Global Supply Chain Finance
Encyclopedia
A global supply chain
refers to the network created among different worldwide companies producing, handling, and distributing specific goods and/or products.
Global supply-chain finance refers to the set of solutions available for financing specific goods and/or products as they move from origin to destination along the supply chain. It is related to a quickly growing use of a battery of technologies and financial business practices that allow for dynamic payables discounting
.
and offshore production, many US companies have experienced a reduction of capital
availability. In addition, the pressure faced by U.S. companies to improve cash flow
has resulted in increased pressure on their overseas suppliers. Specifically, non-US suppliers receive pressure in the form of extended payment terms or increased working capital
imposed on them by large US buyers. The general trend toward open account from letters of credit
has further contributed to the problem.
As a result, there is a need for global supply chain finance (GSCF) solutions. The market opportunity for a GSCF solution is significant. The total worldwide market for receivables management is US$1.3 trillion. Payables discounting and asset-based lending
add an additional US$100 billion and $340 billion, respectively . Only a small percentage of companies are currently using supply chain finance techniques, but more than half have plans or are investigating options to improve supply chain finance techniques.
While buyers are extending payment terms to their suppliers, the suppliers often have limited access to short-term financing and, therefore, a higher cost of money. This cost-shifting
to suppliers results in a financially unstable and higher-risk supply base. Overall, the benchmark report showed that companies should be pursuing three key areas of improvement: GSCF financing; GSCF technology; and GSCF visibility.
Best-in-class companies are more likely than their peers to have a cross-functional team
of purchasing, supply chain, and finance professionals managing their GSCF programs. PayStream Advisors, a Charlotte, NC
based consultancy has developed an Eight Point guideline how to build a Supply Chain Finance Program. Best-in-class companies also are achieving better performance, such as a 10-day advantage in their cash conversion cycles. In other words, these companies are unlocking the trapped value in the financial supply chain by implementing new GSCF techniques and taking advantage of third-party GSCF experts.
within a given buyer-supplier supply chain. It does this by aggregating, packaging, and utilizing various information generated during supply chain activities and marrying this information with the physical control of goods. The coupling of information and physical control enables lenders to mitigate financial risk
within the supply chain. The mitigation of risk allows more capital to be raised, capital to be accessed sooner or capital to be raised at lower rates.
The need to increase capital or inject capital into the supply chain more quickly is being caused by several factors: 1.) Market trends
with respect to the global supply chain have caused companies to demand an integrated approach/solution to physical and financial supply chain challenges: a.) Buyers are looking to optimize their balance sheet
by delaying inventory ownership. b.) Suppliers are looking to obtain funds earlier in the supply chain at favorable rates, given buyers’ desire to delay inventory ownership. c.) middle-market companies are looking to monetize non-US domiciled inventory to increase liquidity. d.) There is wide interest in integrated supply chain finance solutions. 2.) Globalization of the United States and Western Europe’s manufacturing bases has resulted in fewer domestic assets that can be leveraged to generate working capital. 3.) Most small and medium suppliers to US and European businesses are located in countries that lack well-developed capital market
s. Without access to efficient and cost-effective capital, production costs increase significantly or the suppliers go out of business. 4.) Letters of credit, a long-standing method of obtaining capital for suppliers in less developed countries
, are on the decline as large buyers are forcing suppliers to move to open account. 5.) There is a desire to ensure stability of capital as supply chains elongate. Another Asian financial crisis
(such as the one in 1997) would severely disrupt US buyers’ supply chains by making capital unavailable to their suppliers.
firms to join together to develop precise visibility tools that provide CFOs and global supply chain managers with the data they need and lenders with the collateral security required to provide capital. In fact, according to a November 2006 study conducted by the Aberdeen Group, large companies are four times more likely to be planning to spend over US$500,000 in supply chain finance technology over the next 18 months. Once a robust information-based system is established, trading partners, logistics companies, and banks need to be able to access the information quickly and efficiently.
The starting point for information about goods being transported must be the entity that is transporting the goods – the supply chain services provider, transportation company, and/or logistics partner. These are the entities that have the physical control of the goods while in the supply chain. Access to this information is a must from a demand planning perspective. Knowing where the goods are in transit, the financial services provider can more confidently extend financing at various milestones within the supply chain.
