Working Capital - benefitting from Supply Chain Efficiency

Partners in the supply chain should consider the technology linked financing solutions now available in a world increasingly dominated by open account trade transactions.

Making the whole supply chain process more efficient is the key to improving and maintaining competitiveness for most companies, regardless of whether their business has an international or domestic focus. Business-to-business trading activities between companies and their trading partners (or even inter-company) continues to offer many challenges. From sourcing and procurement right through to settlement of financial transactions and the eventual delivery of goods, errors incurred from re-keying of data and other inherent problems can lead to substantial delays and resultant business inefficiencies.

Spurred by the global economic recovery of recent years, global trade flows are increasing plus there has been a tremendous surge in intra-Asia trade flows which has been enhanced by demand from multinationals outsourcing into low-cost manufacturing centers. The outsourcing boom has also seen growing numbers of multinationals shifting the burden of holding inventory back onto their suppliers. Accompanying this phenomenon is a shift in global trade toward open account transactions, which now comprises an ever-increasing percentage of all international trading.

With this shift to open account trade, suppliers are coming under a greater financial burden, often assuming a higher level of risk and experiencing increased working capital management issues, especially during seasonal peaks. It is not surprising that suppliers have demonstrated an on-going preference for the protection offered by Letters of Credit (LC). Indeed, while they represent a decreasing proportion of international trade, Letters of Credit still have an important role to play in helping importers and exporters manage risk and access finance. In practice, however, the "security" or comfort that exporters look to derive from dealing on Letter of Credit terms is often lost due to errors (discrepancies) in export documentation presented at the time of negotiation. According to findings by Standard Chartered, statistics show that 60 percent to 70 percent of all export trade documents contain some form of error. Moreover, some 5 percent to 10 percent of the total costs relating to an international trade transaction are associated with the paperwork and administration alone.

How do suppliers align with the buyer's need to shift to open account, while at the same time mitigate the different risks? What is in it for them?

And how can banks provide true value in an increasingly competitive international trade environment?

-The banking sector plays an important role in facilitating this move to a stronger collaborative supply chain model. Some of the ways that banks can facilitate this process include

-helping importers and exporters manage documents and data more efficiently, whether they are trading on LC, collection or open account terms;

building broader, more integrated electronic capabilities that enable importers and exporters to streamline their trade and supply chain processes end to end from the initial Request for Quote through to payment;

providing more innovative open account financial services that help trading partners mitigate risk, even in the absence of traditional trade instruments such as the Letter of Credit.

A bank's offer of services in partnership or simple collaboration with other parties along the trade supply chain such as insurance and logistics sectors enables the integration and use of common data to achieve greater efficiencies for all parties. This approach can bring risk enhancements to all parties, while at the same time deepening relationships. The ability to deliver these types of services over the Internet also offers a new channel to new markets, and gives greater visibility to the trading partners.

The Solution in Practice

Fortunately, some banks have stepped in to make it easier for companies with an end-to end supply chain solution. An ideal solution is one that involves minimal disruption to existing business processes during implementation and, through the use of new trading techniques, new internet-based technologies and co-operation between all sectors of the business, would not require significant investment on the part of users.

For Standard Chartered, a bank with over 150 years' experience in trade finance, the marrying of its trade expertise with the use of modern techniques and technologies has proven key to the successful development of a supply chain solution that is relevant to the changing environment. What gives the Bank a distinct edge in providing such as solution is its unique geographic 'footprint' and long history of on-the-ground presence in Asia, Africa and the Middle East.

However, the most critical success factor is that the Bank took into account the needs of its clients before and during the development of its supply chain finance solution. The Bank's rigorous validation exercise involved some 800 corporates of all sizes globally and across diverse industries. The feedback showed that corporates desired financing solutions to enhance their own working capital management needs, combined with technology nimble enough to make supply chains more transparent and less error-prone, and trading much faster.

Working capital management and supply chain finance

Standard Chartered took this feedback and created its Supply Chain finance solution, which leverages the strategic relationships developed between the Bank's client (the "Anchor") and their buyers and/or suppliers. The Bank offers alternative financing options to these key strategic business partners of the Anchor clients, thereby helping finance the flow of goods along the total supply chain, from the Anchor client's procurement of goods to its onward sale to the buyer. In this scenario, the Bank becomes an assured and steady source of finance, offering the business "partners" the service of an international bank and access to a wider range of products that may not be available from "local" financial institutions. For Treasurers within the business-partner companies, the financing options enables "de-risking" of the balance sheet; faster conversion of trade receivables into cash; efficiencies in cash management, reduced collection and procurement costs; and, not least, the ability to extend creditors terms.

Typically, greater financial discipline among suppliers and buyers alike is one result of supply chain financing. Another benefit is that overall credit-risk to business partners is mitigated due to Standard Chartered's strong relationship with the Anchor client. In fact, the supply chain financing arrangement often serves to further strengthen the relationship between an Anchor client and its business partners.

Harnessing Technology to Streamline Trade

To complement these Supply Chain finance solutions, Standard Chartered developed its award winning B2BeX, a ground-breaking web-based trade facilitation platform that helps businesses better manage their entire supply chain activity. Launched in late 2002, there are now B2BeX users in Hong Kong, Singapore, Thailand, India, China, the US and UK. B2BeX puts importers and exporters on the same platform, making them more competitive and efficient, often with proven efficiency gains in their paperwork and administration processes of between 25 percent to 50 percent.

B2BeX simplifies international trade by integrating the key trade processes end-to-end, and delivering them on a single platform. The B2BeX platform enables the different parties in the trade process to exchange trade documents and data, including purchase orders, purchase order confirmations, shipping instructions, LC applications, etc, in a more automated manner.

To add speed and efficiency into the supply chain, B2BeX includes a product catalogue where buyers and suppliers can post and source products, in either a public or private community, where they can then re-use the data. Moreover, B2BeX's cutting-edge messaging and translation technologies allow trading partners using different systems to communicate easily in a more automated and collaborative manner.

Supply chain management: a means to effectively manage for least cost and derive highest value from international trade.

An end-to-end supply chain solution should be sufficiently flexible to adapt to new conditions within global trade , whether they be seasonal fluctuations in demand calling for a variety of risk and financing options, or technological challenges imposed by different information exchange standards. Although these challenges and the techniques to master them play out in different permutations across complex supply chains the world over, the net benefits remain beautifully simple: greater communication and collaboration among trading partners, enhanced financial discipline and better transparency and, ultimately, a more robust arena for global trade.

Ken Stratton is Standard Chartered's global sales head for trade, supply chain and B2BeX.

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