Category Archives: Market Intelligence

Supply Chain Finance: A European Bank Perspective

Late this spring, the Euro Banking Association (EBA) released their “Supply Chain Finance European Market Guide”. This gives us some insight into the European Bank Perspective on Supply Chain Finance.

The guide defines Supply Chain Finance (SCF) as the use of financial instruments, practices and technologies to optimize the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners. It then goes on to state that SCF is largely ‘event-driven’ and that each intervention (finance, risk mitigation or payment) in the financial supply chain is driven by an event in the physical supply chain.

The EBA then goes on to state that the key categories of SCF are:

  • Buyer-Centric Accounts Payable
    Also known as “Approved Payables Finance”, “Reverse Factoring”, “Supplier Finance”, or even “Confirming”, it’s generally based on discounted payment of accounts payable in favour of suppliers by accessing a financial institution’s liquidity. “Dynamic Discounting” is a related instrument.
  • Supplier-Centric Accounts Receivable
    Also known as “Receivables Finance”, “Receivables Purchase”, and “Invoice Discounting” or “Invoice Factoring”, it’s where a supplier finances their operations by factoring their invoices or taking loans against the receivables.
  • Inventory-Centric Finance (PO/Inventory Finance)
    Which can be used by the supplier to gain financing based on a PO or a buyer to gain financing based on inventory.
  • Bank Payment Obligation (BPO)
    As described in this recent post on how it took 40 years, but BPOs are now truly SWIFT, a URBPO (under ISO20022), provides an irrevocable payment guarantee in an automated environment and enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers. An alternative to L/Cs (Letters of Credit), it is a new middle ground between L/Cs and Open Account finance which can be used to offer pre- and post-shipment finance.
  • Traditional Documentary Trade Finance
    Letters of Credit and related trade loans.

In other words, supply chain finance is simply

  • a bank or third party lending the buyer money based on inventory;
  • a bank or third party lending the supplier money based on POs, invoices, accounts receivable, or BPOs; or
  • the buyer paying the supplier early for a discount.

And the primary mechanisms by which a supplier gets financing is:

  • receivables, BPO, or L/C financing from a bank,
  • discounting or dynamic discounting from the buyer, or
  • factoring from a third party.

This is a traditional supply chain finance definition and these are, with the exception of the new SWIFT BPO, the traditional mechanisms, so the guide is good in this respect. And it also has a good discussion of risk. However, when it comes to a discussion of automation, it is pretty much limited to e-Invoicing and this is a problem. e-Invoicing is just the foundation — technology has to go beyond just e-Invoicing if SCF is going to not only take off but become a pillar of supply chain support. But that’s a topic for a future post.

The Road to Riches? The Rails, My Friend, the Rails.

Every day, SI is becoming more convinced that if you want your Supply Chain to be a success, you need to ride the rails. It used to be if you were shipping goods long-haul over land, you’d ship them by train. There was no long-haul trucking and air was just too expensive. But then the war ended, Dwight D. Eisenhower championed the National system of Interstate and Defense Highways, the Federal Aid Highway Act of 1956 came into effect, long-haul trucking became an option, buses became more popular than trains for many trips, the railroads started to struggle financially, and ground eventually overtook rail for most cargo in the US.

And today, people in North America associate trains with the Wild, Wild West despite the fact that rail is, by far, the most cost-efficient way to move cargo over ground for distances in excess of 500 miles. It’s also typically the best choice for intermodal ocean freight as the major rail networks will not only have their terminals in the ports, but SLAs (Service Level Agreements) to make sure cargo is quickly transferred from ship to rail-car. For example, agreements between the Port of Halifax and CN Rail gives you a double-stack rail-service direct link to Chicago in 71 hours, which is typically a 3-day drive when you factor in daily driver limits and border crossing.

