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Global Trade Applications in Global Credit Crunch - Part I

Written By: Predrag Jakovljevic
Published On: December 19 2008

I have done blog posts lately on how some supply chain management (SCM) applications could fare in a down economy. One was about pricing optimization solutions while the other one was about how sourcing and procurement can help enterprises in a down economy. But in the meantime the global credit crunch has dawned with a vengeance.

This has not only promoted the economic downturn and recession into possible prospects of a depression, but has also recently had economics and/or political pundits ranting and raving all over the cable news, pro or contra the governments’ rescue (or bailout) measures (the two terms have been used depending on how someone views those state intervention measures). While I personally was not particularly in favor of rescuing via Troubled Assets Relief Program (TARP) those Wall Street crooks and inept misfits (and I’ve never been fond of the $20 martini drinks and $40 valet parking prices in New York City), it is difficult to neglect the other side that needs help.

Namely, it was appalling to watch the politicians’ inability to initially explain the true burning issue: the financial market's unavailability of the short-term lines of credits that companies use regularly to make payroll, procure stuff, keep inventory, etc.

It is easy to beat up on government interventions and shout the paranoia of socialism, but most of these “anti-socialist” individuals and companies ironically live on borrowed money (i.e., credit lines, mortgage loans, bridge financing). Ordinary people don't understand that with all that "economic lubricant" now being all but dried up, their lives may likely be very negatively impacted, and quite soon. One small example: if a utility doesn't have access to credit markets to pay its workers, these workers will not come to work, the utility will shut down, and there will be no power in our homes, etc.

Meet Joe Black: Global Credit Crunch (or Cash is King)

This gloomy scenario is exactly what the politicians and "experts" have failed to explain from the very beginning. If grocery stores don't have access to short-term credit to buy goods to stock shelves, there is no food; if farmers don’t have credit to buy seeds and fertilizers, there will be no crops, and so on and so forth.

Almost every industry that common folks use every day is tied into this short-term credit market. And it was (or still is) all but dried up. Even back in July, Jason Busch’s Spend Matters blog post noted that as banks were reducing credit lines and refusing new loans in certain industries, business credit was drying up, especially for small and medium-sized suppliers.

If this predicament doesn't recover soon, watch how many things might start falling apart, and it would take many more months (if not years) to fix them. Yet, according to Spend Matters’ much more recent blog post, the credit markets have been so challenging these past several weeks, that it has been all but impossible for companies debating a bankruptcy filing to even obtain the often necessary debtor-in-possession (DIP) financing to manage the costs for "lawyers, layoffs and other restructuring necessary for a company's rebirth." Having recently seen a handful of credit lines taken away from completely credit-worthy businesses and individuals, Busch even thought it prudent to author another Spend Matters blog post on the credit topic offering up some nuggets of practical advice for embattled organizations.

The situation is so dire that another recent blog post of his talks about the strange practice of factoring, where a lender might, say, "give a borrower outright 80 cents on the dollar for the company's accounts receivable (A/R)."  Can this be a good option for businesses like manufacturers that are owed a lot of money by customers and that have no better lending option right now? Busch opines that a better option, at least for suppliers working with more sophisticated buying organizations, is to take advantage of dynamic discounting and supply chain finance programs that offer more attractive and flexible interest rate options.

Along similar lines of desperate times calling for desperate measures is the blog post on Ariba’s just-minted partnership with The Receivables Exchange. The exchange lets suppliers sell receivables to a variety of buyers, including hedge funds and asset-based lenders. This new offering provides Ariba suppliers for the first time with the ability to initiate the sale of receivables through the Ariba Supplier Network, whereas previously such activity had to be initiated by buyers.

That times are risky for everyone might indicate the recent Supply Excellence blog post.  It says clearly that:
“…because a unique characteristic of the current credit crisis is that small and mid-size suppliers who are otherwise very healthy, fiscally responsible and profitable are at risk due simply to cash flow issues, not their underlying business models…

...There are many aspects of the credit crisis for which Buyers need to have a plan. Not the least of which is their supplier’s elevated cash flow risks, and thus their ability to support a buyers ongoing operations. More than ever, Buyer/Supplier fortunes are tied together, and the risks to a supplier’s cash flow are direct risks to buyers supply chains.”

