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Global supply-chain finance refers to the set of solutions available for financing specific goods and/or products as they move from origin to destination along the supply chain. It is related to a quickly growing use of a battery of technologies and financial business practices that allow for dynamic payables discounting. A global supply chain refers to the network created among different worldwide companies producing, handling, and distributing specific goods and/or products.[1]
Contents
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1 Overview 2 Benefits of GSCF 3 Market size 4 Market growth 5 Further growth potential - Challenges 6 The role of the GSCF translator 7 Global supply-chain finance solution set 8 Market players 9 References
Overview[edit]
With the supply chain lengthening as a result of globalization and offshore production, many US companies have experienced a reduction of capital availability. In addition, the pressure faced by U.S. companies to improve cash flow has resulted in increased pressure on their overseas suppliers. Specifically, non-US suppliers receive pressure in the form of extended payment terms or increased working capital imposed on them by large US buyers. The general trend toward open account from letters of credit has further contributed to the problem. As a result, there is a need for global supply chain finance (GSCF) solutions. The market opportunity for a GSCF solution is significant. The total worldwide market for receivables management is US$1.3 trillion.
Payables discounting and asset-based lending add an additional US$100 billion and $340 billion, respectively . Only a small percentage of companies are currently using supply chain finance techniques, but more than half have plans or are investigating options to improve supply chain finance techniques. While buyers are extending payment terms to their suppliers, the suppliers often have limited access to shortterm financing and, therefore, a higher cost of money. This cost-shifting to suppliers results in a financially unstable and higher-risk supply base. Overall, the benchmark report showed that companies should be pursuing three key areas of improvement: GSCF financing; GSCF technology; and GSCF visibility.
Benefits of GSCF[edit]
The role of GSCF is to optimize both the availability and cost of capital within a given buyer-supplier supply chain. It does this by aggregating, packaging, and utilizing information generated during supply chain activities and matching this information with the physical control of goods. The coupling of information and physical control enables lenders to mitigate financial risk within the supply chain. The mitigation of risk allows more capital to be raised, capital to be accessed sooner or capital to be raised at lower rates. The need to increase capital or inject capital into the supply chain more quickly is being caused by several factors: 1.) Market trends with respect to the global supply chain have caused companies to demand an integrated approach/solution to physical and financial supply chain challenges: a.) Buyers are looking to optimize their balance sheet by delaying inventory ownership. b.) Suppliers are looking to obtain funds earlier in the supply chain at favorable rates, given buyers desire to delay inventory ownership. c.) middle-market companies are looking to monetize non-US domiciled inventory to increase liquidity. d.) There is wide interest in integrated supply chain finance solutions. 2.) Globalization of the United States and Western Europes manufacturing bases has resulted in fewer domestic assets that can be leveraged to generate working capital. 3.) Most small and medium suppliers to US and European businesses are located in countries that lack welldeveloped capital markets. Without access to efficient and cost-effective capital, production costs increase significantly or the suppliers go out of business. 4.) Letters of credit, a long-standing method of obtaining capital for suppliers in less developed countries, are on the decline as large buyers are forcing suppliers to move to open account. 5.) There is a desire to ensure stability of capital as supply chains elongate. Another Asian financial crisis (such as the one in 1997) would severely disrupt US buyers supply chains by making capital unavailable to their suppliers.
Market size[edit]
Given the competitive nature of the GSCF market (approved payable finance) and due to the fact that business undertaken is covered by customer and bank confidentiality, sources of information regarding market size and players are constrained and not widely available in the public domain. As a result, indications on the market size are based mainly on estimates.The current, global market size for Supply Chain Finance is estimated at USD 275 billion[2] of annual traded volume, which translates in approximately USD 46 billion in outstandings with an average of 60 days payment terms. It is still relatively small compared to the market size of other invoice finance solutions such as factoring, which remains the largest trade finance segment and is primarily domestic in focus. The potential market for Supply Chain Finance for the OECD (Organization for Economic Co-operation and Development) countries is significant and is estimated at USD 1.3 trillion [3] in annual traded volume. The market serving European supply chains is approximately USD 600 billion.[4] Based on these figures, the potential Supply Chain Finance market size for the US is estimated to be approximately USD 600 billion in traded volume per annum.[5] A recent comprehensive research paper[6] estimated that currently there are 200 GSCF programs of scale in place. These programs are run both domestically and cross-border and in multiple currencies. Still, the market potential is far from its capacity. If examining spending of large organizations, such as Lowes USD 33 billion in spend, it becomes apparent that Supply Chain Finance programs usually require a multi-bank platform due to the credit and capital issues associated with banks.[7]
Market growth[edit]
Market experts estimate that only 10% of the global available marketplace has been satisfied with Supply Chain Finance solutions, revealing a large potential market for growth. The market is expected to continue to expand strongly in the coming years at a rate of approximately 20-30% per annum and 10% per annum by 2020.[8] The highest growth of supply chain finance programs currently originates from the US and Western Europe. Asia - India and China in particular, are considered the markets with most potential in the coming years. The driving forces behind the rapid growth of supply chain finance programs are:
Globalisation has increased the risk in supply chains and the impact on the financials of corporations.
Working Capital Management has risen at the top of the CFOs and Treasurers agendas.
Strong interest from suppliers regarding the provision of liquidity and enabling lower financing costs.
and provided by banks specificallyfor large international trading companies, they do not use common foundations. In order for Supply Chain Finance to take off on a broad scale, a fresh impetus isneeded. A tipping point could easily be reached by solving the following challenges.