There is a critical role missing in this equation, however, and that is the supply chain finance “translator” – the entity that is experienced in both logistics/transportation and financial services. The translator is the subject matter expert, if you will, that can bring all entities to the table – transportation and logistics; banks; buyers; and sellers and speak the various languages and understand the needs of each party. In addition to participating in the financial transaction, the translator can help bridge the information divide between the physical and financial worlds, providing critical analysis about the information being collected from the supply chain.
The following explains this translator role:
or in-transit inventory. This results in increased liquidity to this class of borrower, 2.) Inventory finance – Enables companies that supply to large buyers to secure financing on inventory that they are required by buyers to hold. This results in an improvement in the net cash conversion cycle
for the buyer while providing the supplier with capital at a reduced rate. 3.) Receivables management services – Provides third-party outsourcing of receivables management and collections process. It also provides financing of those receivables and guarantees on the payment of those receivables. 4.) Payables discounting -Provides third-party outsourcing of the payables process and leverages a buyer’s credit quality to obtain favorable financing rates for suppliers. This results in lower cost of capital for the supplier, a portion of which can be passed on to the buyer. 5) Insurance
– Further mitigates trade risk through cargo, credit, and transaction dispute insurance.
Because of the complexities surrounding the sharing and transferring of data, the need to physically control the goods, and to maintain visibility throughout the fulfillment supply chain, transportation and logistics providers such as UPS [UPS Corporation] have unique capabilities to support and provide SCF services to global organizations due to their access to the shipping data and capabilities as a lender. In these unique situations, UPS as a translator can participate in the lending as well as collaborate with other lenders in helping to extract costs from the supply chain and ensure that the physical and financial supply chains are synchronized.
Traditionally, dynamic payables discounting
, the early payment of trade payables in advance of the invoice due date, has been only related to invoices that are already approved. Given these discounted payments are paid post-goods receipt and approval, they don't carry any transaction risk which is common in cross border trade
. Given the complexities of modern financing and payment techniques, invoicement including invoice automation and discount management initiatives need a framework to ensure that programs are approached on a strategic basis which bridges the supply chain, purchasing, accounts payable
and finance organizations.
Supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
refers to the network created among different worldwide companies producing, handling, and distributing specific goods and/or products.
Global supply-chain finance refers to the set of solutions available for financing specific goods and/or products as they move from origin to destination along the supply chain. It is related to a quickly growing use of a battery of technologies and financial business practices that allow for dynamic payables discounting
Dynamic Discounting
Dynamic payables discounting is a process which allows buyers and sellers of commercial goods and services to dynamically change the payment terms—such as net 30—to accelerated payment based on a sliding discount scale. Dynamic payables discounting is “dynamic” in one or more ways...
.
Overview
With the supply chain lengthening as a result of globalizationGlobalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
and offshore production, many US companies have experienced a reduction of capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
availability. In addition, the pressure faced by U.S. companies to improve cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
has resulted in increased pressure on their overseas suppliers. Specifically, non-US suppliers receive pressure in the form of extended payment terms or increased working capital
Working capital
Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
imposed on them by large US buyers. The general trend toward open account from letters of credit
Letter of credit
A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking....
has further contributed to the problem.
As a result, there is a need for global supply chain finance (GSCF) solutions. The market opportunity for a GSCF solution is significant. The total worldwide market for receivables management is US$1.3 trillion. Payables discounting and asset-based lending
Asset-based lending
In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to business and large...
add an additional US$100 billion and $340 billion, respectively . Only a small percentage of companies are currently using supply chain finance techniques, but more than half have plans or are investigating options to improve supply chain finance techniques.
While buyers are extending payment terms to their suppliers, the suppliers often have limited access to short-term financing and, therefore, a higher cost of money. This cost-shifting
Cost-shifting
Cost-shifting is either an economic situation where one group underpays for a service resulting another group overpaying for a service or where one group pays a smaller share of costs than before resulting in another group paying a larger share of costs than before...
to suppliers results in a financially unstable and higher-risk supply base. Overall, the benchmark report showed that companies should be pursuing three key areas of improvement: GSCF financing; GSCF technology; and GSCF visibility.
