quality Policy

• Quality Controls• Production Planning & Control

Policies regards Issues pertaining to the Supply Chain must be objectively assessed

Emerging Global Supply Chain Finance – Systems Model

Porter’s Value Chain Model and The Supply Chain

Typical functional areas mapped on the value chain of a manufacturing company

Profit

Margin

Profit

Margin

Firm Infrastructure(Accounting, Finance, General Management)

Human Resource Management(Human Resources)

Technology Development(Engineering)

Production/OperationsSup

port

Act

iviti

es

Service

(Client RelationshipManagement)

InboundLogistics(MaterialManagement-Operations)

Operations

(Operations)

OutboundLogistics

(Sales & Distribution-Operations)

Marketingand Sales

(Marketing)

Prim

ary

Act

iviti

es

Supply Chain

The Value Chain

Physical Goods

Information

Financial Flows

Physical Goods, Information, Payment FlowsS

up

pli

ers

Co

nsu

mer

s

Man

ufa

ctu

rers

Dis

trib

uto

rs

Ret

aile

rs

Logistics

Financial Institutions

• Convergence of Three Value Chains Physical

Informational

Financial

• Strategic approach to dealing with global trade’s inherent complexities is the challenge in SCF. Marrying PEOPLE and PROCESSES and the leveraging of integrated INFORMATION TECHNOLOGY to

unite the disparate functions and constituents involved in global trade to optimize supply chain efficiency and effectiveness.

Buyers are the primary drivers of supply chain finance. As the builder of brands, and associated advertising campaigns, they are largely responsible for shaping consumer demand for the products they wish to sell. They're also the first in the chain to feel the pressure to reduce costs in a market where raw material prices keep rising but consumers expect prices to keep falling in the Walmart Rollback era.

Suppliers need good supply chain finance the most. As the company that manufacturers the goods, they not only feel the current increases in raw material, energy, and labor costs the most, but traditionally hurt the most since they need to bear the brunt of the cost and typically go the longest between the initial outlay for raw materials, overhead, and labor and the day they finally get paid for producing the product. Technology Providers are the enablers of supply chain finance. They provide the technology that connects all of parties together, and enables the visibility and communication required to support modern supply chain finance strategies. Financing institutions play the role of lender in supply chain finance and offer various types of financing, including Pre-Shipment Financing, In-Transit and Post-Shipment Financing and may offer payables discounting and receivables management services.

There are four primary types of players in supply chain finance. There is the buyer, the supplier, the technology provider, and the financing institution.

Activity Logistics/Transportation Provider Technology Provider Financial Services Provider

GoodsDeliver transportation, logistics, and supply chain services – i.e., move the goods.

N/A N/A

Information

Collect and provide information about goods disposition to customer, translator, and financial services provider.

Verify data transfer; aggregate, analyze, manipulate, and provide data; authorize financial transactions.

Receive data from translator in order to authorize financial transactions.

Funds N/AParticipate in funding for transaction and assume a proportionate share of the risk.

Participate in funding for transaction and assume a proportionate share of the risk.

Sales & MarketingIdentify prospects, participate in sales calls, stem commoditization.

Identify prospects, market GSCF, participate in sales calls, identify financial risks, assist in structuring credit solutions.

Identify prospects, participate in sales calls, assist in structuring credit solutions.

Financial BenefitsTransportation revenue, deeper relationship with customer and translator.

Interest income, fee income, deeper relationship with customer, financial services providers, and logistics/transportation provider.

Interest income, deeper relationship with customer, translator, and logistics/transportation provider.

The following explains their roles;The following explains their roles;

Source

InternetIntranet

Customer

Internet

Contract

Supplier

The New Communications Architecture of Modern Trade/ Supply Chain

Contract

• Business Infrastructure in multiple vendor environment• High transaction volumes• Real-time decisions across the supply chain

• Application link enabled (ALE) technology facilitates the transfer of standard business messages between processes. • The internet extends this supply chain integration outside the boundaries of the business itself to encompass vendors and customers.• Business Process Procedures (BPPs) are the actual program elements that provide the functionality of the ERP System. • Many of these BPPs are used by more than one of the application modules.

Corporate Client

The Supply Chain Framework for an Entity

Financing (e.g. lines of credit, term loans)

Risk Management (e.g. insurance, bonding)

Compliance Management (e.g. SOX, customs, security)

Connectivity (e.g. technology platforms)

Cas

h &

Wor

king

Cap

ital M

gmt.

Other Services (e.g. consulting, education, trade promotion)

Supplier Supply Chain

Plan / Invest(Long-term Capital)

Sell & Negotiate

Supply Chain Risk Mgmt.

Outbound Logistics

Invoicing CollectionProduction(Production Financing)

Buyer Supply Chain

Plan / Invest(Long-term Capital)

Source & Procure

Supply Chain Risk Mgmt.

