DBS provides an overview of the fine balance that needs to be achieved for successful management of the supply chain, which is especially nuanced in the Asia Pacific region.
Corporate treasurers have gained greater strategic inﬂuence within their companies over the past few years, with their responsibilities expanding to include improving corporate performance, supporting mergers or acquisitions, as well as optimising costs and reducing risks. Enhancing value in the company’s supply chain by managing both costs and risks more effectively, and building long-lasting buyer-supplier relationships that improve corporate performance are also vital parts of their expanded role. Along with these responsibilities comes a delicate task of balancing competing objectives.
In optimising the supply chain, corporate treasurers aim to reduce costs while also making sure that their supply chain adds value and does not face any disruptions. To improve working capital and lower borrowing expenses, treasurers often look to extend the time taken to pay their suppliers. While that approach may seem attractive on the surface, at a deeper level, it can hurt supplier relationships and increase risk to its supply chain.
Smaller suppliers selling to larger buyers often experience a shortage of working capital when they are faced with extended payment terms and may need to borrow bilaterally from banks at relatively expensive rates.
The 2016 SME Development Survey conducted by DP Information Group in Singapore, for example, found that 46% of SMEs with ﬁnancing issues said higher bank interest rates are their biggest problem. SMEs also said they are being squeezed harder, with 34% indicating that tighter access to credit is an issue. Faced with working capital constraints and difﬁculties in accessing credit, suppliers have to decide whether to absorb these costs or pass them on to their buyers, thus increasing the risk of supply chain disruptions to both suppliers and buyers.
Suppliers also usually prefer buyers who pay them faster. Buyers that extend payment terms without providing any incremental beneﬁts in return may strain supplier relationships. This may drive suppliers to provide preferential services to competitors that pay earlier. A buyer may then lose out to those competitors in obtaining key goods or services they need for production.
The dilemma is particularly acute in Asia. Payment terms in the region already average more than 80 days, compared to about 50 days globally, notes Vijay Vashist, global head of trade and supply chain at DBS.
Funding working capital for so long represents a signiﬁcant cost to suppliers, and any further delay in payment increases the costs even further. While extending payment terms may have a positive impact on the buyer’s performance and balance sheet, the competing objectives from both ends of the supply chain need to be balanced delicately.
The supplier ﬁnance solution
Supplier ﬁnance solutions can help corporate treasurers resolve this dilemma and assist suppliers as well as buyers with optimising their working capital. Under a supplier ﬁnance solution, banks are able to disburse early payments to suppliers based on conﬁrmation of payments by the buyer. By leveraging on the buyers’ stronger credit standings, suppliers are able to obtain ﬁnancing from banks at a lower cost, while at the same time extend their own payment terms. This practice brings mutual beneﬁts to the supply chain by reducing the overall cost of capital for suppliers, whilst buyers still beneﬁt from the extended payment terms.
Supplier payment services
Supplier payment services (SPS) is a new and innovative solution provided by DBS that can be especially beneﬁcial in providing ﬁnancing to
suppliers. While SPS is similar to the traditional supplier ﬁnance structure, where ﬁnancing for the supplier is predicated on the credit strength of the buyer, SPS offers a quick and efﬁcient onboarding process for suppliers.
To illustrate the beneﬁts of the SPS solution, let’s take the case of a multinational apparel company that has a global procurement network, and a majority of its suppliers are located in Asia. Through SPS, the company will be able to achieve the following beneﬁts:
- Quick and scalable onboarding of suppliers who are interested in participating in the programme with light and simpliﬁed documentation
- Coverage across a full range of suppliers from SMEs to large multinationals
- Capabilities to support suppliers based in Asia as well as globally
- At the transactional level, a complete digitised and secure solution to facilitate invoice transmission and ﬁnancing for the company and its suppliers
Technology improves supply chain ﬁnance even further
Along with new solutions such as SPS, digital platforms can deliver faster and far more efﬁcient supply chain solutions.
The DBS IDEAL supply chain ﬁnance platform, for instance, is a secure online solution that helps digitise the supplier ﬁnance solution as described.
It provides buyers and their suppliers with an automated and secure digital environment where they can enjoy easy access to information, electronic exchange of invoices, online initiation of ﬁnancing requests and tracking of the transaction status.
Along with providing real-time visibility on the transaction status, the platform also enables access to detailed reports 24/7 and provides a clear overview of transaction information that allows buyers and sellers to view and select the transactions for ﬁnancing. The platform also provides a fully customisable maker-checker functionality for quick authorisation, helps optimise the cash cycle by monetising and extending payables, and offers full transparency so that all parties can view the status of their transactions and predict their cashﬂow on a real-time basis.
Strengthening the supply chain by supporting suppliers
“Optimising supplier relationships in the region has become pivotal for business expansion in Asia,” Vashist adds. “As supply chain networks are mainly anchored in the region. Working with a regional banking partner can help companies navigate the market challenges, optimise working capital and reduce risks while still maintaining a healthy supply chain. DBS’ market-leading digital capabilities and in-depth regional knowledge gives us the capability to deliver the latest innovations and make banking more seamless for the buyer’s business and for its suppliers.”