Trust lies at the center of all trade finance transactions, but these days, with the credit crunch putting a dent in global commerce, safe harbors are in short supply.

Exporters offering payment terms to foreign buyers are more cautious, and banks that support cross-border sales are more stringent in managing the credit risks involved. Working capital and receivables finance, inevitably, are more expensive and less available.

That’s one reason why supply chain finance (SCF) programs are increasingly popular. These strategies, which combine Internet platforms, software and programs, have been brought to trading operations over the past decade by a handful of large, global banks and a cluster of independent technology companies. SCF has demonstrated a capacity to mitigate risks and build trust, particularly in the huge Asia-U.S. and Asia-Europe trade routes on which it has been heavily focused.

It may be a critical, strategic moment for these banks and technology groups to expand their presence in the larger global trade arena. Some leading players in the field seem to think so.

In New York, Kurt Cavano, head of TradeCard, a technology pioneer, says the SCF automation of transactions and its related “visibility” is making “a huge difference in trust among buyers and sellers.” The complete view of transaction events along the chain “makes it possible to support better cash management for both sides.”

In Oakland, California, Greg Johnsen, Executive Vice President Marketing at GT Nexus, a technology group whose platform supports both physical and financial flows, is equally sanguine. “The credit crunch is a catalyst encouraging traders to examine the opportunities for improving their credit use and cost structures. “It’s the perfect time to look at supply chain finance to manage cash and reduce risks.”

And also in New York, at HSBC Bank USA, Simon Constantinides, Senior Vice President and Head of Sales, Trade & Supply Chain USA, stresses that his institution is helping to manage liquidity and the underlying financial risks of complex supply chains by “working with both buyers and their network of suppliers, leveraging our ability to service clients locally across our extensive international franchise.”

 

How it works, helps

Benefits that flow from supply chain finance programs keep getting more numerous. That reflects the dynamism of the electronic world, but also the accumulation of experience that helps fine-tune the services that customers require. The selling points, or at least their pecking order, not surprisingly, keep changing.

Still, four activities and their cluster of advantages have been shaping the field for some time. These include: making automatic payments, supporting supplier discounts and buyer early payments, injecting credit into key points along the chain (pre-shipment, post-shipment, inventories), and a catch-all effort, “integrating” the flows of goods, funds, and information.

For starters, the basic building block has been the electronic creation and exchange of commercial, financial, and logistics documents by suppliers and buyers, and their transport and financial institutions. Here, SCF has been built on the earlier success of physical supply chain management. Benefits include speed, accuracy, and reduced processing costs.

Technology now automatically matches and reconciles the buyer’s purchase orders and the supplier’s commercial invoices, approving and achieving payment. Standard forms are employed. At TradeCard, a standard commercial invoice form is used by the suppliers in its global SCF network. Technology firm Ariba Inc. (Sunnyvale, California) uses an invoice conversion program that delivers the benefits of electronic commerce to small suppliers that still use paper and fax.

The SCF technology has been a key resource in the gradual replacement of letters of credit (LC) by open account payments practices in U.S. trade. The LC, centuries old, offered the assurance of a bank obligation, but was costly, and sometimes cumbersome and slow. Open account (in which the importer pays after receiving an invoice) is now estimated to be used in 80 percent of U.S. transactions, but is more risky.

Supply chain finance creates trust and limits risk in varying ways. The “visibility” of the entire transaction process (purchase order, fabrication, inspection, transport, customs, and the like) on the Web portal lets banks know where the merchandise is. “The two big questions are: ‘where are the goods?’ and ‘where is the money?’” says Kurt Cavano at TradeCard. And “automation and visibility make them known.”

Moreover, information platforms with data on buyers and sellers trim, or eliminate, the risk profile. Ariba Inc., which combines sourcing and financial services, has a network comprising 160,000 suppliers and over 500 buyers worldwide. “The risk assessment is based on the history of the payer, which comes right off the platform, notes Drew Hofler, Senior Manager for Financial Solutions.

TradeCard, on the other hand, operates as a “club,” with all buyers and sellers (both are clients) in its network underwritten on risk up front, and the data and assessments continually updated.

Discounts, early payment

The SCF portals, networks, and data also support suppliers offering discounts to buyers that pay early. Many technology firms have made this strategy a priority service, and a key sales point. With an automatic payment capability, these programs offer the option of discounting all invoices or some of them.