Global Sourcing and Spend Management Solutions Can Obviously Help, in Part

However, even if there are some indications of the credit crunch easing a bit due to the international federal reserve authorities’ measures, and even if the cogs and wheels of the global economy are being again lubricated, there is still the problem of the inevitable global recession. Given that what every company sources and procures is the first low-hanging fruit for cost-cutting measures (for companies to better use working capital and free up cash), sourcing and spend management application providers might benefit from these difficult times.

To that end, in a good Supply Excellence blog post, British Airways’ chief executive officer (CEO) provides a sound “flight plan” for using spend management to navigate the current economic storm, while Ariba has a relevant white paper entitled “Strategies for High-Yield Working Capital in Today's Economic Environment.”

According to Spend Matters, suppliers need (and want) cash faster in today's market, and they're willing to give up double or triple digit basis points to get it. But perhaps more important, the blog post is pointing out the need for EIPP (electronic invoice payment presentment) solutions from Ariba, PrimeRevenue, Basware, JPMorgan Xign, etc., which go beyond simple invoice automation and disbursement management.

Drew Hofler, the senior manager responsible for Ariba’s Financial Solutions suite of products opines in the Supply Excellence blog post that
“...there are lots of cost pressures on businesses right now, but at least in the area of cash-flow and credit costs, by utilizing third-party financing buyers have a solid tool to lower costs in their supply chains. And I’d say lowering costs beats raising prices…especially when it gives you a competitive advantage in challenging economic times.”

Indeed, I would concur that applications that do the value-add stuff around spend management and supplier performance (scorecards, metrics, etc.) would still remain very core today. Companies should only use their best suppliers when exports/imports come down, to make sure they reward their key partners and keep them in the fold for when the good times come back. Busch advises in his blog post:
“…no quick-fix cash freeing efforts (such as Dynamic Payables Discounting or third-party financing) should be replacements for supplier development programs, which help suppliers free-up working capital on a permanent basis. If you're worried about your suppliers ability to survive the credit crunch, do yourself a favor and tier your suppliers and consider supplier development teams for those which fall into the more strategic buckets (but are most at risk). Lean and Six Sigma programs can do wonders to cut the working capital requirements for suppliers and to free them from mortgaging the future of their business.”

And yet, when it comes to monitoring their entire supply base (not to mention their suppliers' suppliers) in the areas of financial, operational and compliance risk, performance, diversity, and other areas, according to Busch, many interviewed companies will likely come up short. In other words, these inadequacies present lots of room for improvement.

Outside the procurement and supplier side, another “quick win” would be an inventory assessment, which in less than 30 days would allow a company to tune its safety stocks and inventory mix, picking up extra margin on underserved items and extra cash on overstocked items. Freeing up working capital and cash by optimizing the inventory mix is important for companies facing declining profitability, and especially important for leveraged companies who depend on debt, which has recently become scarce and more expensive.

What About Global Trade Management (GTM) Applications?

But what I am aiming at in this blog series are the prospects of global trade management (GTM) applications providers. In fact, in the early and mid-2000s, in the wake of the onset of the global war on terror and due to low-cost-country sourcing, GTM applications were seen as having a rosy prospect. These applications were to help enterprises deal with total landed cost calculations, export/import tariffs calculations, making sure that rogue countries and companies are not involved in their business, etc.

The expected boom for these solutions has not yet happened in earnest, and the earlier TEC article entitled “Global Trade Management Software Vendors Under-Perform, But Were Predictions Overly Optimistic?” provides a good analysis and explanations why not. Still, a few leading vendors in the space have had decent times in this decade.

The analysis of what will happen to GTM applications in light of the current global malaise will be the topic of Part II. In the meantime, what are your views, comments, opinions, etc. about the current economic climate in your region? What are your best practices for sourcing, spend management, and/or global trade, as well as experiences with particular applications?
 
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