Supply Chain Finance Community Forum Asia

When the Supply Chain Finance Community launched in Europe, it was always the inention to expand into new regions. SCF Forum Asia, held on 6th June at the National University of Singapore,  is the first step in achieving that goal.

Welcoming the 90-plus delegates, National University of Singapore professor Lee Loo Hay said the Center for Next Generation Logistics at the school, a new partner for the SCF Community, focuses on new business models, automation and an industry transformation map to help change the industry. Its supply chain readiness study, for example, is designed to show how companies can run their supply chain better.

Supply chain finance solutions

Leading supply chain practitioners provided insights to participants throughout the Forum on solutions and innovations that can enhance supply chain finance.

Rabobank director of asset-based finance Wouter Sleegers led off these industry insights by noting that Asia is the fastest-growing supply chain finance market and also has the biggest potential, given its vast trade volume. Leveraging the financial strength of large buyers introduces specific financing for suppliers, he said, and helps with financing for weaker suppliers.

To bring the full benefits of SCF to suppliers, Sleegers said, banks are giving tools to buyers to support their suppliers, helping suppliers to work with different regulatory frameworks in each country, working with suppliers to ensure that there is appropriate documentation for the local requirements in each market, and going directly to suppliers to explain the benefits of SCF.

FCI Asia Chapter Director Lee Kheng Leong said that another solution is FCI’s own platform, which can help local banks without overseas branches deliver SCF solutions to their clients by using its network of 400 members in 90 countries to offer one legal framework, agreement and communications system for all the correspondents regardless of where they are located.

Case studies

The SCF Community has worked with large multinationals to enhance supply chain finance, said SCF Community chairman Michiel Steeman, and he used three case studies to show the benefits of SCF to buyers and sellers alike.

One case focused on the barley supply chain for Heineken. Heineken had not been directly involved in the lower end of the supply chain, Steeman said, because barley went from farmers who harvest barley to cooperatives that put it in their warehouses to malteries which turn barley into malt. Since 8% of the cost of goods results from financing costs, however, cheaper financing for famers and cooperatives can reduce the cost Heineken pays for the €1.5bn of malt it buys every year. Heineken started by buying barley from the cooperative and turning malteries into contract manufacturers, then went a step further by buying barley from farmers in some markets, which reduced working capital costs for both the cooperatives and the malteries. In some markets, Heineken is even buying seeds or the land for farmers, which reduces working capital needs even further. While there are risks, Heineken can also work with a bank to reduce risk by creating a special purpose vehicle which would have ownership of the barley and malt.

Another case study is Unilever, which provides up to €2.5bn in reverse factoring for the supply chain. Most of this money went, however, to the 20% of suppliers who made up 80% of Unilever’s spend. Unilever also took advantage of dynamic discounting with mid-sized companies. A large number of smaller suppliers, who were of tremendous interest to the local politicians in each country who were starting to put pressure on large companies to support small companies, had limited access to financing. Unilever joined with 50 other corporates and agreed to pay suppliers with less than €100,000 in sales within 30 days. While the impact on suppliers is large, since it touches more than 10,000 companies, the effect on Unilever’s working capital is low.

A third case study is Senseo coffee makers from Philips. Philips had a tier one supplier that made the packaging and a tier two supplier that put the plastic around the electronics. While the tier one supplier was paid within one week, they didn’t pass that benefit to the tier two supplier, which faced more than 90 days payment terms. Philips used a ‘Buy-Sell’ model to start buying from the tier two supplier and selling immediately to the tier one supplier, to create purchasing power and drive down cost. The ‘flash title’ for the instant purchase-and-sale means that Philips has no inventory on its balance sheet and the process enabled Philips to reduce outstanding receivables for the tier two supplier by nine weeks, which helped their financing and also resulted in a lower cost for the products that Philips buys.

Blockchain

Technology is a key part of SCF and, as Windesheim University research fellow Bart Ras explained, blockchain is a leading technology solution to improve supply chain finance further.

Rather than being a technological disruption, Ras said, blockchain is a game-changer because of the trust shift it facilitates. Trust is critically important, he noted, because there is no movement of assets without trust.

To create trust, corporates as well as individuals need to have confidence in the product or service they’re buying, the platform – whether it’s a bank or Airbnb – and the counterparty. Whereas the basis for trust for more than a century has been institutions such as banks, the basis for trust has shifted over the past several years to ‘distributed trust’ based on platforms. On the personal side, for instance, individuals are unhesitatingly using platforms such as Uber or Airbnb as new trust models. Blockchain will similarly offer a new platform for trust for companies, based on an event ledger that will provide absolute certainty that the counterparty is someone you want to deal with and an electronic judge for each transaction.

A key benefit of blockchain in the financial supply chain is that it can reduce the friction each time the goods move, which leads to high finance and intermediary costs that can reach double-digit percentages of total costs at multinationals such as Philips. While blockchain is immature now, Ras said there will be pockets of usage before long and in five years the word ‘blockchain’ will largely disappear because the services it enables will become as common as email is today.

Leading trends in supply chain finance

The Forum ended with a panel that included China Systems regional sales director Digby Bennett, Standard Chartered Bank global trade implementation transaction banking Sarat Mohanty, Asian Development Bank (ADB) supply chain finance programme relationship manager Sabine Oudart, and Rabobank’s Wouter Sleegers.

The focus in starting SCF programs, Mohanty said, is partnering with the ecosystem of the client, especially SMEs. Supplier financing before farmers can harvest is a problem and SCF can be a solution, Sleegers said by way of example. Banks are also looking for partnerships, he noted, so they can leverage the power of their balance sheets. A key issue, however, is how to standardize processes amidst the current variations in contracts, technology, and other components of supply chain finance.

A recent development at ADB, Oudart said, has been to shift from the traditional focus on infrastructure loans to supporting SMEs. Its programme shares the risk with financial institutions in emerging markets, for example, by taking on up to 50% of performance risk.

Asked about companies such as Alibaba and Amazon that offer financing to SMEs, Bennett said he sees them as competitors to banks. While there can be competition, Sleegers said on the other hand that Rabobank has an open model that makes them both a threat and a partner while Mohanty said that Standard Chartered Bank is trying to develop alliances with them.

Next steps

The Forum clearly provided tremendous insights and valuable learnings for participants. Along with planning to return for a second Forum next year, Steeman said he expects to run workshops or other sessions to build the community further over the coming months.