HOW GOOD IS GOOD ENOUGH

A CASE FOR HELPING COMPANIES OPTIMIZING THE FINANCIAL SUPPLY CHAIN

By David Gustin, Managing Partner

Banks are struggling to devise ways to help Corporate and Commercial clients navigate cross border trade. As I speak to many banks, the challenge in the international business is growing revenue. Many are finding their Letter of Credit L/C and Documentary Collection volumes declining and are trying to redefine the cross border services needed for clients. While banks feared being disintermediated during the B2B trading heyday, their real fears lie in watching revenue streams from the L/C business walk out the door.

Many banks assisting clients conduct cross border trade are heads down on three initiatives - how to integrate into clients ERP/Treasury systems, web enabling cash and trade functionality and finally, for the major trade banks, finding ways to intermediate into open account trade flows.

The business processes and procedures of moving goods cross border have not changed, in fact, one could argue they have become more complex in this world. The scope of business has increased for many companies. A typical enterprise does business in more countries with more third parties, trade partners and banks, and through more channels than ever before.

A key driver in the protraction of the supply chain for manufacturers and exporters is that large corporate companies are moving away from owning fixed manufacturing assets to focus on managing a portfolio of brands. Contract manufacturers, their suppliers, third party logistic providers and others are involved in this extended ecosystem. Dealing with this ecosystem creates liquidity, working capital, compliance, and logistic and other challenges.

Successful CFOs recognize there are tremendous risks, working capital, liquidity and logistic issues in this environment. Global enterprises are substituting information for working capital to optimize their financial supply chain. Given the complexities involved here, even best-in-class companies can underestimate the value that can be extracted from reviewing and optimizing some of the most mundane aspects of their financial supply chain and trading functions.

Killen Associates estimates the typical $1 billion company spends $27 million for unnecessary working capital and inefficient processing functions because of the lack of visibility. From our prior research in this space, we know some companies that have the most sophisticated and effective material supply chains but suffer from poor financial supply chains.

As global trade continues to evolve, we see three major trends occurring - each which presents their own challenges and opportunities to the banks. These trends are:

Importers desire closer collaboration with vendors (and hence need less L/Cs). In addition, these importers are looking to use event management to drvie the pruchase to pay cycle.

Manufactures are protracting the supply chain by using third parties for contract manufacture and logistics

A growing recognition that the financial supply chain is linked to the physical supply chain

What "buy side" solutions can the banks put forward?

With more international trade being done by OA and Purchase Orders, combined with more investment in event management of the purchase to pay cycle, banks will have opportunities in the following areas:

Ability to do credit enhancement at different points on the supply chain given much tighter knowledge of what is happening
Planned PO Financing (egs. Given POs have different characteristics than L/Cs, for example shorter lead times in issuance combined with the software tools being implemented to control inventory will require banks to be more active in financing planned POs)
We believe there are a few key logistical events which can help drive more flexible purchase to pay solutions using the PO and event management. These events include when goods are delivered to docks, clear customs, received at Distribution Centers, etc. This will involve messaging, workflow, exception handling, etc. The consolidators, through the ASNs, and the carriers, are the parities that together can help the banks tie the physical and financial flows. Banks will need to thoroughly understand areas in which they have not played before.
Facilitate Account Payable settlement for importers that are bloated by inefficiencies, integration challenges, and a lack of coordination between the flow of money and the supply chain.

What sell side solutions do we see?

Solutions that help companies think through the liquidity, working capital, risk, and logistic challenges beyond their four walls.
ERP / Treasury systems / Bank integration solutions. Centralized treasuries are the norm to handle not only the cash and credit needs, but to help drive regional or global financial supply chain solutions. These Treasury groups are implementing new systems to help provide visibility into cash - not an easy proposition with complex company structures and bank relationships
Of course electronic documentation and compliance - cleaning up inefficient processes, reducing discrepancies, and trying to accelerate cash flow

Over the next several months, Global Business Intelligence will be speaking with leading import and export companies across North America to understand how they are optimizing the financial supply chain, discovering what is working and what is not. It will be interesting to see where the "pain points" are and how various Corporates are spending resources to resolve. Stay tuned!