Corporates that create supply chains with highly flexible supply routes will find they are part of larger global chains and reap

the economic advantages, says Dan Barnes.

Globalisation can give clued-up corporates some fantastic opportunities in their supply chains. Thanks to current technologies, contacts can be made around the world with the potential to cut costs as competition increases between suppliers. And competition is growing, says Nigel Woodward, director of global financial services at Intel: “The global supply chain is not new, but technology and market communications are making the world a smaller place in terms of communications and are giving corporates much more choice on where they go shopping.” But supply is a mission-critical function so any change to the process is not without risk. Supply chains – physical and financial – inherently carry the risk balance of efficient delivery against efficient payment, meaning both parties carry the risk.

In 2006, research company Aberdeen Group released figures indicating 82% of corporates were concerned about supply chain resiliency but only 11% actively managed this risk. Experience on both the supplier and receiver sides is the only natural way of minimising this risk, with trust or experience of proven efficiency between partners taking the function of real risk management. But where new relationships are formed such trust does not exist, creating the potential for changing relationships and/or management of risk.

Jeremy Shaw, senior vice-president and head of trade finance EMEA for JPMorgan, says that these situations will continue to occur for the immediate future: “Global trade is growing aggressively, you can see that with India and China, two huge areas that are sucking resources in for their domestic populations but also manufacturing and

re-exporting to the US, Europe and increasingly other parts of Asia.” He adds that understanding these potential relationships fully will be vital when trying to find the most suitable partner. “As a corporate, my increased international reach may allow me to find a partner that supplies me 20% cheaper than I’ve previously found. But if my capital is tied up for nine months, how much is it saving me?”

This may not be such a challenge for the long-established multinational. It has large amounts of sway due to its size, often enough to minimise problems, or the resources to absorb the costs involved in a failure of the supply chain. For smaller local and regional players without those strengths, other sources of stability will be needed. An inefficient payment chain could critically rob a corporate of liquidity, a supply chain delay could lose orders, materially damaging business.

Supply chain transparency

While IT systems are not a cure-all, they can make the process more secure and efficient by providing visibility down the supply chain. However, these have often not been adopted, says Richard Spong, solutions marketing manager (EMEA) of IT provider Sterling Commerce: “Some large UK corporations have a very detailed global view of their liquidity position right now – but it is one week in arrears. Anyone looking at current technology can see it could support a much better reporting standard – I’m not saying real time across the board but I am saying at least a day in arrears. All of that technology is available from banks or integration providers like ourselves.”

Technologies such as radio frequency identification (RFID) tags can allow careful monitoring of cargo tied to the financial supply chain improving efficiency and certainty.

A challenge to this is that single systems will rarely be implemented across an entire company, meaning that data cannot necessarily be sent across company functions or silos. Like most businesses, corporates are not fully integrated entities but have different working practices and tools globally, often leaving a number of systems in use that do not talk to one another. “You are unlikely to have a full SAP implementation in both your London headquarters and your two-man operation in Puerto Rico. You’ll have other types of technology from mergers and acquisitions. If you buy a chain of stores in Italy the chances are that it is running on an Italian-supplied accounting platform that is not integrated with your SAP system in London,” says Mr Spong.

One route to facilitate secure and efficient communications between organisations is offered by industry initiatives such as the Transaction Workflow Innovation Standards Team (Twist), which is trying to develop standardised formats for transferring data between organisations. The uptake of such standards is limited, however. Interbank payments network Swift could offer a direct, secure and standardised network for inter-corporate payments. However, the most alluring offer so far to come from the bank-owned co-operative still only offers corporate-to-bank payments via the standardised corporate environment (Score).

This has been a significant move for the payments giant, as until recently member banks had been voting against direct corporate access to the network. Luc Meurant, head of the corporate access programme at Swift, explains that Score, launched at the beginning of 2007, is the greatest opportunity so far for corporates to take advantage of the Swift network. “As long as a corporate is listed on a stock exchange in a country that is a member of the Financial Action Task Force, it, or its subsidiary, can use the Score mode. That gives it access to multiple banks across Swift assisting initially with treasury transactions and cash management.

