An increasing number of companies in Canada are turning to supply chain finance programmes to improve the efficiency of the cash conversion cycle, safeguard supplier relationships, and drive the ESG agenda. It’s a trend that looks set to intensify as firms move towards more sophisticated methods of treasury management.
In comparison to its global counterparts, the Canadian market has to date been somewhat behind the curve in terms of its adoption of supply chain finance programmes. But this is changing as more and more Canada-based organisations with global supply chains seek to avail themselves of the benefits that such programmes can deliver. The trend has been accelerated by the Covid-19 pandemic, which has brought to light the fragility of modern supply chains.
SCF picks up pace
For many years, around the globe, supply chain finance programmes of all kinds have been a source of critical working capital and a means of improving the stability of players across the entire business ecosystem.
But the uptake of supply chain finance has lagged in some countries, such as Canada, where a more conservative corporate culture has meant that firms have favoured traditional capital market offerings, and not pushed out payment terms as aggressively as other markets to gain working capital. Suppliers, on the other hand, have looked at factoring or receivables financing, to get paid earlier.
Moreover, some of Canada’s largest firms, such as gold and oil corporations, as well as others that operate within the mining industry, typically have their own nuanced and well-defined supply chain and payment terms for their commodity production. This means there is generally less competition and fewer options for introducing efficiencies into their core production. Very often overlooked are the opportunities supply chain programmes can bring across the spectrum of production input costs.
However, a continued uptick in the country’s non-commodities and services exports – combined with the impact of recent crises over the last couple of decades – has attracted increased interest in supply chain finance amongst Canadian companies.
“In Canada, over the past few years, we’ve seen much more interest in the adoption of different kinds of supply chain programmes as companies seek to draw on the multitude of benefits that these programmes can provide,” says John Landry, Managing Director, Treasury and Trade Solutions Head of Citi Canada.
“As we continue to talk to our clients about supply chain finance programmes, a number of important elements have come to the fore for companies in different situations.”
Landry explains that clients may be pursuing advantages around working capital, and improved cash metrics; or they may be looking to adjust payment terms. Alternatively, they may want to ensure that their suppliers are secure and healthy; or, in instances where their input of goods cannot be easily substituted, it becomes more about obtaining continued supply.
“Companies are increasingly making use of these programmes as a means of securing their supply chains. During the pandemic, for example, buyers concerned about not being guaranteed supply of a particular material that they were reliant on, turned to supply chain programmes to ensure that suppliers of those goods had sufficient liquidity and were able to stay in business,” says Landry. “In doing so, buyers were able to differentiate themselves from other companies by offering better terms, such as early payments, to their suppliers and therefore establish themselves as preferred partners.
“The non-localised nature of the pandemic highlighted the fact that companies who produce or distribute a product with a unique, difficult to substitute input need to have a clear plan for ensuring supply; relying on contingent suppliers doesn’t solve the problem when production challenges are global in nature.”
Other important driving forces behind the recent escalation of supply chain finance programmes include the shift towards a more modern economic environment, which requires faster and more efficient management of data, as well as increasing regulatory expectations around the transparency of data and transaction flows throughout the supply chain.
“Many alternatives to supply chain finance, including factoring and receivables finance programmes, continue to be built on fax, email and unstructured data. But in the context of increasing data needs, the escalating pace of imports and exports amongst our clients, as well as the growing diversity of their supply chains have made those alternatives less and less desirable,” says Landry.
As more supply chain finance programmes have been rolled out by firms across the country, treasury and finance departments at other companies have witnessed these precedents, and have become a lot more comfortable with getting involved in similar initiatives and setting up their own programmes, he adds.
Integrating ESG agendas
Environmental, social and governance (ESG) considerations, already a key issue for supply chains before the pandemic, have come into sharper focus over the last year, and are now an increasingly important factor in how supply chains are managed and financed.
Companies’ responsibilities to their consumers and their investors – both ever more insistent on improved ESG performance – are forcing them to take a closer look at their supply chains to ensure such issues are being addressed.
An evolving global trend is the incorporation of such goals into supply chain finance programmes, and the provision of tangible incentives to suppliers – such as preferential pricing – to drive sustainable behaviours.
“If you’re a treasurer or CFO in a large firm, and your CEO has mandated that ESG considerations be built into the firm’s funding and across its operations, a supply chain programme is one of only a few options to make that happen,” Landry explains. This often plays out in buyer sourcing policies.
Banks have a vital role to play in helping companies achieve their sustainability objectives. As a global leader in the shift to sustainable finance, Citi leverages its extensive trade expertise and infrastructure to support its clients through a range of measures, including facilitating access to independent ratings and analysis firms to allow greater insight into corporate supply chains, which in turn helps clients create more sustainable supply chains.
“This extends to layering in ESG requirements: if a client has a specific interest around minority-owned businesses, environmental ratings or goals, or a certain governance profile within their firm, those are all things that we can customise to their particular corporate agenda,” says Landry. “We work with clients to translate their particular environmental, social or governance goals into independently verifiable scorecards and goals for their supplier network. We arrange for independent monitoring of those goals and the client can then direct pricing and term enhancements for suppliers meeting or making progress against those goals. This enhances transparency and accountability and creates positive economic incentives to demonstrate progress against the firm’s ESG priorities.”
Citi’s Treasury and Trade Solutions Group in Canada includes a dedicated supplier onboarding team that works with clients’ procurement and treasury departments to craft supply chain finance programmes in such a way that makes it easy to bring suppliers on board.
The outlook for Canada
As supply chains become even more globalised, data access requirements grow, and regulatory oversight continues to intensify, it is becoming an increasingly critical requirement for companies to work with a global banking partner that has boots on the ground on both sides of transactions, and which is equipped with a sophisticated, multi-language, multi-currency platform that underpins the ability to exchange data and provide support.
“Citi’s involvement in assisting Canadian firms on outbound and inbound trade is a top priority for us,” says Landry.
The bank has been present in the Canadian market for over a century and as clients’ needs continue to evolve, it is dedicating additional resources and effort to ensure its ongoing leadership.
“As companies gain more comfort with the supply chain finance product, whether their needs are economically driven or otherwise,
Citi is well positioned to support their business-critical objectives,” he concludes.
Citi’s “Doing business in….” series, exclusive to GTR, takes a look at the practicalities of doing business in, and engaging in cross-border trade with, high growth markets. This fourth instalment focuses on Canada, and showcases the views of John Landry, Managing Director, Treasury and Trade Solutions Head of Citi Canada.