Many articles in trade and logistics publications reference the developing supply chain market. But the term may not be familiar to everyone. In its simplest form, the physical supply chain can be summarised as the movement of goods and services, both crossborder and locally, through suppliers, distributors, transporters, storage facilities and retailers participating in the sale and delivery of a particular product.
Today’s supply chain also needs to acknowledge the financial element. At HSBC, this is summarised as the coordination and integration of the physical supply chain to optimise working capital costs as well as reducing or managing financial risks, thus improving profitability and increasing shareholder value.
Greater cost awareness
This is why, against a backdrop of increasing cost awareness, working capital management optimisation and a changing international trade landscape, HSBC launched its supply chain business, in late 2004. The team was largely completed in 2005 and was initially tasked with, among other things, developing leading open account solutions for international trade. By offering value-added services to customers seeking end-to-end financial solutions to support their supply chains, HSBC moved the bank into a new market outside the traditional domain of banks.
Making progress
This mandate is being progressed, with dedicated and experienced supply chain teams now established in London, New York, Paris, Hong Kong, Shanghai and Düsseldorf. The UK team typically services the FTSE 250 and some European corporate importers and exporters. However, supply chain is not limited to this market and the team is now engaging with global relationship managers who cover middle-market enterprises (MME).
Why should banks develop their supply chain business? Global trade is expanding. However, the way it is transacted is changing, with movement away from bank-based products – such as letters of credit, collections, standby letters of credit and guarantees – to open account. This shift removes banks from any processing and resulting information flows, affecting their income derived from activities including processing and handling commission and pre-shipment and post-shipment finance to vendors. Their role in a transaction, therefore, may become limited to providing only settlement – the last leg of most trades.
Sepa implications
Given this change and the implications of the Single Euro Payments Area (Sepa), the need for banks to become an integral party to open account trade is evident, especially for eurozone transactions. Sepa will drive down the cost of crossborder automated clearing house payments within Europe, meaning banks’ income from payments flows may be adversely affected. Given this and the reasons already discussed, HSBC is working hard by introducing innovative solutions, such as platforms enabling corporates to view electronically open account trading.
Banks can add ‘corporate value’ through dematerialisation, imaged open account and document checking. As well as slowing income erosion, these solutions give customers the benefits of outsourcing and e-enablement. Further, as supply chains covering the ordering and fulfilment of goods delivery become more global and complex, corporates are looking to their bank for support. Banks are increasingly delivering solutions to reduce the strain on working capital and satisfy corporate demand for risk management tools to mitigate the inherent risks of extended supply chains.
Working together
Demand for supply chain consultancy is also increasing, reflecting its strategic importance in the market. Increasingly, chief financial officers, treasurers, information technology managers, and logistics and procurement managers are working together to optimise working capital requirements and reduce costs with a view to increasing profitability.
Alan Beattie, global head, supply chain business at HSBC, says: “Our business works on an evolutionary rather than a revolutionary basis. It continues to change and develop to meet the diverse requirements of not only our customers, but also the changing market.
“Minimisation of risk exposure throughout the trade cycle, from contract negotiation to settlement and the maximisation of cash flow, are common goals for both HSBC and its corporate customers. The demands of large buyers has forced changes such as non-negotiable document dematerialisation, bringing cost savings to both the buyer and supplier. Achieving this is challenging, however, by working in collaboration, both vendors and buyers can benefit.”
The continued development of supply chain initiatives is vital for banks seeking to remain competitive in international commerce.
Ray Moore is head of supply chain business, UK, at HSBC.