The current global credit and liquidity crunch has increased attention to working capital requirements, especially among overseas suppliers, who are being financially squeezed and face higher borrowing costs.

Sue Welch, CEO at TradeStone Software (Gloucester, Massachusetts), a supply chain technology company, notes that growing numbers of suppliers are exiting their businesses, closing factories. To protect the supply base, “more transactions are now based on the buyer’s balance sheet.”

Viktoriya Sadlovska, SCF analyst at Aberdeen Group (Boston), a technology research firm, says a recent Aberdeen study on global risk management found that 13 percent of respondents saw weak supplier finances disrupting U.S. buyer operations. So, U.S. buyers have a stake in those finances.

And, Drew Hofler at Ariba notes that buyers with strong cash positions “have an opportunity to utilize their cash lucratively, and become ‘the bank’ for their supply chain.” Large corporations such as GE and Dell have been doing this for years. “They use their own cash to finance supplier early payment at rates that are far less expensive to suppliers than other options, and, at the same time, are more profitable to themselves than alternative short-term cash investments.”

Plus, it’s a win-win for both parties, he added, “particularly when that collaboration is facilitated by network technology” that allows thousands of suppliers early payment and the ability to access it at the click of a button.

Injecting credit

The seamless nature of electronics-supported supply chains has brought the capacity to bring credit to any place along its path, but, significantly, to the places where it is needed most. That means that overseas suppliers, typically the weakest link, can often receive working capital at affordable cost. And, U.S. buyers can enjoy longer payment terms through the injection of bank credit.

Delivery of finance is provided either directly by banks, when they are principals in managing the supply chain finance, or indirectly by banks, finance companies, and credit insurers, when technology groups are principals.

The global banks that dominate the business maintain a substantial presence in East Asia, where most of the merchandise involved is produced. That helps them work directly with the suppliers, offering pre-shipment working capital, and work both sides of the transactions with suppliers and buyers in early payments and discounts.

The technology firms in the field keep saying, “We are not banks,” but they work closely with banks, finance companies, and credit insurers to make transactions happen with their supply chain customers. Some, like GT Nexus or TradeStone Software, offer portals and automation that support their customers’ relationships with their own banks.

But others, such as TradeCard and Ariba, have ongoing formal relationships with financing institutions and resources that they consistently bring into transaction management.

Viktoriya Sadlovska at Aberdeen Group identifies a key innovation in the field. While still emerging, buyers and suppliers in many cases now enjoy on-demand access to supply chain financing, which “helps reduce the finance costs embedded in their supply chains and improve their long-term working capital management.”

Furthermore, SCF technology that brings in third-party finance allows suppliers to get paid earlier “at better rates,” while the financial institutions “use a potentially higher credit rating of the buyer” and thus help the supplier reduce its prices (instead of adding in higher credit costs).

Integration and fine-tuning

The seamlessness of supply chain finance keeps getting more seamless, as experience brings adjustments. One visible change can be found in corporate culture: increasingly, executives from sourcing and logistics, as well as finance, units now have a role in SCF, and communicate regularly about it. Departments other than finance often play a part in the decision to sign up with a technology firm.

And, as automation and visibility have shortened the supply and payment cycles, buyers can now arrange smaller shipments and shorter lead times. “In the old paper world, buyers made bigger orders and larger shipments,” says Kurt Cavano at TradeCard. With smaller orders, monthly decisions become bi-weekly and weekly, a big change. And the shorter lead “reduces working capital requirements,” he added.

Or, as Sue Welch at TradeStone Software puts it: Retailers can now offer purchase orders in much shorter cycles, so “the product can be defined at the last possible time, reflecting more precisely what the market wants.”

Meanwhile, a growing part of supply chain finance is to view the entire chain as a single strategy. “It’s a holistic approach, to view the entire operation from design to delivery,” says Welch, and that has led to the use of costing software and programs that consider finance as part of a much larger activity.

In addition, new financial resources are being brought into the field by the technology groups. The latest is The Receivables Exchange (New Orleans HQ), recently launched, which brings in a potentially huge additional funding capability. The Exchange offers an automatic trading platform in which investors (lenders) can buy accounts receivables, including cross-border receivables.

