The full integration of physical and financial supply chains has long been impeded. But the growing availability of standardised solutions for messaging and communication looks set to enhance information sharing for all.
While physical and financial supply chains are often viewed as two separate, but entwined, sets of events, there is growing recognition of the need to integrate them more closely.
For corporate executives involved in trade and trade finance transactions, being able to access and share valuable physical and financial supply chain information can be crucial to the arrangement of cost-effective financing when it is needed most, and lead to major improvements in their companies’ working capital optimisation.
There is frequently a significant divergence between the management of the two functions within any given organisation, says Pravin Advani, global trade executive, Asia Pacific at JP Morgan treasury services.
“The managers of the physical supply chain often pursue goals such as economies of scale, buffer stocks of inventory, robust infrastructure and bargaining power that allows them to negotiate more favourable terms with their suppliers – all of which tend to require injections of working capital,” he explains. “For the managers of the financial supply chain, a key objective is to minimise the amount of working capital tied up in the supply chain, freeing up those funds for redeployment into alternate growth areas and reducing financing expenses.”
However, Advani recognises that there are major moves to address this disconnect: “We are beginning to see a greater push to align technology within and between companies, enhance information flows, minimise and reduce documentation, and better match skills sets on both sides of the fence with professionals that have an understanding of their counterparts’ objectives and challenges,” he says.
“Today, there is growing recognition that those companies that can align and synchronise their physical and financial supply chains will have an advantage, and a corresponding emphasis on more co-ordinated management of the two.”
Similarly, Simon Constantinides, regional head of trade and supply chain, Asia Pacific at HSBC, believes that corporates today are increasingly linking their management of physical and financial supply chains processes.
“In the past, the people responsible within a company for managing the production process were distinct from those on the financial side, but there was a recognition that the two needed to be brought together,” he says. “Great progress has been made over the last five years or so, and a lot of the financial strategies deployed are now closely linked to the physical supply chain. Companies also recognise that the banks they do business with can do a lot for their suppliers as well.”
Nevertheless, several major issues continue to hinder the true linkage of physical and financial supply chains – including their growing internationalisation and complexity.
In Asia, strong growth in global trade has been followed by a recent boom in regional trade. According to research conducted by RBC Capital Markets and published in January 2012, 46% of China’s exports and 56% of other Asian countries’ exports are now intra-regional.
This has given rise to more intricate, cross-border supply chains, impacting the level of supply chain visibility achievable.
“Companies today are increasingly global in their outlook, whether that means looking across borders for new customers, or scouring the globe for the best and most cost-competitive suppliers,” says JP Morgan’s Advani. “As these trading networks grow larger and more diverse, so too do the challenges of exchanging information, payments and documentation.”
The problems of supply chain visibility are further compounded by the fact that the multiple partners involved, which range from corporate buyers, banks and suppliers to logistics companies and shipping companies, typically rely on different technology platforms and use different messaging and communication formats, thus restricting their ability to share valuable information with each other.
“Within both the physical and financial supply chain you can have numerous parties involved from the beginning to the end; each with differing areas of expertise, varying interests, and often competing priorities,” continues Advani. “When you add in technology mismatches; different standards and protocols in terms of information sharing and documentation; as well as language, time-zone, and cultural differences, it can become a difficult, convoluted process.”
Meanwhile, Ken Stratton, managing director and global head of sales, global transaction services (GTS) at DBS points out that the deployment of different technologies by various service providers is such that it can make accessing information held in the physical supply chain alone difficult.
He explains that companies gather and manage physical supply chain information from a number of documents, including bills of lading, freight forwarders’ receipts and warehouse receipts, but that efforts in the past to create supply chain finance portals, which pool together this information, have been met with mixed success.
“These portals would pool together information on the movement of goods from various parties into a central data base, but this approach has encountered challenges because most of the different parties – which include banks, freight forwarders and logistics companies – use different technologies, with different information formats such as electronic data interchange (EDI) and extensible markup language (XML),” he says.
“There is definitely significant value in the creation of a solution that brings every aspect of the supply chain, both physical and financial, together into a manageable format.”
Banks can play a bigger role.
Advani believes that trade banks are in a strong position to play a bigger role in linking physical and financial supply chains.
“The transfer of information and the need for financing and payments are clearly focus areas for managers of physical and financial supply chains, which provides an opportunity for trade finance banks to leverage their global infrastructures, technology investments and payments expertise to step in and bring the two together,” he says.
“By allowing for automation over manual processing, enhancing visibility in tracking transaction-related data and financial flows and linking widely spread counterparties with a financial bridge, banks can help to drive down costs and create a better controlled, measurable and more predictable financial operating environment.”
There are also strong suggestions that logistics companies could take a lead by gathering physical supply chain information and sharing it with banks in more closely-knit collaborations.
As logistics companies take responsibility for the transport and warehousing of goods in transit, they are well placed to provide banks with the physical supply chain information they need on the goods involved, their location, as well as cargo loading and shipment dates, when assessing the provision of financing.
“Third party logistics providers and fourth party logistics party providers who have developed supply chain management systems are capable of synchronising the physical, informational and financial networks to the benefit of all parties involved,” says Frank LaMonaca, vice-president, international division at UPS Capital, the financial services arm of the global logistics services provider.
