Cooperative Supply Chains - Jan Dirk van Beusekom, Fortis

The financial supply chain faces major challenges, not least of which is the complexity of integrated solutions aimed at resolving this. Jan Dirk van Beusekom, Global Head of Financial Supply Chain for Fortis, says ideally all aspects of the supply chain must be involved on a common platform.

While most companies have faced relatively few problems creating a physical supply chain, their efforts to establish a true financial supply chain (FSC) have lagged behind. Yet it is essential to develop an efficient FSC that can optimise working capital and financial flows in an increasingly global trading environment.

Part of the issue is that it has not been entirely clear how to best achieve this. Banks and non-financial institutions have produced a mix of answers that have only tackled parts of the challenge so far.

Fortis is currently developing its comprehensive solution, which will offer CFOs a genuine opportunity to take control of their working capital and cash management.

IMPROVING THE FINANCIAL STRAND

When Fortis looked at the FSC, it realised that while the ‘chain’ concept described the physical logistics well, it was something of a misnomer for the finance function. It suggested a straight through process, when the reality is more the intertwining of three key strands: logistics, finance and, crucially, information. As with any decent rope, the strength is in the weaving of the threads rather than their individual operating capability.

Managing information flows, and the documents and data that support them – such as purchase orders, advanced shipping notices, invoices and payment approvals – is paramount. In recent years, the increasing convergence of physical and financial supply chains around electronic information flows has been a key feature. This information has been used by buyers to reduce costs, typically at the expense of the supplier or the service provider.

However, buyers are beginning to appreciate the view shared by Fortis that sustainable performance improvement can be achieved by concentrating more on driving costs and inefficiencies out of the chain rather than pushing costs down the chain onto weaker parties.

While optimisation of the physical supply chain has largely been achieved, further savings are proving harder to realise, hence the emergence of various FSC solutions. Though it poses technical challenges, especially for suppliers with less adequate ERP systems, the most obvious part of the solution is the dematerialisation and automation of the supply chain.

Buyers and suppliers and banks share a common data exchange platform. Information retrieved from this platform can help reduce the cost of financing in the entire supply chain because it gives access to the information flows of all its participants.

TARGETING THE LEADER

To achieve this end, Fortis is targeting the supply chain leaders, initially in Europe. Its aim is to tear down the barriers between the different supply chain elements.

Fortis begins by sitting together with finance professionals, procurement managers and commercial directors to realign opposing priorities. Fortis analyses each part of the supply chain, looking at country, financial strength, reliability and communications. It then considers the type of goods, ordering and dispatch processes, ownership and insurance, the average day’s inventory outstanding per supplier, transport methods and quality checking.

Next, it examines purchase and sales, such as payment methods, early payment discounts, days purchase outstanding (DPO) and day’s sales outstanding (DSO), the currency and FX hedges, how the company’s processes are currently financed.

Finally, but most importantly, Fortis looks at the information flow provided by both suppliers and logistics companies, including how orders are handled, invoices managed, inventory reported and transport tracked. It also details the ERP systems used by the supply chain leader downwards, the media used for exchanging information and the formats employed.

By analysing all these aspects of the supply chain, Fortis is able to see where it can add value to buyers and involve the suppliers in the chain. The premise is simple: Fortis’s commercial aim is relationship banking and capturing flows along the chain. Suppliers can possibly reduce their cost of funds and obtain more information on their flows of goods and cash because participants will be able to see the information on orders and fund accordingly.

For Fortis’s large base of corporate customers, joining an FSC solution could most probably reduce costs. Fortis also believes that the greater flow of business from new customers in the chain will allow it to recoup that income. It also accepts that while its FSC model works most efficiently for everyone if all parties in the FSC work with Fortis, its solution will also include a multibank layer.

RELATIONSHIP BANKING IS NOT OLD-FASHIONED

The banking industry has tended in recent years to concentrate on processes because relationships seem old fashioned. Fortis assumes that is why its competitors have focused only on discrete parts of the supply chain. There are a lot of accounts receivable offers, some banks have platforms for open account trading and one or two have accounts payable programmes.

However, Fortis is resisting this trend away from relationship banking, which in payments and receivables has seen the partnering of many banks. Rather than seeking exclusive relationships, Fortis has expanded its own commercial and corporate banking presence throughout Europe, most recently in Switzerland, the Czech Republic, Greece and Scandinavia.

It is also present in six Chinese provinces and will be expanding its presence there and throughout Asia to meet the needs created by low-cost-country sourcing (LCCS) trends. Recently Pin An, the second largest life insurance company in China was welcomed as a shareholder and Louis Cheung Chi Yan, the Executive Director Group President of Pin An, was appointed as a Board Member of Fortis, showing Fortis dedication to the region.

Fortis believes that by working with suppliers and merging their physical supply chain information with the FSC, it can optimise working capital, lower product unit costs, extend DPO and reduce the supply base risk.

In addition, understanding an LCCS’s supplier cost of funds and access to capital can help supply chain leaders construct payment and funding options to further reduce unit costs while being viewed as the preferred buyer.

This is a key issue. Fortis’s research shows that many companies have not integrated their FSC as an integral part of their LCCS strategy. The lost value is therefore embedded in higher unit costs for buyers.

REWORKING THE FINANCIAL SUPPLY CHAIN

This is not a marketing ploy. Fortis has been radically reconfigured to produce its FSC solution, which sharply differentiates it from its competitors. The reorganisation has enjoyed the support of top management. Fortis has brought together numerous functions, including factoring, leasing, trade finance, accounts receivable and payable and trust, into a single integrated operation – Special Financial Services of which Fortis Financial Supply Chain and Cash Management is an integral part.

Fortis has integrated its established products, such as e-invoicing and its SEPA processing, into these processes. Fortis was one of the first three banks to confirm its readiness for SEPA transactions. While these functions could all work together on the FSC, they are also available separately. Fortis is among Europe’s top five factoring providers and one of the top ten in international leasing.

The FSC data exchange platform will plug into its participants’ ERP systems. It is essentially an overlay for its participants’ existing IT and there is no need for any radical changes. For any members of a supply chain whose existing systems are inadequate, IT consultancy and assistance to upgrade can be provided for.

While part of an efficient FSC’s power rests in the dematerialisation of document flows, Fortis believes that its competitors have made the mistake of dematerialising customer support as well. Fortis has long operated a system of global relationship managers as a single point of contact for all its banking products. This also applies to its FSC customers. There are dedicated relationship managers who will be there from the implementation of the FSC right through to its day-to-day operations.

Fortis does not think that it is reinventing the wheel with its Financial Supply Chain and Cash Management product because it does not believe an adequate FSC wheel has yet been built. For Fortis, future value can only be achieved by a cooperative relationship between the links in the supply chain – from the leader to the end.

By attaching itself to every link in that chain, Fortis can finesse the increased flow of accurate data to lower the costs of funding and essential trade-related services.