Enhancing supply chain finance
How technology is transforming cost and working capital solutions
Special Counsel, Clayton Utz
Group Treasurer, Coca-Cola Amatil
General Manager, Treasury, CIMIC
Director, Innovation & Digital Solutions and Head of Blockchain Services Australia, KPMG
Managing Director, Head of Corporate & Institutional Banking, Oceania, MUFG
Director, International Trade, PWC
Supply Chain Finance Consultant
Editor-in-Chief, The Asset
Since the global financial crisis (GFC) just over a decade ago, supply chain finance has slowly evolved from a banking product to a comprehensive and holistic solution supporting not only banking clients but also clients’ suppliers.
For corporate treasurers, deploying their own supply chain finance solution has been a game changer, enabling them to unlock working capital, strengthen their balance sheet and reduce debt.
This financing exercise was particularly important for Keith Allan, group treasurer at Coca-Cola Amatil, who set up his first supply chain finance programme shortly after the financial crisis. “We were in an environment where liquidity was potentially being withdrawn from some of our suppliers. In the post-GFC world there is a lot more awareness over liquidity,” says Allan during the recent Supply Chain Finance Roundtable organized by The Asset and sponsored exclusively by MUFG Bank.
The increasing need for working capital solutions has prompted a number of banks to see the banking business through a new lens.
“Banks historically have looked at the capital structure of a company and focused more on long-term debt. Over the last 10-15 years short-term working capital has been a core focus for banks,” says Drew Riethmuller, managing director, head of corporate & institutional banking, Oceania at MUFG.
“Short-term financing actually helps us from a return perspective. It helps a bank’s balance sheet to have a blend of different types of lending products,” he says.
Designing a supply chain finance plan is already a challenge. Getting everyone on board for its implementation can even be tougher.
Michael Azzi, general manager at global contractor CIMIC Group’s treasury admits that “there were internal challenges in terms of the culture to make it work”. Azzi explains that the key is “to get the whole business involved where they see it as an important thing not only for treasury, but for the benefit of the whole business”.
Indeed, supply chain finance can work wonders for working capital management and the benefits can also extend to a company’s suppliers. However, education on supply chain finance is paramount for the programme to succeed.
“A lot of suppliers don’t understand it. A lot of them were sceptical, so it took a bit of time to educate them and improve the take-up of the programme,” Azzi says. “It’s quite taxing on resources when you’re trying to negotiate with suppliers and give them an understanding on this.”
Adoption has been slow in some cases because suppliers misunderstood how these funding solutions work. They have associated supply chain finance with some failed debt factoring exercise. Debt factoring is a type of debtor finance where a business sells its accounts receivable (i.e. invoices) to a third party at a discount.
“Particularly in the receivable financing side it has associations with debt factoring. Historically debt factoring has not been seen as something a company wanted to associate itself with. It was a last resort when you were looking for quick cash,” says Christine Hilder, special counsel at Sydney-headquartered law firm Clayton Utz.
It was only recently that this mindset has changed, she adds.
“Supply chain finance has become a lot more sophisticated. People are now cherry-picking receivables and obligors. It allows them to get liquidity to a certain level. It also allows them to control how much of that they can actually do,” she notes.
To get the support of suppliers, corporate treasury teams are actively engaging them into the programme.
It helps that treasurers have an understanding of their suxppliers’ current financing arrangement that could overlap with existing supply chain solutions.
Having a dedicated person committed to onboarding suppliers could also aid in the success of the programme.
“You need to be clear what education piece you are putting forward to these suppliers. You need someone on the inside who is prepared to interact with these suppliers and really get them onboard. You need someone to drive that process. That is actually when it is much more successful,” says Hilder.
Advances in technology are helping treasury teams get their jobs done better. In getting the support of suppliers, having a digital platform to better communicate with them could be key.
Coca-Cola Amatil believes this could address a number of suppliers’ concerns.
“We want a portal that the suppliers can log into and they can see when they are going to get paid. They can see when their invoices have been received. They can upload their invoices so that we can become more efficient in dealing with them,” says Allan.
At the moment “it’s still quite manual and clunky” as far as channels for interactions go with suppliers, according to Azzi.
He hopes that CIMIC’s supply chain finance programme will eventually become an integrated process.
“From the time you raise it to the purchase orders, to getting the claims from the suppliers, to approving claims – we want it to be fully integrated,” he adds.
For now, achieving a seamless supply chain finance programme seems near impossible. But new solutions like blockchain technology offers hope.
“Blockchain solves the double spend problem. That creates trust in supply chain where there is a lack of trust – that provides an important piece to the overall puzzle. It (blockchain) is fundamentally a part of the solution, but it does require other technology components,” explains Luke Branson, director for international trade at PwC.
Blockchain, which in recent years has been gaining attention for its ability to digitally verify transactions, could be a useful tool in markets like Australia where supply chain and trade information is housed in different entities. A single unified network on a blockchain would ideally make it easier to share supply chain information and in turn make it easier to set up a supply chain finance solution.
Blockchain and similar technologies are at the centre of experiments and partnerships in the finance world with fintechs as major proponents. However, corporates don’t see much upside to partnering with fintechs.
“The challenge for us with fintechs is the implementation; the time it takes to commit to it,” explains Azzi. “The last thing you want to do is commit to implementing a system and then the fintech isn’t around in two months’ time because they couldn’t do their next round of funding,” he says.
Laszlo Peter director of innovation and digital solutions at KPMG believes it is fintechs’ lack of track record that is holding some corporates back from using new supply chain finance management systems.
“Very few organizations will go through the pain again of implementing a multi-million dollar in-house system and convincing their suppliers to connect to it in hub-and-spoke. Once you implement it you are in a whole world of pain of maintaining it,” says Peter who is also KPMG head of blockchain services in Australia.
In truth, treasurers feel more comfortable using a new platform or system if a bank or a formal financial institution had collaborated with it beforehand.
MUFG Bank, for instance, worked with Singaporean fintech NTT DATA last year to facilitate the digitalization of cross-border trade finance and data exchange between its operations in Japan and Singapore. The experience has worked well for the fintech partner.
“It’s not just about finance; not just about technology. The banks obviously have the balance sheet. A lot of the fintech players have the technology though they don’t have the liquidity to support and scale the programme that it can grow,” says Ryan Fernandes, a supply chain finance consultant.
Beyond seamless treasury plans, technology is seen as having a positive and profound impact on supply chain finance.
Panellists at the roundtable agree that macro challenges like the US-China trade war will disrupt global supply chain. But going forward technology will be its biggest disruptor. New solutions will offer greater visibility on finance and revolutionize cost and capital management.
“The technology that we have seen happen in the last two to three years is going to keep accelerating. That’s going to have a big impact for supply chain finance,” says Riethmuller.