“The growth of intra-regional trade in Asia and global trade has reinforced the importance of supply chain integration to ensure the effective flow of goods and information. Now, it is more important than ever for all partners to be engaged in efforts that would make information sharing easier and timely.”
However, HSBC’s Constantinides believes that although logistics companies can service their corporate customers with physical supply chain information, making it available to banks may prove tougher.
“Logistics companies can drive information flows and make information available to their customers, enabling the latter to find out where their inventory is – be it in docks, on a ship or in a warehouse. However, getting that information to banks is harder as different players have spent vast amounts of money on different technological interfaces,” he says. “Banks also do question whether this type of information can provide them with improved risk control.”
Meanwhile, Stratton at DBS believes that the questions banks need to address when looking to finance goods in transit go beyond knowing where the goods are – to who actually owns them.
“Over the years, banks have worked closely with logistics companies to implement ways in which they can improve the level of information made available on goods in transit,” he says. “However, this does not provide a total solution, as knowing where goods are does not also mean that the owner or their bankers have control or ‘actual ownership’ of the goods.
“There can be cases where goods are sitting on the dock and someone else may pick them up, which can result in messy court cases as overseas suppliers or local buyers fight to recover their goods.”
One of the solutions being mooted here is for logistics companies to actually play a bigger role in the financing of goods in transit – and possibly even acquiring them themselves.
UPS Capital has already moved in this direction by offering financing – on its own and in collaboration with traditional lenders – for inventory and goods in transit under the control of its parent company.
“An integrator such as UPS can satisfy customers’ needs for better management of their physical supply chain, offer real-time information, and provide supply chain financing and risk management solutions to help customers grow their business,” says LaMonaca.
The difficulties that different supply chain partners face when sharing information is also being increasingly addressed by the availability of global standards for electronic messaging and communication.
“Over the last three to four years, companies themselves have been pushing for bank-agnostic solutions. Technology providers are also doing their part in the lobby for standards,” says HSBC’s Constantinides, adding: “In the past, many banks wanted to have their own unique technologies, but are now starting to realise that this is not necessarily what their customers will accept.”
Swift is at the heart of efforts to introduce standardised electronic messaging formats for both banks and corporates in a major move to improve information flows and reduce the huge amount of paper-based documentation that trade and trade finance transactions have historically required.
Having launched the Bank Payment Obligation (BPO), which performs a similar function to a letter of credit but is electronically transmitted over Swift’s Trade Services Utility (TSU) in 2010, it is now involved in a major collaboration to develop an electronic bill of lading solution for documentary credit-based trade transactions.
Connie Leung, director, payments and trade markets, Asia Pacific at Swift, believes that Asian corporates and banks will spearhead the take-up of both electronic solutions to improve supply chain linkages, reduce the risks associated with paper-based documentation, and speed up the transfer of information required by all the counterparties involved in cross-border trade transactions.
“The demand has always been there in Asia for both the TSU and the BPO and this is because of the high level of intra-regional trade,” she explains, pointing out that as the distances involved in shipping goods within Asia is much shorter, it is not uncommon for goods to arrive before the required trade documents, resulting in a mismatch in the timing of physical and financial supply chain cycles.
“Typically, intra-regional shipments can take as little as two days, but traditional payment guarantees can involve 14 days of processing. By comparison, there is a five-day turnaround cycle with the BPO.”
Of the 86 banks worldwide that are members of Swift’s TSU community, 39 are in Asia. Moreover, of the 19 banks that have adopted the BPO, nine are of Asian origin.
Bank of China is already a key proponent, having participated in the first ever live cross-border BPO issued by Bank of Montreal (to guarantee its client’s payment for goods being imported from China), which it used to extend finance to the Chinese exporter.
It has since also issued live BPOs on behalf of Chinese companies importing from Asian countries that include a BPO to Hua Nan Bank in Taiwan for goods being imported by Shanghai Silk from Yarn Jazz in Taiwan.
Meanwhile, Swift’s collaboration with INTTRA, a global provider of e-commerce solutions for the ocean freight industry, on a new electronic bill of lading solution is another major initiative, which specifically aims to knit physical and financial supply chain players together by providing the parties involved with access to standardised information.
Leung points out that original bills of lading, which serve as documents of title to the goods being shipped, have always needed to be on paper, but that their processing gives rise to too much manual work, loss of time and costs associated with using a courier – not to mention the possibility that the paper documents may get lost.
“The benefit of moving the bill of lading to electronic transmission is to reduce the trade processing time from the current minimum of 14 days,” she says, pointing out that, as with letters of credit, such paper-based documents can take longer to process than the timescales involved in intra-Asian trade shipments. “The electronic bill of lading will also reduce courier costs, facilitate automation and lead towards data matching as opposed to the paper checking of documents.”
The new solution is currently being piloted in Asia by a trading group which includes New Zealand-based dairy company Fonterra (represented by Australia New Zealand Bank), which is shipping goods to importers in Korea and China, represented by Korea Exchange Bank and China Merchants Bank respectively, and also involves two shipping companies.
Phase one of the pilot, which involved testing the electronic solution while still sending paper-based documents by courier was completed in December 2011, while phase two, which will see Swift’s Fileact for electronic exchange of information completely replace couriers, is scheduled for the first half of 2012.