Why is SI becoming more convinced that Rail is the Future? Three reasons:

  1. Fuel Efficiency
    Trains can move a ton of freight nearly 450 miles on a single gallon of fuel. Find a truck that can do that!
  2. Predictability
    The railroads control the rails – and can schedule them to maximize capacity and prevent traffic jams that can delay trucks for hours or more. Plus, well maintained lines and trains that keep to schedules suffer significantly less accidents than traffic on the road.
  3. Adoption by the East
    While the young and immature west might have dumbly abandoned trains just like it abandoned trams (and replaced them with gas guzzling polluting busses), the East is investing Billions in new (high-speed) rail lines everywhere. Consider this recent article in the Economist on how its One Night to Bangkok with Laos committing to invest 6.2 Billion on a new 260-mile passenger and freight railway between Kunming and Vientiane straight through the mountainous region of Northern Laos. Think about that. The GDP of Laos is only 9.3 Billion! That’s a huge commitment for a country the size of Laos, even if the commitment connects China to Thailand and will capture a sizeable portion of the 4 Trillion worth of imports and exports that flow into and out of China. This 6.2 Billion dollar railway will require 196 km of blasting and will create 76 tunnels. To put this into perspective, combined they would form a tunnel long enough to connect Korea to Japan under the sea.

It’s time to ride those rails!

Some Risks Can’t Be Squashed? Can Co-opetition Help?

Good visibility, planning, and mitigation can go a long way to eliminating, or at least circumventing, a large number of internal and external risks in an organization’s supply chain. It can improve quality, smooth transportation, and minimize production line downtime and stock-outs in situations where the risk – such as product contamination, risky transportation routes (due to piracy), and possible port closings (due to impending strikes) can be recognized in advance. However, even though we know some regions are high risks for natural disasters such as hurricanes, earthquakes, tsunamis, and volcanic eruptions, we are generally unable to predict such events with more than a few days warning at best. These risks will never go away – and in situations where only a few suppliers can supply a given raw material or component – and can’t be easily mitigated.

So what is an organization to do? Well, it should start by making sure it has a good Contingent Business Interruption (CBI) insurance policy in place that covers supply chain interruptions, but that doesn’t solve the problem. It can proceed by making sure it knows every backup source of supply, but if the disruption results in a worldwide market shortage, someone is going without and this doesn’t necessarily solve the problem either. It can do its best to identify alternative designs that can work with different, more easily obtained, raw materials – but if such alternate designs are considerably more expensive or less rugged, this doesn’t help either.

As per the title of this posts, some risks can’t be squashed. So how does an organization maximize its resiliency? Co-opetition, short for cooperative competition, might be the answer. Generally speaking, in most markets with constrained supply, there are only a few big companies that represent most of the demand. Think hard drives – how many hard drive manufacturers are there? Cell phones? Motion sensors for game consoles? And every company in the market knows who the other big companies are. And, at any given time, some of these companies will be overstocked and others will be understocked as the market demand sways from one product to another, in ways that are not always predictable.

What if these companies took a lesson from the BRIC, which just banded together to “create a $100 Billion buffer” (CNN Money, Sep 6, 2013) to help protect their economies from shocks when G20 leaders warned that the global recovery is still at risk from volatile capital flows. China is contributing 41 Billion to the fund, Brazil, Russia, and India will provide 18 Billion each, and the new BRICS member, South Africa, is coughing up 5 Billion. The fund — called the Contingent Reserve Arrangement — is being designed to provide member countries with an emergency cushion of cash during times of crisis.

Instead of creating monetary funds, the companies in the co-opetition could create virtual emergency raw material / component pools where member companies affected by a disruption could obtain a limited supply from their competitor or their competitor’s supplier agains the reserve locked up by their competitor. Each of the companies would share in the pain caused by the disruption. And although this means that some companies would, as a result, feel the result worse than they would otherwise as they would be giving up some supply to their competitors, they could take comfort knowing that the next time a disruption hit them severely, they will feel the blow a lot less than they would otherwise as all of the co-opetition members will be sharing the pain. Done properly, each company in the collective could insure that, no matter what, it would be able to keep operating at a baseline and the risk of a severe or catastrophic disruption would be minimized for all members.

Thoughts?

Does Royal Mail Have the Solution to the US Postal Service’s Woes?

In our last post on the US Post Office, we asked will Darrell Issa save the US Post Office. Given that the US Post Offices need to identify immediate savings of almost 20 Billion plus (as it keeps bleeding red with losses of 15.9 Billion in 2012 and 3.2 Billion in the first two quarters of 2013), something needs to be done fast.

In response to this need, as chronicled in our last post, we noted how Darrell Issa, a Representative of California and chairman of the US House Oversight and Government Reform, signed off on H.R. 2748, the Postal Reform Act of 2013, designed to bring the United States Postal Service (USPS) to financial solvency with cost-cutting reforms and innovative new sources of revenue. While the plan had a couple of good points, SI’s conclusion was that it was not going to be enough to generate the savings required.

