Criss-crossed by some of the world’s largest supply chains, the Asia Pacific region has become a hubbub of activity as both global and regional companies seek to expand their presence. The need for cash to fuel that growth, while shoring up supply chains against risks and challenges thrown up by the current volatile environment for international trade, has pushed treasurers to look for new solutions, with a growing number choosing supply chain finance to help them reach their objectives.
The Asian growth story continues to unfold, with the region on track to top 50% of global GDP by 2040. Global production shifts have fed this growth, with a growing number of products now originating in Asia, traded intra-Asia, and destined for the major markets around the world.
Forward-thinking companies are positioning themselves now for Asia’s next chapter, while at the same time navigating the world’s more uncertain economic outlook. For treasurers, this means achieving strong working capital ratios and healthy balance sheets so they can scale their operations while shoring themselves up against any headwinds. To do this, a growing number are turning to supply chain finance (SCF) programmes, which not only improve cash flow by extending days payable outstanding, but also simultaneously provide financial support to suppliers in an efficient and cost-effective manner.
“One of the most important tasks for treasurers is improving their working capital cycle. Specifically for treasurers in Asia Pacific, if they want to expand into new markets, they need access to working capital,” says Aziz Parvez, Asia head of corporate sales at Bank of America Merrill Lynch. “This is why supply chain finance is an important tool. It can help companies meet their commercial goals by improving working capital, and also improving their own balance sheet and the balance sheet of their suppliers.”
A growing trend
Despite the opportunities presented by SCF, until recently, the number of companies that actually implemented the solution in the Asia Pacific has been relatively small. Today, it is growing in acceptance by Asian treasury teams, becoming an indispensable working capital tool for many corporates across the region.
One such corporate is Hong Kong-listed global luggage manufacturer and retailer Samsonite. “As a listed company, we know that working capital is an important KPI for us; it’s something that analysts consider when they are assessing our performance. Also, we wanted to improve our working capital to support the company’s expansions plans in Asia Pacific, especially in China,” explains Paul Melkebeke, chief supply officer at Samsonite.
To help improve cash flows, the company had already extended its payment terms to 105 days, but found this to be a challenge for its suppliers. “If you include the fact suppliers have to order their materials 60-70 days before they ship the goods to us, that meant the payment terms were more like 180 days,” adds Melkebeke. To address this pressure without compromising its highly valued supplier relationships, the company opted to implement a supply chain finance programme provided by Bank of America Merrill Lynch, which saw the bank advance payment to suppliers between 15 and 30 days after the shipment of goods, with Samsonite settling the relevant invoices after 105 days. After starting in Hong Kong using US dollars, the programme subsequently moved into China in renminbi.
Today, fully 90% of the company’s suppliers are using 105-day payment terms, freeing up capital for day-to-day operations and strategic acquisitions.“Suppliers view it as a service that is being offered to them. It gives them the flexibility to draw on the invoices when they need to, making their own cash flow planning a lot more flexible and cheaper,” says Melkebeke.
While corporates in Asia often take the lead in convincing their suppliers of the benefits of supply chain finance, Bank of America Merrill Lynch’s Parvez highlights the key role banks need to play in boosting awareness and acceptance of the solution. “From the moment we start working on a new supply chain finance programme, one of our key jobs is to provide advice and highlight the benefits to suppliers,” he says. “The best way to make it relevant to each supplier is to quantify the benefits. Under a supply chain finance programme, the supplier borrows at an interest rate that is based on the buyer’s credit rating. This is a lower rate than what they would pay if they borrowed on a standalone basis, using their own credit history. More importantly, from a working capital point of view, suppliers can receive funds earlier in the cycle than if they had to wait for the order to be filled.”
Internal buy-in is also a key factor, and Parvez stresses the need for a cross-company approach to putting in place a programme to ensure all departments understand the benefits. “For companies wanting to introduce supply chain finance, it’s really important that the different finance functions – treasury and procurement – work together. Procurement is the department that works directly with suppliers so the programme is most effective when that team plays an active role in making sure that suppliers understand how the programme will provide them with financial support.”
The right fit for Asia
For Melkebeke, another benefit of supply chain finance is that it enables Samsonite to adapt its processes to the Asian business environment. “For example, typically suppliers will want to have more money before Chinese New Year so they can pay bonuses,” he says. “When there was no supply chain finance programme in place, suppliers would have to ask me for permission to make an exception about paying earlier than 105 days. That created a lot of emails going back and forth. Now with the supply chain finance programme, suppliers can discount invoices without contacting me, which makes the whole process far more efficient.”