Inbound Logistics

Invoice Processing

PaymentProduction(Production Financing)

Supply Chain Finance = Managing the Working Capital

DesignOrder &Materials Planning

ProcurementManufacturing Preassembly Assembly Packing &

ShippingSales

After-market Services

Reduce, parts complexity &

releases

Optimize Procurement /

Purchasing

Reduce Lead Times

& WIP

Optimize product testing

Reduce Finished Goods

Reduce Inventory

Modify Payment Terms

Optimize Payment

Processes

Revise delivery and warehousing

Modify Payment Terms

Optimize Payment

Processes

Modify Payment

Terms

Optimize Payment

Processes

Revise delivery and warehousing

Optimize Procurement / Purchasing

Reduce Lead Times

& WIP

Reduce Finished Goods

Reduce Inventory

Modify Payment

Terms

Optimize Payment

Processes

Source: Boston Consulting Group, EDC. May 2008

• Buyer / Supplier collaboration seeks to accelerate cash flow and eliminate cost from the supply chain

Managing the Accounting and Finance Systems

Strategic SystemsStrategic Systems

Tactical SystemsTactical Systems

Operational and Transaction Processing

System

Operational and Transaction Processing

System

Internal Environment

Internal Environment

ExternalEnvironment

ExternalEnvironment

Managing the Accounting and Finance Systems

TACTIAL SYSTEMSa. Budgeting Preparation and Controlb. Investment Managementc. Capital Budgeting d. Cost Analysis and Controle. Tax Management f. Auditingg. Financial Planning

INTERNAL ENVIRONMENTTop ManagementOperation/ProductionMarketingHRMEngineering

EXTERNAL ENVIRONMENTIRSSECVendorsClientsCPA CompaniesSuppliersCustomersBusiness Partners

STRATEGIC SYSTEMSa. Strategic Planning b. Ratios and Financial Healthc. Merger and Acquisition Analysis

OPERATIONAL ANDTRANSACTION PROCESSING

SYSTEMSa. The General Ledger b. Sales Order Processingc. Accounts Payable and Receivabled. Receiving and Shipping e. Payroll f. Inventory Management g. Periodical Reports & Statements

SCF

Business Process Functions

Business Transaction Data

• Transaction Processing System (TPS)– supports transaction processes– monitors, collects, stores, processes, and disseminates

information for all routine core business transactions– includes accounting and finance transactions and some sales,

personnel, and production activitiesLarge amount of data are processedThe sources of data are mostly internal, and the output is intended mainly

for an internal audienceThe TPS processes information on a regular basisLarge storage (database) capacity is requiredHigh processing speed is needed due to the high volumeTPS basically monitors and collects past dataInput and output data are structuredHigh level of detail is usually observedLow computation complexityHigh level of accuracy, data integrity, and security is neededHigh reliability is requiredInquiry processing is a must

• A functional information systems comprises several smaller information systems that support specific activities performed by each functional area

• The specific IS applications in any functional area can be integrated to form a coherent departmental functional, or they can be completely independent

• Functional information systems interface with each other to form the organization-wide information system

• Some organizational information systems interface with the business environment

• Information systems applications support the three levels of an organization’s activities: operational, managerial, and strategic

Basic Units of Enterprise Resource Planning System

SCF

Supply Chain Management

PP

SD

MM CO

FI

AM

QM

IS

PP

PS

PM

HR Work Flow~

Product & ServicePeople

Finance

Business Process Procedures (BPPs) shared across application modules

Web Application Server or MiddlewareWeb Application Server or Middleware

•SD - Sales & Distribution * FI - Financial Accounting * QM - Quality Management * PS - Project System

* MM - Material Management * CO – Controlling * PM - Plant Maintenance * WF - Workflow •PP - Production Planning * AM - Fixed Asset Mgm’t. * HR - Human Resources * IS - Industry Solutions

A Popular ERP Client Server

Supply Chain Management & Finance in System (ERP) Environment

• ERP transaction data is entered where the data is initially created in the business process. Example: The receipt of a customer order to the delivery of that order to the customer.•  Once entered, data is available for reference and use with all other events along the supply chain. •  A change in the data from one ERP application will result in an automatic update of that data when used in the other application modules involved.

Some Challenges:•Manual-intensive financial processes are becoming too burdensome - time to reconcile and approve invoices is too long • Firms lack cross-functional SCF teams • IT resources are constrained to automate invoice and payment processes • Multiple financial systems make invoice and payment concentration virtually impossible • Financing alternatives available that do not impact ratios, balance sheet, lines of credit, etc.

