Stuart Roberts, Global Trade Sales Head, Treasury and Trade Solutions, and Prashant Ramachandran, Trade Analytics Lead, Treasury and Trade Solutions, Citi
The outlook for the world is uncertain, volatile and varied, with growth in the US, deflationary pressures in the EU, recession concerns in Japan and slowing growth in China and some other emerging markets. Multinational companies with global footprints and globally dispersed supply chains face three key challenges – the loss of emerging markets as a growth engine, the end of easy money and a concurrent sudden rise of interconnected risks, including from FX volatility, sovereign defaults, interest rate increases, commodity price movements, trading partner defaults and rising geopolitical instability.
While the risks are not as great as 2008 – and there are no liquidity fears – global firms must pay attention to their financial supply chains, the often under-appreciated twin of the physical supply chain. Most of the risks that a firm’s global operations are exposed to are felt first in the financial supply chain: they lead to working capital stresses and subsequent disruption of the physical supply chain. Maintaining supply chain stability while freeing up cash to focus on growth opportunities requires companies to take a holistic view of their financial supply chain and develop a refined supplier and customer segmentation strategy based on financing and risk drivers. By doing so, many of the risks that firms face in 2015 can be mitigated and cash can be freed up for investing in growth. However, for companies to gain a global view of the financial supply chain and segment suppliers and customers effectively they must increase their analytical rigor, mine appropriate financial data and tap the practical know-how of their banking partners.
Citi proactively supports its clients’ need for supply chain insight through a new tool called Global Flows Analytics. Using the latest big data and machine learning technologies, Citi mines the $3 trillion of client payment flows that pass through its global network every day and combine it with Citi’s institutional knowledge and credit and risk data to generate actionable financial supply chain insights for clients. Citi’s experience shows that a bottom-up approach that relies on leveraging client payments data to map-out the financial supply chain can unlock huge value for clients and helps to make visible the risks of the current environment. Five steps are essential for unlocking this value:
1) Make data available and visible
Too often data exists in departmental silos within firms. Firms must develop a holistic view of their global operations that incorporates credit, procurement and finance data to form a singular picture of a transaction and counterparty. Furthermore, data must be made available at its most granular level as insight often comes from the combination and recombination of minute, discrete data elements. This often necessitates a big data solution because of the volume, variety and resolution levels of the data.
2) Analyse the payment data
A firm’s payment data with its bank can provide a rich picture of its behaviour. Citi’s Global Flows Analytics, for instance, has helped Citi client managers provide rich insights to their clients on local supplier payments that could have been better financed with head office loans and supplier finance programs, FX exposures in different currencies across different subsidiaries, and inefficiencies in inter-company flows. This data also often highlights how the firm’s behaviour deviates from corporate norms at a local subsidiary level.
3) Identify the gap between the physical supply chain and the financial supply chain
This step is best done in consultation with a company’s banking partners. Once all operational, financial and payments data has been collected, the trading model of the company should be mapped out and overlaid with the existing treasury model and working capital processes. The business goals and priorities should also be considered. Analysing the alignment of the financial supply chain with its physical counterpart helps identify the gaps that could pose serious risks to the firm. For instance, the firm’s trading model might rely on a huge number of suppliers in emerging markets. A financial supply chain analysis would identify how its working capital is negatively impact because of slowing growth and worsening credit ratings. This is turn might mean a significant part of the corporate’s physical supply chain is vulnerable to interest rate shocks.
4) Refine trade partner segmentation and benchmarking
Unlike traditional segmentation metrics, financial supply chain analysis uses a wide mix of working capital and bank proprietary risk metrics to develop a more accurate risk profile and working capital picture of a firm’s trading partners. Segmenting the supply chain in this way opens up a wide array of working capital solutions that the corporate can then deploy with the right segment in a targeted manner. Benchmarking these metrics against the wider industry can yield a truer picture of the gap between the financial supply chains of the firm and its broader industry.[[[PAGE]]]
5) Model the financial benefits
Developing different ‘what if’ scenarios is the final step in creating business value from financial supply chain insights. Depending on the business objectives of the firm, different scenarios can be tested out – each of which have a different balance sheet and P&L statement impact. Citi Global Flows Analytics enables client managers to recommend working capital solutions for clients based on complex calculations and algorithms that dynamically change in response to change in the working capital or risk metrics of a client’s trading partners.
The convergence of physical and financial supply chains is long overdue. As firms enter a new phase of heightened global uncertainty and risks, they will need all available insights to make sense of the world. Banks, with their treasure trove of data and insights, should seize this opportunity to partner with clients in this new journey.
About Citi Global Flows Analytics
Developed by the Citi Innovation Lab at Singapore in partnership with its global trade group, Citi Global Flows Analytics enables organisations to use their own payments data to visualise their supply chain and identify working capital optimisation opportunities. By using a corporate’s real data, and applying Citi’s expert analysis, it provides genuine insights into payments and other patterns and risk assessment based on day-to-day operations rather than speculative modelling.