“Corporates often have relationships with different banks in different countries across their supply chain and they need to communicate with them in a resilient manner – well we’ve never lost a payment.” The limit of Score is its inability to provide corporate-to-corporate connectivity and this is where financial services organisations can expand their role.

Open account trading

“Approximately 80% of trading is currently done on open account,” says Andrew Walton-Green, CEO of IT provider Gresham Computing, “giving a huge opportunity for banks to step in.” The practice of open-account trading introduces credit risk in a supply chain where risk management systems are not in use. “Generally, the biggest problem for corporates is going to be visibility of working capital,” says Mr Walton-Green: “When you have goods travelling overseas and you don’t have letters of credit you are taking huge amounts of risk.”

However, technology makes it easier to create intermediaries that can connect corporates and banks. When there are many of these, it limits the chances of seeing a complete view of other players, says Mr Woodward, “It’s not like 10 or 20 years ago when to set up a Swift or a similar operation would cost an absolute fortune. So you can have all sorts of intermediaries coming to market – which is part of the problem as well, as none of them have the scale to do the global job.”

There appears then to be no easy solution to the challenge of supply chain efficiency, and certainly corporates appear to be in a tug-of-war, as one recent study claimed. Research by supply chain solution provider Demica noted that “73% of large European companies are still trying to extend payment terms offered by their suppliers”.

Extended payment terms (delaying revenue recognition for an agreed period of time) benefit the buyer but not the supplier and so move rather than reduce risk, but may be put in place, particularly when a large corporate has several small suppliers that rely on its business. Demica notes that in some cases this can increase the overall risk of failure by increasing pressure on the companies in the chain.

“These days, terms extension/reduction demands are almost as frequent as price discussions. Increasingly, these demands have the potential to put an unsustainable strain on corporate buyer/supplier relations.” Options for relief of this pressure include use of non-bank intermediaries such as Tradecard that connect buyer and seller (along with financial partners) via an automated trading platform.

The same study found that most European corporates were happy to have their key relationship banks create services that assist with supply chain finance. So is the banking industry ready to take these opportunities and face up to the challenge? Demica’s survey says “yes”.

Global connectivity

But ABN AMRO has realised there is a significant challenge to many banks – and is offering a solution. Much like the intermediaries, many banks are unable to offer a global reach. Like their customers, they are often local or regional players. Sainath Radhakrishnan, head of financial institutions trade outsourcing solutions, transaction banking at ABN AMRO, explains that his bank is offering the capability to other financial institutions to participate in supply chain financing beyond their usual geographic boundaries.

“Banks have been unable to fully leverage their relationships and the risk appetite they have with their key customers due to open account trade and non-familiarity with many markets where their customers’ supply chain partners are located. Thanks to our extensive branch network, we are able to partner with banks on both sides of the transaction and give them a complete view of the buyer and the seller.”

He adds: “For example, a company in Europe is a large importer from China. It banks with a European bank that doesn’t have a branch in China. The supplier is financing the trade by borrowing funds from a local bank that has no view of the buyer and so keeps interest rates high to match the risk.

“Because of our presence in the emerging markets and by involving the buyer’s bank, we can see the entire supply chain. So we can improve the risk perception and the associated financing costs for the supplier and the entire chain [buyer included] and help the banks strengthen their relationships with their clients.”

Whether by taking on technology or banking services, the 89% of corporates from Aberdeen’s 2006 study that do not actively manage supply chain risk will need to make investments to achieve real gains in 2007. The first corporates to create a supply chain with highly flexible supply routes will in turn find that they are increasingly part of larger global chains and reap the economic advantages. Others will see that global market begin to shrink, along with revenues.

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