Cash Cycle

Manufacturing Cycle

ProcurementDemand Management

ShipmentOrder Management

Payment

Integrated Systems

Sales

VisibilityTrace & Track

Insurance Services

PaymentTreasuryCashFinancingDocument Management

Risk Management

Business Intelligence

Supply Chain Event Management

Information Management

Strategic Sourcing Strategic Sourcing

Electronic Data InterchangeIntranet/Internet

Physical Supply Chain Mgmt.Strategic Sourcing

Supply Chain – Data Interchange – Information Management

Forex & Commodity Risk Hedge

Mgmt. Reporting

Financial Supply Chain Management

Supply Chain Financing for Financial Institutions is about Linking the various components of the Enterprise system with FI systems in a Web-based environment in an orderly manner, offering visibility, recording & monitoring events; clearly identifying & mitigating risks in a multi-entity set up & providing cheaper Finance.

• Modern ERP System integrates and encompasses the primary aspect of supply chain processing. • ERP consists of a series of integrated core business applications modules for transaction processing. • These modules contain a set of functions that implement best business practices for supply chain management (SCM) activities.

Suppliers Manufacturing

Transfer

Distribuion

Transfer

Retail Outlet

Transfer Transfer

Information Flow & Flow of Goods

Information Flow & Flow of Cash

Supply Chain

Modern ERP is a software that supports the information flows among the processes in the supply chain. 

Supply Chain & Modern ERP Systems

Financing Programs

Containers loaded

Factory

Containers are loaded

on ship

Port of Lading-

Terminal

Final delivery

Distribution Center

Pu

rch

ase

Ord

er

SteamshipLine

Vessel at sea

Containers moved to port

of lading.

InlandDray

Containers moved DC.

InlandDray

Containers are loaded

on ship

Port of Discharge-Terminal

Flow of Goods, Information and Funds

Bo

ok

ing

Re

qu

es

t

PO

D

Pallet or Carton

- RFID Tag Fix RFID

ReaderHandheld RFID

Reader Fix RFID

Reader

Transportation process

AS

N

Inve

nto

ry U

pd

ate

Inve

nto

ry U

pd

ate

Bill

of

La

din

g

Sta

tus

Up

dat

e

Sta

tus

Up

dat

e

Cu

sto

ms

Cle

ara

nc

e

Sta

tus

Up

dat

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Supply Chain information is gathered, aggregated and normalized from multiple points and systems, providing a single view across orders, inventory, shipments

and financial supply chain processes.

Fix RFID

Reader

1,2 3 4 5,6 7 8 109

PO Financing

A/R FinancingInvoice

FactoringForfaiting

Letters of Credit

Documentary Collections

Pre-shipment Finance

Post-shipment Finance

Inventory Financing

Buyer Financing

Buyer’s CreditSupplier’s Credit

PO Financing

Source: TradeBeam

Emerging Modern Supply Chain Finance: A View

Global supply chain convergence is providing visibility platforms that are reducing liability and risk and opening the market for Structured Finance Solutions.

Supply Chain Convergence is Releasing Value ~ $$$ Convergence is leading to:• The development of financial solutions within the inbound-outbound supply chains & the after market.           

Offering significant working capital release.

• The integration of inventory optimization platforms into supply chain offerings.

The establishment of multi-vendor businesses within the services arena. Reduction in inventory, working capital and product liabilities.

• Solutions that are transferable across industry sectors using global logistics capability.

Supply Chain Finance in Asia/Africa

Current Environment• In a time with so much bad news, the good news is that most companies have substantial potential to

improve their working capital management and suboptimal practices by implementing supply chain financing solutions

• External forces (scarce and more expensive bank lines, higher cost of capital) are creating pressure on supply chains

• The most common suboptimal practices creating inefficiencies in the supply chain include: – Fragmented banking and processing structures

– Limited global cash visibility and inaccurate cash flow forecasting – Compartmentalized and decentralized receivables, payables and working capital processes – Localized investment practices with only

periodic oversight – Ad-hoc subsidiary funding and repatriation

• Some of the SCF solutions to address opportunities are: – Supply Chain Finance & Service solutions that include Buyer Centric and Seller Centric Finance programs – Consolidated financial institution

transaction servicing relationships – Streamlined and rationalized treasury, cash flow forecasting, billing and procurement practices – Centralized investment processes – Systematic practices for up or down-streaming of cash between affiliates and the corporate parent

• By addressing these suboptimal practices and providing access to liquidity within the supply chain, companies can improve their financial performance and the efficiency of flows through their physical and financial supply chains

SCF can drive competitive advantage: Only 13% of respondents are actively using SCF techniques to lower end-to-end costs in their supply chains.   56% have firm plans or are currently investigating options to improve end-to-end SCF.  

The need to increase capital or inject capital into the supply chain more quickly is being caused by several factors:

1.) Market trends with respect to the global supply chain have caused companies to demand an integrated approach/solution to physical and financial supply chain challenges:

a.) Buyers are looking to optimize their balance-sheet by delaying inventory ownership. b.) Suppliers are looking to obtain funds earlier in the supply chain at favorable rates, given buyers’

desire to delay inventory ownership. c.) Middle-market companies are looking to monetize non-US domiciled inventory to increase liquidity. d.) There is wide interest in integrated supply chain finance solutions.

