The Future of Supply Chain Management is Both Global and Local
by Sebastian Hölker, Head of Innovative Trade Products, UniCredit
Many assume that globalised supply chains come hand-in-hand with the centralisation of management processes. But this doesn’t make sense for all aspects of the supply chain, and in a globalised economy, local expertise is increasingly important and each supply chain needs to be approached according to their individual characteristics, argues Sebastian Hölker, Head of Innovative Trade Products at UniCredit.
There is no doubt that globalised supply chains have created a huge amount of efficiency for companies worldwide. For many, perhaps the natural next step would be centralisation by consolidating the control of similar processes in a single location. Indeed, already many such processes – such as cash management and IT infrastructure – have been centralised to good effect by forward-thinking companies.
But other elements equally important to supply chain managers – such as national regulation and rules governing important financial aspects such as credit risk analysis – are proving more difficult to centralise on account of their regional nuances. In our view, it is increasingly important that companies do not lose sight of the value of local expertise for these components. In fact, we believe that the most effective strategies of the next few years will be carried out by supply chain managers who leverage local expertise while building their international supply chains.
Some centralisation is beneficial
The banking crises have revealed that doing business with one bank alone can expose firms to an unnecessary level of risk concentration.
In some cases, banks may suggest that centralisation is the natural next step in an efficient, global supply chain – indeed, some banks even tell their clients that the most efficient solution is one run by a single bank. Of course, corporates can see that there are some benefits in rationalising their banking relationships, but the banking crises have revealed that doing business with one bank alone can expose firms to an unnecessary level of risk concentration. As such, the diversification of banking relationships is pursued by many businesses for good reason.
But even in terms of efficiency, we argue that one single bank is not always capable of providing the best solutions for every aspect of a modern multinational firm’s global supply chain. In our view, supply chains can be broadly split up into five flows: goods, money, rights, risk and information. Taken together, there isn’t a single solution for all of these components – nor should there be. But there are efficient, centralised, global management systems for some.
For instance, logistics providers like DHL and UPS had become so efficient that until a few years ago, international freight often arrived before the money intended to pay for it - even if dispatched simultaneously. While this sounds somewhat embarrassing for banking providers, it means that centralised logistics management is a practical and efficient way to oversee a company’s flow of goods.
Meanwhile, the flow of money around the world is increasingly commoditised and the barriers to trade – even in countries like China – ever easier to overcome. Again, this makes the consolidation of cash management processes relatively straightforward.
Local knowledge remains crucial
While the management of goods and money flows are becoming ever more centralised, we believe the opposite is happening in other flows in global supply chains, such as the flow of risk. Indeed, judging a debtor’s credit risk requires intimate knowledge of their business practices, and this is best done locally for a number of reasons.
Firstly, local partners are far more likely to have long-standing relationships as well as the required documentation – such as Know Your Customer certificates – in place. Moreover, the regulatory treatment of credit risk differs markedly from country to country, even within Europe.
It is true that the Basel accords have given Europe a certain amount of harmonisation in this respect, but individual states are still granted significant leeway in how they follow the guidelines. Taken together, these factors make it difficult to accurately assess the credit risk presented by a corporate in another country without hitting a number of buffers. And that will have an impact on pricing.
Similarly, the regulatory standards for purchasing receivables can be very different from one country to another. In some countries, like Germany, there are few requirements and the process can be relatively freely designed by the parties involved. In others, like Italy, far more formalised standards are in place. Knowledge of each, specific, legal system is crucial to execute the process efficiently. Rather than considering these local variations a nuisance, forward-looking corporates should build partnerships with banks that are able to leverage their local expertise to overcome local challenges.
And these differences can even extend to cultural peculiarities – another area in which local know-how can help to grease the gears of business. Even within Europe – a relatively small geographic area – the disparities in business conventions can be huge from region to region and country to country.
At UniCredit, our clients in France, Germany and Spain often ask us for help in dealing with their partners in Central and Eastern Europe – areas in which our large footprint is very useful. We rely on our local colleagues to know the issues that regional businesses face – eliminating uncertainty and providing for better results on both sides of the transaction.