Not that Royal Mail is in much better shape. As per an article in the Economist last summer, chronicled in this SI post that asked who’s in worse shape, Royal Mail racked up a £s;10 Billion deficit in unfunded pension liabilities. They may have saved over 300 Million in the first phase of their Procurement Transformation, and may expect to save over 600 Million in the second phase of their Procurement Transformation, but that’s a far cry from the 10 Billion they need to save.

However, as per this recent article over on CNN Money on how
“U.K.’s Royal Mail Goes Public” (Sep 12, 2013), the British Government is planning to sell a majority of its take in the Royal Mail through an IPO (initial public offering) that will be one of the U.K.’s largest in decades. The sale will certainly help, but given that the postal service IPO is likely to be valued around £s;3 Billion, that’s less than 1/3 of the shortfall and not a quick fix.

Still, it might indicate the only solution for the U.S. Postal Service that is now losing an estimated 25 Million daily. Specifically, the US should consider selling the US Post Office to a private equity group that can do what private equity groups do – turn struggling businesses with a lot of profit potential around into profit making machines. There are arguments both ways on this topic, some of which are summarized in this Research Roundup, but given that the USPS did 65 Billion in Revenue in 2012, the potential valuation could easily be in the 200 Billion range, and any group that could raise that kind of equity could definitely afford to make up the unfunded liabilities. It’s an interesting thought.

Where Do the Savings Lie?

Inflationary times are back, economic growth is slow, the job-situation hasn’t improved much, employers would rather keep a job vacant nine years waiting for the perfect candidate over spending even a single dollar on training, and CFOs are being told to put pressure on Procurement to cut costs to the bone. In other words, despite all the talk in recent years about training, innovation, and value-generation, it’s still business as usual at review time.

You’ve beat your suppliers senseless, kept overhead to a minimum (not by choice, you weren’t allowed to replace people lost to attrition), done some automation and strategic sourcing, and put as much effort as you could into high-cost categories. As far as you’re concerned, you’ve squeezed all the blood out of the stone and there’s nothing left. And if you are a sourcing leader, that might be true for the categories you’ve been focussing on for 6 to 9 years and that you’ve strategically sourced 3 times in a row.

But is this all the savings to be had? Not by a long shot.

The first thing to remember is that costs fall into two categories: recurring and one-time. Recurring costs include human resources (employees and mid to long term contractors); raw material, component, and production costs; overhead; COGS (cost of goods sold), transportation, and insurance. If your organization is a leader in Procurement and Supply Management and seen as a value generator, then, in addition to reducing raw-material, component, and production costs, it works with operations to keep overheads and insurance costs low, works with logistics to keep transportation costs low, works with Sales & Marketing to keep COGS low using its expertise, and even works with HR to get contractors at competitive rates. (In other words, it’s directly or indirectly reducing every cost except salary, which it has no control over.)

One-time costs include expedited shipping, temporary/contingent labour (to address seasonal spikes, such as the surge in demand many retailers get around Christmas time), switching costs (when switching suppliers or raw materials), and one-time costs associated with recalls, settlements, and stock-outs (on the shelves and in the factory). Most Supply Management departments work with logistics to optimize and keep transportation in check to minimize shipping costs, work with HR to make sure temporary/contingent labour is sourced appropriately, and take switching costs into account when evaluating sources of supply, and this is a good start, but these one-time costs pale in comparison to the cost of a recall, settlement, or stock-out. Recalling a contaminated or unsafe product that makes it to the shelves can easily cost in the tens of millions of dollars, a settlement that results from a class action lawsuit can cost in the hundreds of millions (especially when legal costs are factored in), and a supply chain disruption that results in the assembly line for the key, or only, product line being shut down for months can bankrupt a company (and a number of companies have gone bankrupt as a result of serious disruptions in production). How much is your Supply Management organization doing to prevent these very costly incidents, which can wipe out years of savings, from happening? Remember, Supply Management has, or should have, the supplier relationship and be doing its utmost to insure quality (preventing recalls or lawsuits), supply management has (or should have) the visibility to detect shortages or stock-outs well before they happen (and is the only organization in the position to take action and locate another source of supply in time), and only Supply Management has (or should have) the cross-functional capability to address these issues.

So, do you know where the savings lie?