2.) Globalization of the United States and Western Europe’s manufacturing bases has resulted in fewer domestic assets that can be leveraged to generate working capital.

3.) Most small and medium suppliers to U.S. and European businesses are located in countries that lack well-developed Capital markets. Without access to efficient and cost-effective capital, production costs increase significantly or the suppliers go out of business.

4.) Letters of credit, a long-standing method of obtaining capital for suppliers in less developed countries, are on the decline as large buyers are forcing suppliers to move to open account.

5.) There is a desire to ensure stability of capital as supply chains elongate.

Current Environment

Supply Chain Stages & SolutionsWorking Capital is one of the largest core users of capital. Although many companies have made significant improvements in working capital management, there remains tremendous upside to leveraging the latest tools and resources to take it to the next level especially in context of Emerging Markets.

Working Capital is one of the largest core users of capital. Although many companies have made significant improvements in working capital management, there remains tremendous upside to leveraging the latest tools and resources to take it to the next level especially in context of Emerging Markets.

Cash ManagementProcesses & Structures

Procure to Payment Process Order to Cash Process

Purchase Order

Invoice Payment Receipt

InvoicePayment Payment Issuance

Clear Payment

Clear Payment

Levers Streamline Cash ManagementProcesses & Structures

Streamline Supply ChainAccounts Payables

Streamline Supply ChainAccounts Receivables

Working Capital Improvement Strategy

• Manage DPO  •Reduce COGS •Reduce processing costs & errors  •Capture early pay discounts •Increase rebate from card usage • Improve relationships with supply chain partners

•Increase visibility to global cash•Improve cash forecasting •Improve yield & reduce funding costs•Systematize processes and consolidate 

•Reduce DSO•Sustain or accelerate revenue growth•Minimize collection float•Accelerate cash application of•Receivables•Improve predictability of cash flows•Operating more efficiently•Manage customer credit risk•Improve relationships with supply chain partners

Enhance Working CapitalRelease LiquidityImprove Performance

Supply Chain Finance in Asia/Africa While there have been initiatives to speed up the physical supply chain in Asia by harmonizing the Trade & Duty structure and by

improving Infrastructure & strengthening Institutions to facilitate Trade, the Financial Services industry in Asia has been criticized for its inability to develop at the same pace.

Supply Chain Finance is expected to work as a lubricant for the Corporate Supply Chain as it helps in reducing financial risk of the entities involved. It brings in Bank/Financial Service provider to bring in its Risk Management & Advisory capabilities for structuring of transactions/deals and offer guidance regards Legal & Taxation aspects to the Corporate & other entities (generally SMEs) involved in the Value Chain. It also helps in developing an understanding of appropriate Incentive/Reward structure for entities across the Supply Chain.

Making the financial supply chain more efficient means reducing manufacturing costs, business process costs and costs related to logistics. But this can only be achieved with a set of carefully designed financial solutions that are designed around the whole supply chain & define risk for each of the entities & focus on developing procedures to mitigate the same in a transparent & effective manner besides bringing their own value-add like ensuring liquidity across various entities participating in the Value Chain.

Significant developments have already taken place in Asia, in making the processes involved in taking goods from the raw materials stage, through production to the ultimate delivery and then to the end-consumer, in a more efficient manner. These improvements have been a result of:

• Faster and cheaper telecommunications;• Globalization that has facilitated a better understanding across borders thereby facilitating negotiation;• An almost insatiable demand from consumers for more choice and more speed;• The increase in disposable income in more and more countries;• The increased use of air transportation; and• New technologies.

The above trends are now repeating themselves in Africa as those countries rush in to capitalize upon their strength in Raw material supplies as well as improve upon their manufacturing/service capabilities.

The Financial Supply Chain

A financial institution can truly assist in creating value for a corporate entity by understanding the entire supply chain and by working in collaboration with other members of that chain, sharing the same vision and dedication to quality and technology. This atmosphere of trust creates a desire to offer banking and other financial services to the supply chain.

Data is Key to Unlocking the Inherent Benefits of Efficient Supply Chains

Figure 1: The Importance of Data for Efficient Supply Chains

IT developments over the past 10 years have provided global Supply Chain & trading communities with massive opportunities to realize their potential and gain an edge over their competitors. The key to unlocking these benefits is the efficient management of data that is created and used by all parties in what should be a simple process of moving goods from "A" to "B"; or manufacturer to consumer.

What IT does is:

• It speeds up communications between various entities in the supply chain & offers opportunities to Financial Service providers who have Relationship with these entities to peep into the ongoing transactions/ processes for effectively guiding the transaction to conclusions & identify/manage/reduce risks as appropriate.

