From SCF to WCO
by Robin Page, Chief Executive, TMI
One of the most popular of TMI’s regular special reports has been our annual survey of developments in supply chain finance (SCF). This particular report is indeed concerned with that subject but in recognition of the widening of the remit given to SCF in the increasing financial sophistication of today’s large companies we have re-titled it ‘Working Capital Optimisation’ –and as you read these interesting and authoritative articles you will appreciate just how inextricably intertwined the two have become.
Two articles by Phillip Kerle, the Chief Executive Officer of Demica, a leading provider of working capital solutions, give an excellent overview of the current situation. The first one, ‘Financing Dynamic Distribution’, summarises the results of a study of how distributor finance programmes are enabling downstream business and downstream distributor finance (DF). Distributor finance programmes help distributors to access affordable finance and increase sales, to the benefit of distributors and large corporate sellers alike, and the report contains some illuminating quotes from global corporates looking to expand in emerging markets. Further research from Demica is embodied in the second article, ‘Forging New Links’, which reviews progress in the market and reveals, among other things, that major international banks surveyed around the world are experiencing an annual growth rate of between 30% and 40% in SCF programmes, with Eastern Europe, India and China currently seen as the top three areas with the greatest future potential for SCF.
Martin Böhme, a Senior Manager with PwC Belgium, points out that while SCF is currently a very popular solution for European corporates, “its implementation provides many hurdles far beyond the typical scope of the treasury function”. He outlines some of the many lessons learned from SCF implementations that PwC has supported in recent months in an article which will be invaluable reading for any company about to embark on a similar venture, noting how the high numbers of different stakeholders lead to “higher complexity to manage” and the vital importance of speaking a common language with the buyers and purchasing managers who will communicate with the account manager or sales team of the supplier. Bank relationship management is the topic chosen by Hugo van Wijk, CEO of Vallstein, and Robert Dekker, Senior Manager with KPMG in The Netherlands. They urge treasurers to quantify the relationship, specifically by the use of a technique called WalletSizing, developed by Vallstein, which allows “transparency across all bank relationships in one uniform method of calculation” and has the additional bonus of taking into account the relevant areas of Basel II and III regulation.
Are we experiencing the start of a new era in global supply chain finance? is the query of Dr Sebastian Hölker, Head of Global Innovative Trade Products at UniCredit. He analyses the structure and likely impact of Bank Payment Obligation (BPO), an irrevocable undertaking given by one bank to another bank that it will pay on a specified date after a pre-agreed event has taken place, with proof provided by automated matching of data in a so-called Transaction Matching Application. This “enables banks to co-operate in such a way that each party to the supply chain can be serviced by the bank that is suited best for this task: its local bank”, ideally possessed of a long-standing track record and deep knowledge of its local client’s business.
‘When Treasury Meets Trade’ is the title of a thought-provoking article by Chris Bozek, Managing Director and Head of Global Trade and Supply Chain Products with Bank of America Merrill Lynch. He examines the convergence of treasury and trade in practical terms, pointing up the importance of financial institutions providing “working capital experts who are able to speak to the corporation about maximising the cash conversion cycle for local and global transactions”. A further component is ensuring that any solutions are developed in an integrated way “but offered as modules based on a corporation’s needs”.
Integration is also the theme of the article by Oliver Klein, Corporate Banking, Sales Specialist, Sales Strategy International Business with Commerzbank AG. He describes a new and innovative way in which Commerzbank’s Cash Management and International Business division is engaging with customers and structuring solutions to meet the changing needs of international business. By working with customers directly across their entire financial supply chain, Commerzbank is able to move beyond individual products and services, and instead “focus on identifying scope for improvement in the financial supply chain and transforming processes into a financial value chain.” Klein also notes that the Single Euro Payments Area (SEPA) offers considerable opportunity for financial supply chain optimisation. By standardising payment and collection instruments and communication formats across the Eurozone, companies can both rationalise their order-to-cash and purchase-to-pay processes, and also align the two more closely.