Supplying Global Trade

Manufacturers are persistently migrating overseas to slash direct costs. By becoming, to all intents and purposes, importers, they have to deal with the intrinsically riskier nature of international trade. For this reason, companies along the supply chain are striving to become more collaborative.

They understand they must share forecasts and attempt to operate in a highly integrated fashion so that the end-customer will perceive the entire supply chain as fully integrated. This means that the respective financial chains must be equally integrated and shared. Cash flow and fund management is even more relevant in an environment that experiences low levels of trust.

FINANCE KEY TO SUPPLY CHAIN TRANSACTIONS

New automation solutions reduce processing costs significantly by offering enhanced visibility and less uncertainty in accounts receivable and accounts payable, with a significant reduction in working capital needs. Furthermore, they also accelerate the process of procuring goods, accelerating payment and invoice reconciliation.

There is, however, a major constraint that concerns supply chain professionals: how to link supply chain performance to financial decisions. As confirmed by analyst Adrian Gonzalez at ARC, "the flow of money and the role of finance are playing a greater role in logistics and supply chain management, especially in global trade".

Unlike in domestic trade, which is very much a world of sending electronic purchase orders and receiving electronic ship notices and invoices, in the global trade world once a product is ordered there are a number of points that can lead to timing problems.

A supply chain is not truly optimised if, despite electronic ordering taking seconds and goods being delivered next day, money is only moved after months of reconciliations and clearances.

THE ROLE OF BANKS

Banks must represent a trusted party that offers cost-effective access to an extensive network and comprehensive service offering that supports the timely flow of accurate payments between all players in the chain. That means paying attention to the working capital requirements of overseas suppliers, not just the importers. Working capital finance helps smaller exporters buy materials, or fabricate their products.

Currently, the financial instrument of the letter of credit is the cornerstone in managing the financial flows associated to bringing inventory in from overseas. However, in the past few years both banks and non-banks have been working to expand new solutions for importers, looking for a much more innovative way of getting back into financing trade.

The big banks, such as JPMorgan Chase and Wells Fargo HSBC Trade Bank, which run huge processing centres in Hong Kong and neighbouring countries, are moving to a new strategy.

Their electronic systems convert purchase orders to letters of credit or open account automatically, while they use their presence on the ground in East Asia to finance the local suppliers.

Then there’s UPS, the transport logistics player, which is increasingly visible in trade finance. UPS Capital, its finance arm, bought a bank in 2002, issues its own letters of credit, and merges the physical and financial supply chains.

TECHNOLOGY ONLY TAKES YOU SO FAR

Although open account eliminates the processing and service fees incurred under traditional trade instruments, it creates an administrative burden. Companies must tackle the documentary processing activities, which were previously handled by banks under letters of credit.

This often entails taking data from multiple sources, consolidating it and matching commercial invoices / bills of lading against purchase orders. This manual process is both time-consuming and subject to error. Technology can enhance this process through automation and remove the documentary risk by ensuring that the invoice conforms to the purchase order.

However, looking for a technical solution through a common meta-format for payment settlements has proved insufficient – as occurs with any attempt to replace good practices of business process analysis and revision with pure purchase of technology – resulting in endless debates lasting years.

GET THE BASICS RIGHT FIRST

As Jürgen Lutz, senior cash management specialist at HypoVereinsbank comments: "The first, most simple and inevitable step in the payment chain – offering a standardised, fail-safe transfer channel, independent of banks – has been neglected. Banks have invested large amounts in the ongoing development of better electronic banking products, and then used these projects to set themselves apart from their competitors."

Upon closer inspection, however, electronic banking software is merely an interface to close the integration gap between credit and debit payment streams within the company and the bank’s processes. It is not – to quote Lutz – ‘a decisive customer link’.

The big banks are trying to narrow the gap on several fronts. One such front is SWIFTNet. Large international banks with a significant European presence (ABN AMRO, BNP Paribas, Deutsche Bank, The Royal Bank of Scotland, San Paolo IMI) have recently signed an agreement to pilot the SWIFTNet Trade Services Utility (TSU) solution.

SWIFTNet TSU is a central matching and workflow engine that uses industry standards and the SWIFTNet messaging network to enable banks to provide enhanced supply chain services.

PLANNING THE SUPPLY CHAIN

The CFO and supply chain managers must work together to enrich trade process elements with information, best practices and performance metrics on flows of funds.

If companies seek solutions based on industry standards and deployed by independent associations and consortia, a great deal of value can derive from exploiting the principles and guidelines of the Supply Chain Council’s Supply Chain Operations Reference (SCOR) model.

The main ‘plan, source, make, deliver and return’ process types traditionally focus on operational execution and performance. They include scheduling and sequencing, transforming materials and services, and moving products.

There are additional ‘enable’ process elements which are more geared towards preparing, maintaining, and managing information on which planning and execution processes rely. They can indeed provide the foundation of a SCOR-based trade platform.

UNITING PHYSICAL AND FINANCIAL

A new approach must grow upon the traditional practice of optimising a supply chain in terms of its physical logistics perspective.

What does it mean to design and plan a supply chain from a physical and financial perspective? How can the supply chain manager, in tight collaboration with the CFO, establish a correct balance between the two instances?

Bottom line: the supply chain transaction is not completed until the invoice is paid and taxes are recovered. Otherwise, all the good work in planning can die in transactional failure.