• It helps in bringing clarity to how & in what manner the different entities in the Supply Chain can engage in transactions, in defining various risks & their boundaries, in identifying exactly who is owning what risk on a real-time basis.

• Integration of Corprate’s system with that of the bank’s helps in relatively greater transparency in recording of Supply Chain events.

• It helps in Eliminating errors in the documentary or order process;

• Reduce the various risks inherent in international trade by providing transparency at every step;

• Increase Inventory Visibility, Improve agility & Analytics capability, Improve reliability & customer service.

• Speeds up the supply chain transaction; and

• Ultimately reduce the costs of a company's supply chain.

The above leads to banking becoming more comfortable due to better understanding of Risk and ability to monitor performance at short intervals time at low cost.

Encourages greater commitment of capital/credit to the structure Comfort in lowering the cost of finance Improved other forms of support to the entity once the performance track-record is established

The Financial Supply Chain

Basic Supply Chain Finance Structuring

The basic process for efficient supplier payments and supply chain finance can be summarised as follows: • The buyer sends to the bank a Confirmed Payables file specifying the dates on which invoice payments are to be made.

• Suppliers are advised by the bank of the amounts and dates on which payments are to be settled on behalf of the buyer.

• This communication can be by email, fax, post, or preferably on the bank's web-based portal.

• In addition to informing the supplier of future payment dates, the bank offers the supplier early settlement of these payments. This financing is negotiated with the suppliers separately from the supplier payments which the bank undertakes to make on behalf of the buyer.

• If the supplier decides to accept the early payment and completes the short form documentation, funds will be received by the supplier at an account with the financing bank or any bank of his choice.

• At maturity of each invoice the bank either makes settlement to the supplier on behalf of the buyer (if early settlement has not been taken by the supplier) or is reimbursed for the discounted payment using the buyer's funds in those cases where supplier finance has been drawn down.

• This structure works equally well for both domestic and international trade.

Migrating from Paper to Electronic in Supply Chain Finance

Banks in Asia are migrating their customers onto secure and robust web-based portals, where suppliers can access the latest invoice status and financing offers and have the opportunity to accept early settlement of selected invoices or indeed all invoices.

Supply Chain Finance

Migrating from Paper to Electronic in Supply Chain Finance

Benefits for Suppliers

• Opportunity to obtain early settlement of invoices from the bank, improving the cash flow of the supplier.

• The value of funds obtained is the full face value of the invoices settled minus a discount charge for the period until maturity.

• Thus the supplier receives a higher percentage of invoice face value than under a factoring or invoice discounting arrangement, where typically only a pre-agreed percentage (eg 70-80%) of the invoice face value will be advanced.

• The funds raised through supply chain finance will usually be non-recourse for the supplier since the discounted payment is structured as a receivables assignment.

• Being non-recourse early settlement, this funding is off balance sheet for the supplier and therefore does not eat into their existing credit limits. This structure may enable the supplier to access more funding than would be possible on a standalone basis.

• The simple documentation signed between the bank and the supplier is usually a short form contract by way of a sale/purchase of receivables, whereby the bank becomes the holder of the trade debt.

• Where the supplier is a small or medium enterprise (SME) and the buyer is a large credit-worthy corporate, the discount cost will often be lower than the SME might achieve through conventional borrowing.

• Even if the supplier decides not to take early settlement of invoices, he still has the benefit of early visibility of cash flow which helps with cash forecasting.

Benefits for the Buyer

• Creates a more collaborative, stable and financially robust supply chain which functions more efficiently for the benefit of the buyer and his suppliers.

• The bank works with the buyer to inform the suppliers of the new supplier payment arrangement, outlining the operational and financial benefits.

• Cuts the cost of processing supplier payments and gives the buyer improved visibility of its outbound cash flow, by outsourcing the supplier payments process to a bank. • Reduces 'chaser' queries from suppliers regarding the current status of invoices, ie have invoices been received, processed and approved? Suppliers can obtain the status of invoices and discounted early settlement offers on the bank's supplier portal.

• Importantly, where properly structured and documented, arms-length finance for suppliers can be delivered in such a way that trade payables on the buyer's balance sheet continue to be classified as commercial outstandings due to trade creditors, instead of being converted into bank debt which would otherwise impact negatively on the buyer's debt gearing ratios.

• As a separate arrangement, the buyer may be able to negotiate improved terms (eg cost of goods or longer trade credit terms) with his supplier base, in the light of the improved working capital management the suppliers enjoy under the bank's supplier payment programme.

Migrating from Paper to Electronic in Supply Chain Finance

Supply Chain Finance and Factoring/Invoice Discounting

While supply chain finance benefits from buyer data (ie knowledge that invoices to be financed have been approved), factors and invoice discounting providers are generally reliant on information solely from the supplier at the point when funds are advanced.