Who does what

Despite its dynamism, the major players in SCF remain a handful of global banks and a handful of technology firms. The ranks of the latter may grow, as new entrants from telecom groups, software and systems integrators put their oars in the water.

Banks have natural advantages in the field, including a large existing customer base and international networks, as well as many years of experience in trade finance. They also have the deep pockets needed to invest in the technology and systems involved. The global institutions, in turn, deliver their programs to mid-size and smaller institutions, which lack the scale required for the field.

The large banks—such as JPMorgan Chase Bank, HSBC Bank, Citibank—offer roughly comparable programs, but distinguish themselves from one another in varying ways.

HSBC Bank, for example, has built in-house industry sector expertise. “Our staff comes from a variety of backgrounds,” says William Nowicki, Head of Trade and Supply Chain-North America. “That includes retail clothing and consumer goods, which are important for dealing with the trade flows from Asia.”

JPMorgan Chase acquired Vastera, a trade management firm that improves supply chain efficiency and supports compliance with government rules.

Among the ten or twelve technology firms with a hand in supply chain finance, very diverse strategies can be found.

TradeCard has specialized in finance over the past ten years. It not only automates the payments process and creates visibility, but has ongoing strategic relationships with banks. Those include JPMorgan Chase and Citibank, which move the money in its transactions, and a cluster of lenders in key Asian countries that provide pre-shipment credit to suppliers. It works closely with Coface, the credit insurer.

GT Nexus focused initially on the logistics side, but has made SCF an equal priority. It has an international office network, with global clients, including traders and financial institutions. It offers a private label program for banks. But it supports customers’ banking relationships, not its own strategic partners. It offers costing and pricing programs to analyze the entire chain.

Orbian Corporation has a major focus on finance, delivers an automated system for early payments and bringing liquidity to the supply chain. Significantly, it funds transactions through continuing access to large banks (U.S., Europe, Japan) and the capital markets. Orbian holds the receivables on its own, but sells notes against them (receivables are the collateral).

Ariba Inc. combines a major role in sourcing, helping clients to find appropriate suppliers, with finance. Its global supplier network has produced a large database on payments history, which can underpin transactions. On the finance side, it struck an alliance with Orbian in 2007, and just recently teamed up with The Receivables Exchange.

TradeStone Software has a major focus on working with retailers, which includes a service that begins with design processes, tracking components inputs, logistics, and includes finance. On the finance side, activities focus on payments processing, include creating a letter of credit request, sending it to a bank, grouping “approved for payment” invoices into a single vendor payment.

It's still early

For all the rapid growth and billions of dollars involved, supply chain finance is considered by many to be still at an early stage. Greg Johnsen at GT Nexus says some trickle down to middle market firms has occurred, but the users are still mostly large corporations. But, “the concept is still new,” there is still a long way to go.

And, as Viktoriya Sadlovska puts it: “Supply chain finance is attractive, and has arrived. But it is still an emerging area in the corporate world. And a big opportunity.” wt



Contributing Editor Richard Barovick is a leading trade finance journalist based in Washington.

Sidebar: Patagonia: A Happy Finance Customer

When Kyle McIntosh arrived in 2005 at Patagonia Inc., the Ventura, California, maker of outdoor clothing had already begun discussions with TradeCard to shift from manual letters of credit to the supply chain finance group’s open account platform. Soon, the production department came on board favoring the move, “and the CEO has been a fan,” says McIntosh, the company’s corporate controller.

The new strategy enabled Patagonia to slash finance costs $100,000 a year and reduce staff by one person, he reports. Meanwhile, sales have expanded 25 percent to $300 million.

And the transition proved to be fairly smooth. Patagonia outsources production to countries in Asia, Latin America, and the Middle East, and 89 factories now use TradeCard’s standard invoice, while the factories and the finance department work with the same set of information. Suppliers “enjoy knowing where they stand on payments,” he says.

No doubt, there was some uncertainty at first. A few suppliers were already working with TradeCard, but others “were unsure about paying fees to TradeCard, and some felt their pre-export finance was at risk,” he recalls. But those concerns disappeared: the fees were lower than those they had been paying to their banks, and TradeCard offered a network of local lenders for working capital, as well as early payment programs.

Also: “Different departments within Patagonia now talk to one another, the sourcing strategy is more crisp,” he adds. Sounds like a satisfied customer.