New Data Triggers for International Supply Chain Finance
Written By: David Gustin
Published On: July 2005
Global Business recently interviewed over one hundred major retailers and manufacturers, global transportation and logistic companies, financial institutions, and global trade vendors to assess existing and emerging trade data and document solutions. As part of that exercise,
we discussed, with each segment, their views on international supply chain finance.
There are four transformative forces driving corporate global supply chains:
- Security and regulatory mandates, and
Our discussions with corporation after corporation indicated that many have drastically changed their global supply chain models in a relatively short time. The degree of international sourcing or third-party manufacturing in most industries is forcing the redesign of processes, partner relationships, systems, etc. to improve cycle time, delivered costs, order fill rates, and on time performance. In virtually every industry, companies operate their supply chains on a global basis to compete.
By using arm's length contracts to source product, engineer, manufacture components, or sub-assemble products, companies have now put themselves in a position to be much more concerned about managing inventory and working capital.
The Forces at Work
We see many driving forces behind the opportunities in international supply chain finance, but will focus on three dominant ones:
Force #1: Companies are rapidly increasing their planned direct imports and global procurements over the next five years.
This has major balance sheet implications, as many companies are accruing in-transit inventory at some point overseas. In the past, buying domestic enabled companies to smooth out demand (their domestic suppliers held extra inventory at a cost, in order to mask the difficulties of forecasting and bad behavior on both sides). Now companies must incur additional lead times, transportation transit times, and associated bottlenecks. This can add forty-five days or more to the order. Additionally, companies are using letters of credit (LC) less and less to finance these imports.
Force #2: The number of consumer brand manufacturers using third parties to manufacture outside the US has exploded.
The automotive and high tech sectors have been most progressive in sharing information (designs, forecasts, etc.) with contract manufacturers, and other industries are following suit, given the aforementioned transformative trends. In some cases, brand companies no longer pay tier one and two suppliers directly. Instead, the consolidating manager or third party logistics (3PL) providers manage and pay these suppliers, adding layers and additional time in the supply chain.
Force #3: Internet-based technologies enable the real-time exchange of information about product data between trading partners.
Determining how much banks would lend against your receivables was once a manual effort; now technology has changed the landscape. Banks used to look at boxes of aging reports to prepare their borrowing-based reports, and then credit analysts would take these reports and eliminate ineligibles to come up with the lending amount. Today the process can be automated, so the borrower can capture all key receivable and payment information to create all these reports on the fly.
In addition to these main forces, various others are at work, and they are demanding a new way for banks and logistic providers to work together.
Supply Chain Finance Trigger Points
In our research, we found the market is in the early stages of migrating to data triggered finance. Our study found six trigger points in international supply chain finance, defined as lending to a party based on a relationship to another party.
(click here for larger verison)
A brief discussion of each trigger follows.
The Six Triggers
Trigger #1: Purchase Order Issuance
While suppliers desire more access to offshore funds, traditionally pre-shipment finance has been seen as a pure supplier responsibility and in the domain of local Asian banks. There are some banks that are playing in this space using buyer master purchase orders for working capital facilities for key suppliers.
Trigger #2: Work in Progress Payments
We found a small number of large (usually regional or global) banks with buyer support programs and master purchase order contracts with medium to large tier one and two suppliers who have performed well and contract over many years. These suppliers are critical to the buyer in product and design and are therefore dedicated and usually a part of a long-term relationship. For example, Ford will identify suppliers and provide performance history to the bank to assist in provision of pre-shipment facilities.
Trigger #3: Vendor Managed Inventory
Many high tech manufacturers in the made-to-order business are using vendor managed inventory programs with overseas suppliers to provide a more cost-effective and efficient flow to inventory management. Lead logistic providers and major third-party logistics providers are behind these programs, and as a result, there will be a growing interest in trigger finance and payment when inventory is pulled from a warehouse.
Trigger #4: Inventory In-transit Financing
There are a select few vendors that are going beyond the GT Nexus, Inttra, and Tradebeam supply chain visibility models to enable international in-transit inventory to be funded on a non-recourse basis to emerging market suppliers.
Trigger 5: Proof of Delivery via Forwarder Cargo Receipt and Other Documents
In our survey group, we did not find any banks involved in receiving electronic forwarder cargo receipt (FCR) or inspection certificates to trigger finance. We believe that to date, traditional collection products emulate having FCRs and other documents, such as certificate of origin (CofO), inspection certificates, etc. But as more cargo is exported with electronic messages such as FCRs and advanced shipment notices, then there will be more opportunities to develop liquidity off these messages. This trigger remains to be explored and developed.
Trigger #6: Buyer Approved Invoices
There is both great interest and a high degree of market confusion about the buyer-supported, supplier early payment model. These programs are not without single buyer concentration, accounting, and loss of flexibility risk to the buyers. These challenges must be overcome before a more rapid acceptance of the program.
Entering a Transition Period
We are entering a period where banks and finance houses have major opportunities on the "supplier side". We see that most solutions are developing from the buy side as a point of lower risk.
Our survey on supply chain finance showed 63 percent of companies strongly agreed or agree with the following statement:
"We are interested in helping our overseas vendors with supply chain finance solutions and recognize their overhead costs come back to us in freight on board (FOB) prices, and I am willing to work with my banking group to find solutions here"
Thus there is strong market support for international supply chain finance solutions based on the aforementioned figure.
From our discussions, no bank, finance house, or logistics company is doing all six forms of trigger point international finance. The trigger points that generate the most cross-industry interest are buyer-supported vendor early payments that trigger the approved invoice, and pre-export financing that trigger an established purchase order.
To date, most banks focus on major corporate buyers and help with finance for a few key international suppliers to mitigate supply chain costs, but as the market moves away from documentary-based trade, such as LC and documentary collections, opportunities exist to help a broader number of trading partners.
- Banks need data triggers to be smarter about payment and finance, and that means figuring out how to work with global transportation and logistics players.
- Banks will need to get smart about industry sectors and the global flow of suppliers, the tiered nature of specific supply chains, etc. The old "formula of wallet", where banks measure market share by calculating a percentage of their corporate client's account, does not make as much sense in this global supply chain world.
- New credit and business policies will need to be put in place to deal with this new world. The opportunity for open accounts is now a supply chain finance structure. It cannot be ignored and traditional products will not suffice. The time to start making the transition is now.
About the Author
David Gustin is managing partner of Global Business Intelligence, which specializes in international trade research, and works with importers, exporters, banks, insurers, transportation and logistic companies, and global trade vendors interested in international supply chain issues.
Their most recent study, Beyond Counting Kilos and Boxes, was completed in spring 2005.