The natural way to enhance a supply chain finance solution is for a bank to deliver value-added solutions that assist buyers in the invoice approval process.

• These accounts payable solutions and e-invoicing initiatives help the buyer to streamline his processes and approve his invoices more quickly.

• This in turn enables the bank to offer finance to suppliers earlier in the trade cycle.

Banks experienced in supply chain finance are therefore working their way back along the trade cycle in order to bring their customers value added services to facilitate the efficient receipt and processing of invoices.

This in turn will enable the creation of greater volumes of approved payables, which will permit suppliers to get early settlement on more invoices, hence releasing increased working capital from the financial supply chain.

1. Shipment

2. Invoice

6. Payment of Claim

5b. Payment Dilution & uninsured portion

5a. Payment terms of up to 180 days (360 days in some cases)

4. Purchase of A/R

3. Transfer of Title/ Invoice listCross-Border

Buyer

Seller

ECA Insurer

Loss Payee on Insurance Policy

Credit Insurance Policy

Supply Chain Finance and Factoring/Invoice Discounting

Supply Chain Finance in Asia/Africa – Next Steps

Global Financial Crisis has changed the behaviour of our Corporate as well as those of Financial Institutions/Banks.

Corporate: - Desperately seek Capital to support the growth, yet are keen that they protect their valuable trading partners in their Supply Chain (besides seek to cutting costs). Clients also want a single integrated platform to view all their Cash, Trade/Supply Chain activities. Need Real assessment of their including real time information status on Transactions/order flows through out the value

chain. Real time capture & reporting of all actionable information & analytics and all Supply Chain events. Fx Visibility to hedge/mitigate losses.

With shrinking credit/risk appetite & reduced lending power, it is challenging for any one bank or institution to fund the entire Supply Chain of any large, multi-country/location set up. Arranging for funding through Corr. Bank also often leads to too much risk with the lead/arranging bank (which are now

frequently seeking to reduce risk). Partner banks are also hesitant to go to any single bank’s proprietary platform, thus the corporate’s purpose for the

project is undermined. Though bank’s are often seeking ways/capability to on-board Supplier’s in countries/geographies where they do not have

physical presence, however: This does not serve fully in terms of capture of full information flow. Regulations in certain geographies are a hindrance.

The above has led to growth of bank neutral third party providers like Misys, Orbian, PrimeRevenue to name a few. These platform support information flow activities between Clients, their channel partners & participating banks.

Benefits of working with GSCF Technology providers:The Application Service Provider (ASP) model or hosted services eliminate the need to purchase and install software are catching

on with organisations seeking to capitalise on supply chain finance at a time of tightening IT budgets.• Costs: As no up-front capital investment is required, it represents a very affordable model. The traditional, in-house model,

pursued by several banks setting up SCF solutions, requires significant capital investment.• Cutting costs and time to market :Banks that use ASPs to deliver supply chain finance programmes and services to their

corporate clients can eliminate the costs involved in developing or purchasing the software required, as well as the cost of software installation, maintenance and development – all of which are managed by the ASP. Their financial outlay is thus limited to payments for transactions made via the hosted platform and, in some cases, an upfront set-up fee, meaning that they benefit from a variable cost structure. Equally importantly, by deploying hosted solutions, banks also benefit from speed to market when launching new SCF programmes for their corporate clients, and offering them enhanced services.

• Quickly tailored to suit: offers Trade Portal for Multi-Bank (MTP for Multi-Bank), a front-end solution for trade transactions, as an ASP service to both banks and corporate looking for speed and ease of implementation. ASP-delivered solutions is made available directly to corporates as well as banks, as a “generic product” that can be quickly tailored to meet different corporates’ programme needs, and then rolled out across multiple geographies.

• Given the current corporate client demand, and the fact that supply chain finance is becoming more complex on the technology and services side, banks are asking themselves whether it makes sense to continue supporting their own solutions. Working with us allows banks to speed up their time to market with supply chain finance programmes and reduce technology development expenses

• Working in this way not only enables banks to cut the costs and overheads involved in running their own installed solutions but can help them generate new opportunities for lending because, by collaborating with an ASP, they can quickly satisfy corporate clients’ requests for transaction-specific, on-demand SCF services. Banks can also boost their revenues by providing new clients with supply chain services at no extra cost to themselves.

ASP model & SCF Services• Aside from hosting the software, ASP SCF Tech. providers can play a much bigger role in the establishment of SCF

programmes by helping buyers to prioritise which suppliers should be included, and determining programme parameters in terms of liquidity, currencies and geographies.

• Buyers can also take advantage of working capital advisory services to optimise their working capital, take help in short listing Financial Institutions/Banks to work with.

