From FSC to SCF

Financial supply chain (FSC) and supply chain finance (SCF) are often used interchangeably. Yet in reality, they cover different areas and different matters. And the distinction is not merely academic. Significant investments surround these initiatives and both corporate organisations and technology providers need to understand this difference to better arrange their plans for investments and market positioning.

Banks are realising that as supply chain management matures, their traditional business is shrinking. There are now numerous best-of-breed technology players offering services, including financial, to corporations at a lower cost.

BANKS HAVE SUPPLY CHAINS, TOO

In the past, banks identified the supply chain solely with procurement, which does indeed cover many of the activities that generate value. For instance, the procurement team of an average bank puts 20% of its efforts into purchasing stationery while negotiating high-expenditure contracts for IT systems is another important duty. Banks also deal with service providers and consultants – some 30% of their efforts are dedicated to managing these high-expense relationships. Another vital role is sourcing infrastructure for outlets and branches.

In talking with representatives of major banks, the Supply Chain Council has found that some already understood, perhaps unconsciously, that they participate in the planning and control of workflows that match the dynamics of typical physical chains.

For example, a bank’s cash supply chain consists of many elements, with cash at its branches, at the cash centre and at the Central Bank. Cash moves almost constantly across these three locations, and in each it has a different cost and return. In such a business, where physical processes are required to move cash to where return is greatest, it becomes evident how crucial physical supply chain management is.

In fact, one of the most significant and engaging cases that involved extremely synchronised cross-border supply chain processes occurred with the introduction of the euro in 12 countries on 1 January 2002. Literally overnight, all ATMs across Europe were replenished with euro banknotes and in the following weeks, local currency was withdrawn and exchanged.

The impact on banks’ supply chains was enormous, prompting some to realise that the supply chain is the broader, end-to-end holistic set of processes and practices by which products or services are brought to market, paralleled by flows of documents and funds that define the terms of payment with customers and suppliers and their settlement practices. That, in a nutshell, is the financial supply chain.

THE VALUE OF SCF

Many organisations have invested heavily in their physical supply chains in the justifiable expectation of a fair return. A close inspection of the procure-to-pay and order-to-cash process flows clearly reveals that significant value can be derived from the financial portion of these chains.

As a result, banks are digitising and automating their financial services to support the electronic execution of key functions. Banks now support transaction management by encouraging the digital exchange of information. This pushes their clients towards paperless transactions, reducing the burden of manual document processing. They also support working capital management, improving clients’ cash utilisation by facilitating operations with suppliers, especially those in the Far East.

Pre- and post-shipment working capital finance is the foundation of a bank’s SCF portfolio. Complete visibility of all transactions over a portal is the key technical enabler, while risk mitigation in daily operations is also enhanced thanks to this improved visibility.

Executives have to efficiently generate working capital and optimise cashflow and costs. They are therefore actively considering instruments that finance all aspects of the supply chain, such as payables, inventory and receivables. Identifying solutions that optimise supply chain processes by improving visibility, reducing processing errors and time delays and ensuring IFRS and Sarbanes-Oxley compliance, demands proper skills in ongoing treasury administration, management of risk in areas like FX, credit, interest rate, accounting and country.

The ability to implement methods, practices and solutions that ensure transparency and visibility between customers and suppliers has become the watchword for technology providers. This area of SCF will develop to provide ever more beneficial instruments and products in response to corporate supply chain management expectations.

However, to achieve full corporate involvement, other important aspects come into play. Even though the SCF market is huge for banks – Supply Chain Council research shows business transactions of hundred billions of euros across buyer-seller platforms – these banks must take the next step to close the gap with their corporate counterparts.

SOLUTIONS, NOT PRODUCTS

Evolution requires banks to offer solutions, not just products. In a recent conference, the chief treasurer of an $11bn corporate said: "[Banks must] develop products that present beginning-to-end solutions instead of fragmented answers that require band-aids and look at aggregating multiple products into one solution to kill many birds."

One of the leading banks contacted during the Supply Chain Council’s research has formally appointed an individual to head up its SCF business globally. This executive comes from a physical supply chain background, which shows that the bank takes this sector very seriously.

Collaborative finance is already attracting significant attention. Aberdeen Research is about to publish a report on collaborative supply chain finance, analysing how a firm should collaborate internally to manage SCF programmes; how finance, supply chain, procurement and sales can develop joint strategies in this area.

The study also establishes how a company should collaborate externally to achieve cost savings or top-line growth with the help of SCF, by revising SCF practices with suppliers, for instance. The bottom line of this research is that a corporation that adopts collaborative SCF organisational strategies needs creative and collaborative financial services from its bank to address its strategic needs.

COLLABORATIVE FINANCE SERVICES

Corporates have used banking relationships to evaluate or implement several SCF products, including sale of receivables, financing inventory from raw materials to finished goods and extending payables through supplier financings.

In addition, from a technology standpoint, corporates are looking for solutions that optimise supply chain processes, including web portals to display approved-for-pay and unapproved-for-pay suppliers, high-risk customer credit insurance, electronic fund transfer with all significant customers, integration with back-end ERP and CRM systems.

The bank’s team must be knowledgeable and work hard to establish long-term, individual relationships. Corporates must not feel like they are being used to pilot a bank’s new product lines. The team is expected to understand the client’s requirements, objectives and long-term vision, and execute a short and long-term joint business plan.

At the same time, while corporates are available and eager to introduce solutions for collaborative finance services, they are not prepared to do so at the cost of performing a reengineering exercise. Therefore, any processes currently performed by the company must be left untouched.

This means that banks need to be familiar with the transactions and trades in the physical supply chain in order to provide good FSC services. The reach and on-the-ground presence of the global banks overseas, as well as long-standing client relationships, can help banks become active players.

DEVELOPING THE TECHNOLOGY

Technology firms are investing heavily in solutions that leverage practices from supply chain management to offer platforms for payment reconciliations, buyer and seller integration portals, straight-through processing, EIPP, e-invoicing, cash and trade management automation, and open accounting features.

However, true collaborative finance services are still more of a destination. They aim to bundle a bank’s financial products into more holistic and end-to-end services to support of the globalised and integrated supply chain strategies of their clients. Banks need to structure their product teams into more solution-oriented task forces with an industry background and a flexible attitude to operate in a completely new environment.

Education and coaching are the keywords to change the paradigm. The concept of collaboration goes beyond the solutions a bank can deliver. To support a supply chain on an end-to-end basis, multiple solution providers have to be engaged in proportion to the length and complexity of the supply chain.

Regardless of a bank’s geographic reach and balance sheet, it may not have the credit capacity or risk appetite to finance the extremities of the supply chain, and will engage ‘partner’ banks.

Those banks will need information and/or technical integration with the lead bank in order to effectively provide services which require a collaborative rather than a competitive approach. In other situations, those same banks may be competitors.

Technology will provide solutions that ensure ease of use, integration with existing back office ERPs at almost zero footprints and workflow management systems that match financial solutions to the business processes of the corporate client.

For the full benefits of FSC and SCF to be seen, banks need to provide solutions to their clients in a collaborative and knowledgeable manner. Those that succeed will see great advantage in the operations of their own business and that of their corporate clients.