Best-in-class companies are more likely than their peers to have a cross-functional team
Cross-functional team
A cross-functional team is a group of people with different functional expertise working toward a common goal. It may include people from finance, marketing, operations, and human resources departments. Typically, it includes employees from all levels of an organization...
of purchasing, supply chain, and finance professionals managing their GSCF programs. PayStream Advisors, a Charlotte, NC
Charlotte, North Carolina
Charlotte is the largest city in the U.S. state of North Carolina and the seat of Mecklenburg County. In 2010, Charlotte's population according to the US Census Bureau was 731,424, making it the 17th largest city in the United States based on population. The Charlotte metropolitan area had a 2009...
based consultancy has developed an Eight Point guideline how to build a Supply Chain Finance Program. Best-in-class companies also are achieving better performance, such as a 10-day advantage in their cash conversion cycles. In other words, these companies are unlocking the trapped value in the financial supply chain by implementing new GSCF techniques and taking advantage of third-party GSCF experts.
Benefits of GSCF
The role of GSCF is to optimize both the availability and cost of capitalCost of capital
The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds , or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities"...
within a given buyer-supplier supply chain. It does this by aggregating, packaging, and utilizing various information generated during supply chain activities and marrying this information with the physical control of goods. The coupling of information and physical control enables lenders to mitigate financial risk
Financial risk
Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss...
within the supply chain. The mitigation of risk allows more capital to be raised, capital to be accessed sooner or capital to be raised at lower rates.
The need to increase capital or inject capital into the supply chain more quickly is being caused by several factors: 1.) Market trends
Market trends
A market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames...
with respect to the global supply chain have caused companies to demand an integrated approach/solution to physical and financial supply chain challenges: a.) Buyers are looking to optimize their balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
by delaying inventory ownership. b.) Suppliers are looking to obtain funds earlier in the supply chain at favorable rates, given buyers’ desire to delay inventory ownership. c.) middle-market companies are looking to monetize non-US domiciled inventory to increase liquidity. d.) There is wide interest in integrated supply chain finance solutions. 2.) Globalization of the United States and Western Europe’s manufacturing bases has resulted in fewer domestic assets that can be leveraged to generate working capital. 3.) Most small and medium suppliers to US and European businesses are located in countries that lack well-developed capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
s. Without access to efficient and cost-effective capital, production costs increase significantly or the suppliers go out of business. 4.) Letters of credit, a long-standing method of obtaining capital for suppliers in less developed countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
, are on the decline as large buyers are forcing suppliers to move to open account. 5.) There is a desire to ensure stability of capital as supply chains elongate. Another Asian financial crisis
East Asian financial crisis
The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion....
(such as the one in 1997) would severely disrupt US buyers’ supply chains by making capital unavailable to their suppliers.
The role of the GSCF “translator”
Physical and informational control are the keys to a GSCF solution. There is a need for logistics providers and financial servicesFinancial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
firms to join together to develop precise visibility tools that provide CFOs and global supply chain managers with the data they need and lenders with the collateral security required to provide capital. In fact, according to a November 2006 study conducted by the Aberdeen Group, large companies are four times more likely to be planning to spend over US$500,000 in supply chain finance technology over the next 18 months. Once a robust information-based system is established, trading partners, logistics companies, and banks need to be able to access the information quickly and efficiently.
The starting point for information about goods being transported must be the entity that is transporting the goods – the supply chain services provider, transportation company, and/or logistics partner. These are the entities that have the physical control of the goods while in the supply chain. Access to this information is a must from a demand planning perspective. Knowing where the goods are in transit, the financial services provider can more confidently extend financing at various milestones within the supply chain.
There is a critical role missing in this equation, however, and that is the supply chain finance “translator” – the entity that is experienced in both logistics/transportation and financial services. The translator is the subject matter expert, if you will, that can bring all entities to the table – transportation and logistics; banks; buyers; and sellers and speak the various languages and understand the needs of each party. In addition to participating in the financial transaction, the translator can help bridge the information divide between the physical and financial worlds, providing critical analysis about the information being collected from the supply chain.