• Suppliers are offered a range of SCF enablement and education services to ensure that they understand the value of financing provided and are trained in the platform’s use.

• The GSCF Technology provider are/can be actively involved in the entire roll-out of a programme from satisfying the procurement needs of the buyer to working with the suppliers, educating them and enabling them to get settled on the system.

• Tech. providers can advise buyers on their working capital, which means that we have to look at the value offered by different suppliers/dealers. They also provide buyers with a detailed analysis of their supply chains.

• By using an ASP, corporates are not tied to one particular bank’s platform, and can select and change their bank funding providers as required – without having to change the technology used.

• However, with ASP solutions, security will always be a major issue as banks are worried about information being held on a server which is not theirs. If a bank installs the software at its own end, then the information held will be protected by its own corporate security systems and firewall. This shall still remain a cause of concern and a challenge for GSCF Tech. Service provider. Generally the Corporate, their Business Consultants as well as Retained agents in various countries work with the Tech. Provider to chart a workable process & get banks/FIs onboard though Tech. Providers are increasingly looking to internalize the skills to hiring requisite talent or working out suitable cooperation agreements with other service providers so that they can bunch the services under one roof.

Strategies for SuccessInnovative, Collaborative, MindSet• Supply Chain finance requires the collaboration of multiple parties to succeed. Furthermore, it requires an innovative

mindset as many of the best solutions will be relatively non-traditional solutions compared to the non-collaborative silo solutions traditionally employed by many business units. Practitioners must be prepared to embrace new ways of doing business in order to achieve the full value that is there for the taking. It takes more than just "thinking outside the box". It takes a commitment, and a drive, to continually innovate the business to the next level.

Align Purchasing, Engineering, and Finance • Purchasing, which includes logistics for the purpose of this wiki, is responsible for many of the payables that end up in

accounts payable. Engineering, responsible for New Product Design (NPD), is responsible for much of the product cost, baking in up to 80% of the costs in the design phase. Finance is responsible for making the payments generated by Purchasing and generating the reports necessary to comply with federal regulations, such as Sarbanes-Oxley. Thus, in order to reduce operating costs and optimize working capital, all units need to work in unison.

Create a Cross-Functional Team • Aligning purchasing, engineering, and finance is a great start - but it's not enough. To truly succeed, each of these units will

need to work together on a daily basis. This will require a cross-functional team whose driving goal is to optimize costs across the supply chain while not only preserving, but increasing value to all parties. This will include increasing quality, reliability of delivery, and reducing risk as well.

Employ Capital and Cash Management Tools • Be sure to make heavy use of automation. Manually-intensive financial transaction and trade document processing leads to

long processing times, poor visibility, and high transaction costs. Well designed e-Procurement and e-Payment systems can perform 2-way and 3-way matching and automate routine transactions within pre-defined contracts and tolerances.

Strategies for FailureShifting Inventory to Suppliers • With increasing costs across the board and little or no room to increase prices, companies are scrambling for new ways to

increase profits. This has resulted in many companies scrambling to find new ways to reduce inventory and reduce one of the biggest costs on their balance sheets - inventory carrying charges. Unfortunately, many of these companies have chosen the unenlightened solution of simply delaying purchases until the last minute, which forces their suppliers, who are often ill-equipped to do so, to hold the inventory instead. Considering that most suppliers have to wait an unduly long time between their initial cost outlay to make a product and the eventual payment for that product in an environment where many buyers are now demanding payment terms that include 60, 90, or even 120 Days-Payable-Outstanding (DPO) and that most do not have large storage facilities or inventory management expertise, this drives up their costs from all angles. Their financing charges go through the roof as they have to take out more high-cost short-term financing, often at rates of 20% to 40% per annum (which are especially common in developing economies), their costs of operation go through the roof as they have to either acquire additional assets or pay a third party to manage the inventory, and their opportunity costs rise as they are prevented from ramping up production, due to lack of funds and storage, on New Product Development that could ultimately prove more profitable to them, and the buyer.

Increasing Days Payable Outstanding • One of the the primary actions that buyers who are new to supply chain finance take is to extend payment terms for their

suppliers, which often have constricted access to short-term financing with a significantly higher cost of capital. This cost-shifting to suppliers might result in better Days-Payable-Outstanding (DPO) statistics to the buyer in the short term, but ultimately results in a less financially stable, and thus higher-risk supply base, and, eventually, an overall higher cost of goods sold versus competitors who have mastered sound SCF practices.

• Strapped for cash, and lacking adequate access to affordable capital, these suppliers may be forced to delay raw material ordering, squeeze work-in-process inventories, or skimp on plant maintenance or quality processes. Each of these options negatively impacts the buyer's return on investment and could lead to significant supply shortages, especially if demand spikes.

Mistaking Early Payment Discounts and Factoring for Financing Options • Early payment discount programs, regular or automated, do not address the root causes of financial flow inefficiency and can in

fact exacerbate the underlying drivers. Instead of shifting inventory to a supplier, you're essentially shifting costs and this often results in cost increases, rather than cost reductions, across the supply chain.

“Best Practices”- Supplier Acquisition Client Role• Set program goals based on Supplier categorization/analysis • Set specific procurement manager goals • Ensure procurement is adequately trained on program message • Establish procurement liaison to provider • Provide target Supplier contact list (financial contact if possible)

– Follow-up with Suppliers on terms extension – Follow-up with unresponsive suppliers – Meet regularly with provider to review progress

Role of Provider – Performs Supplier analysis – Works with client on Supplier acquisition plan strategy – Train client’s procurement team on the solution – Work with Suppliers to demonstrate benefits they can achieve through the program – Set up Suppliers and conduct supplier training

Program Key Success FactorsSingle integrated solution: – Seamless deployment of the program is dependent upon provider’s capabilities to execute all aspects of the program, including

•Owned-and-operated web-based platform • Payments, including cross-border and foreign currency Documentation and funding of AR purchases •Supplier on-boarding:

– A Supplier Finance program’s success is measured by the suppliers’ participation, – Designing a successful program requires financial expertise to dimension benefits and strategize implementation, – Provider’s experience drives state-of-art materials demonstrating program’s value-add to suppliers, – Dedicated team in charge of approaching and on-boarding vendors Funding: – Large programs require a lead agent to raise adequate capital among investors, – In-depth knowledge of investor marketplace is key to ensure that capital availability does not hinder program’s  ramp-up and growth  Reporting:  – Immediate and comprehensive reporting available to all stakeholders

“Best Practices” – Dealer FinancingClient Role• Set program goals upfront (market share initiative, monetization of receivables, off-balance sheet treatment, etc.) and manages to these goals • Designate the desired size and parameters of the program (i.e. regions, countries, currency, number of Buyers, receivable asset size, DSO

enhancement, etc.) • Include Treasury, Accounting, and Sales in the process • Agree on implementation plan and timeline Role of Provider• Manage the implementation of the receivables portfolio finance process in close coordination with client • Deliver the financing, liquidity and other strategic objectives, as designated by client • Work with Buyers to demonstrate benefits they can achieve through the program • Provide flexibility to program to add Buyers and countries, as needed • Work closely with client to manage the program on an ongoing basis

Program Key Success Factors• Single integrated solution

Automated global, regional or country solutions for managing receivables and improving cash conversion cycles Alignment of strategic goals with Treasury, Accounting, Procurement, and Sales functions results in the most successful programs

• Solutions implemented that benefit both the Seller and Buyer have the most success – Opportunity to increase sales and shareholder value Risk mitigation Providing liquidity to Buyers

• Funding capabilities Large programs require a banking partner that is able to provide financing on a global basis – In-depth knowledge of local marketplace is key to ensure capital availability Stability and longevity of programs are essential

• Reporting & Servicing Capabilities Operational and servicing support which includes the collection of data and timely reporting detail for each buyer, country, region, and global consolidation

Providing Credit and Liquidity to Supply Chain Financing

• In response to the growing concern over decreased liquidity for global trade, many governments, through their stimulus packages and/or established ECAs, are partnering with exporters and their banks in a series of global trade programs to mitigate cross-border risk in the supply chain

• ECA trade programs aim at reviving the private market and improving global trade flows • This type of government backed receivables financing counters high lending costs between banks and

Suppliers • Supplier Financing programs supported by ECAs offer more competitive pricing for companies while

substantially limiting the amount of capital required to be held on a lender’s balance sheet • Key benefits

– Cash flow certainty – Reduces non-payment risk – Incentive to expand into new markets – Allows more attractive credit terms to buyers – Policies attractive to lenders to provide liquidity

Intl FinancialSettlement

TRADERSSINGLE WINDOWPORTAL GATEWAYU Trade HubU Trade Hub

Messaging Hub

e-Trade Document Repository

Data Warehouse

MarketingForeign

ExchangeG4C

e-ServicesLogisticsCustoms

Settlement

E MarketplacesE Biz sites

InfoTrade sites

Trade Leads &Overseas Ads

Credit Info Co.

Korea Export Ins. Corp.

CreditEvaluation

Union/Assoc.KCCI

Quarantine StationInsurance Co.Private Inst.

Licenses &Certification

KFTC, SWIFTNet, TSU, Bank of Korea, Banks,

Foreign Exchange Network

FinancialInstitution

Shipper/AirlinersForwarder

CY, Bonded Warehouse

KLNET, KILC

Logistics

Korea Customs ServiceCustoms Broker

CustomsGlobal Networking

ICC

PAAForeignSuppliers

OverseasBranch

12

3

45

Some Country Models: Korea

Source: KTNET