The following explains this translator role:
| Activity | Logistics/Transportation provider | GSCF translator | Financial services provider |
|---|---|---|---|
| Goods | Deliver transportation, logistics, and supply chain services – i.e., move the goods. | N/A | N/A |
| Information | Collect and provide information about goods disposition to customer, translator, and financial services provider. | Verify data transfer; aggregate, analyze, manipulate, and provide data; authorize financial transactions. | Receive data from translator in order to authorize financial transactions. |
| Funds | N/A | Participate in funding for transaction and assume a proportionate share of the risk. | Participate in funding for transaction and assume a proportionate share of the risk. |
| Sales and marketing | Identify prospects, participate in sales calls, stem commoditization. | Identify prospects, market GSCF, participate in sales calls, identify financial risks, assist in structuring credit solutions. | Identify prospects, participate in sales calls, assist in structuring credit solutions. |
| Financial benefits | Transportation revenue, deeper relationship with customer and translator. | Interest income, fee income, deeper relationship with customer, financial services providers, and logistics/transportation provider. | Interest income, deeper relationship with customer, translator, and logistics/transportation provider. |
Global supply-chain finance solution set
Some of the product solutions that could be sold under the banner of Global Supply Chain Financing include, but are not limited to: 1.) Global asset-based lending (GABL) – Enables middle market companies to monetize off-shoreOffshore investment
Offshore investment is the keeping of money in a jurisdiction other than one's country of residence. Offshore jurisdictions are a commonly accepted solution to reducing tax burdens levied in most countries to both large and small scale investors alike...
or in-transit inventory. This results in increased liquidity to this class of borrower, 2.) Inventory finance – Enables companies that supply to large buyers to secure financing on inventory that they are required by buyers to hold. This results in an improvement in the net cash conversion cycle
Cash conversion cycle
In management accounting, the Cash Conversion Cycle measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth...
for the buyer while providing the supplier with capital at a reduced rate. 3.) Receivables management services – Provides third-party outsourcing of receivables management and collections process. It also provides financing of those receivables and guarantees on the payment of those receivables. 4.) Payables discounting -Provides third-party outsourcing of the payables process and leverages a buyer’s credit quality to obtain favorable financing rates for suppliers. This results in lower cost of capital for the supplier, a portion of which can be passed on to the buyer. 5) Insurance
– Further mitigates trade risk through cargo, credit, and transaction dispute insurance.
Because of the complexities surrounding the sharing and transferring of data, the need to physically control the goods, and to maintain visibility throughout the fulfillment supply chain, transportation and logistics providers such as UPS [UPS Corporation] have unique capabilities to support and provide SCF services to global organizations due to their access to the shipping data and capabilities as a lender. In these unique situations, UPS as a translator can participate in the lending as well as collaborate with other lenders in helping to extract costs from the supply chain and ensure that the physical and financial supply chains are synchronized.
Traditionally, dynamic payables discounting
Dynamic Discounting
Dynamic payables discounting is a process which allows buyers and sellers of commercial goods and services to dynamically change the payment terms—such as net 30—to accelerated payment based on a sliding discount scale. Dynamic payables discounting is “dynamic” in one or more ways...
, the early payment of trade payables in advance of the invoice due date, has been only related to invoices that are already approved. Given these discounted payments are paid post-goods receipt and approval, they don't carry any transaction risk which is common in cross border trade
Border trade
Border trade, in general, refers to the flow of goods and services across theinternational borders between jurisdictions. In this sense, it is a part of normal legal tradethat flows through standard export/import frameworks of nations...
. Given the complexities of modern financing and payment techniques, invoicement including invoice automation and discount management initiatives need a framework to ensure that programs are approached on a strategic basis which bridges the supply chain, purchasing, accounts payable
Accounts payable
Accounts payable is a file or account sub-ledger that records amounts that a person or company owes to suppliers, but has not paid yet , sometimes referred as trade payables. When an invoice is received, it is added to the file, and then removed when it is paid...
and finance organizations.