On-boarding of Supplier. Current Supply Chain Finance programs require the buyers tradingpartners - the suppliers - to be enlisted on the buyers Supply Chain Financeportal. The multitude of such platforms generates operational issues forsuppliers wishing to benefit from various Supply Chain Finance offerings viatheir buyers funders.
Know-Your-Customer (KYC). Most funders require KYC checks to be performed onsuppliers being enlisted as new trading partners. This procedure not onlyincreases the total processing cost, but it also puts thebusiness case for all parties including the service provider, funder, buyer andultimately the supplier at risk.
Available Capital and Liquidity. With 90% of liquidity in Supply Chain Finance programs provided by large, global commercial banks, there is a large amount of tradeassets, which cannot be covered by such financial institutions. Further regulations such as Basel III might impact the risk appetite and fundingcapacity of banks and make it more attractive for nonbank funders to step inand support Supply Chain Finance facilities. Limited to large buyers. Todays Supply Chain Finance offerings are mainly addressingthe large buyers with sound credit ratings whereas the real Supply Chain Finance opportunity extends to large suppliers too, in particular in terms of payment assurance and risk mitigation.
Proprietary legal documentation. Current Supply Chain Finance offerings use proprietary legal documentation, which makes the signingof non-standard agreements a costly, complex and time consuming process forcorporate clients and their suppliers. Therefore, the market is currently facing challenges related to the absence of interoperability and legalstandards.
Standardized product definitions. The naming and definitions of the various Supply Chain Finance solutions vary from one market player to the other, which makesit difficult for corporations to compare offerings and consider switching fromone provider to another.
Physical and informational control are the keys to a GSCF solution. There is a need for logistics providers and financial services firms to join together to develop precise visibility tools that provide CFOs and global supply chain managers with the data they need and lenders with the collateral security required to provide capital. In fact, according to a November 2006 study conducted by the Aberdeen Group, large companies are four times more likely to be planning to spend over US$500,000 in supply chain finance technology over the next 18 months. Once a robust information-based system is established, trading partners, logistics companies, and banks need to be able to access the information quickly and efficiently. The starting point for information about goods being transported must be the entity that is transporting the goods the supply chain services provider, transportation company, and/or logistics partner. These are the entities that have the physical control of the goods while in the supply chain. Access to this information is a must from a demand planning perspective. Knowing where the goods are in transit, the financial services provider can more confidently extend financing at various milestones within the supply chain. There is a critical role missing in this equation, however, and that is the supply chain finance translator the entity that is experienced in both logistics/transportation and financial services. The translator is the subject matter expert, if you will, that can bring all entities to the table transportation and logistics; banks; buyers; and sellers and speak the various languages and understand the needs of each party. In addition to participating in the financial transaction, the translator can help bridge the information divide between the physical and financial worlds, providing critical analysis about the information being collected from the supply chain. The following explains this translator role:
Activity
Logistics/Transportation provider
GSCF translator
Goods
Deliver transportation, logistics, and supply chain services i.e., move the goods.
N/A
N/A
Collect and provide information about goods disposition to Information customer, translator, and financial services provider.
Verify data transfer; aggregate, Receive data from translator analyze, manipulate, and provide in order to authorize financial data; authorize financial transactions. transactions.
Funds
N/A
Participate in funding for transaction and assume a proportionate share of the risk.
Participate in funding for transaction and assume a proportionate share of the risk.
Identify prospects, market GSCF, Identify prospects, participate participate in sales calls, identify in sales calls, assist in financial risks, assist in structuring credit solutions. structuring credit solutions.
Financial benefits
Interest income, fee income, deeper relationship with customer, financial services providers, and logistics/transportation provider.
Interest income, deeper relationship with customer, translator, and logistics/transportation provider.
Examples of solution providers are Misys TI Plus, TradeCard, Demica, PrimeRevenue and Manhattan Associates.
Market players[edit]
Supply Chain Finance practices have been in place for over adecade. Three distinctive Supply Chain Finance structures have crystallized.
Buyer managed platforms. In this structure the buyer owns and runs the Supply ChainFinance platform. Some large retailers such as Carrefour[9] or Metro Group[10] are using this structure and managing the finance program, supplier onboarding, andliquidity themselves.
Bank proprietary platforms. The Supply Chain Finance structure is managed by large commercial banks providing the technology platform, services and funding. This structure is used by several large buying organizations such as Carlsberg, Boeing, Marks & Spencer and Proctor & Gamble.
Multi-bank platforms. The structure that has exhibited the strongest growth rate is represented by independent third party supply chain finance providers offering multi-bank platforms. This structure separates the entities, which manage the platform a specialised service provider such as PrimeRevenue and the funding partner, which provides liquidity and takes the credit risk. Based on the fact that funding in SupplyChain Finance is uncommitted, no bank can fund in every jurisdiction or currency and due to the general limitations in terms of credit risk appetite, companies such as Volvo,[11] Siemens,[12] KPN[13] andother leading organizations have chosen this structure. In terms of market share Global Supply Chain Finance is managed mainly by a handful of players including large commercial banks such as Citibank, JPMorgan, Deutsche Bank, HSBC, Santander and PrimeRevenue. Together they manage about 40% of the market share. The rest of the Supply Chain Finance is serviced and funded by a variety of local banks and small, independent service providers. PrimeRevenue is the largest Supply Chain Finance platform in the market, which has partnerships with more than 40 banks and other financial institutions[14] and is responsible for more than 10% of the global marketshare in terms of managed trading volume. The multi-banking platform is managing the largest Supply Chain Finance programs in the
world including Volvo, Whirlpool and several other facilities from global organizations.
References[edit]
1. Jump up^ TradeCard Launches Trade Express Tto Support Smart Growth, Drive Lean Supply Management and Enhance Cash Flow and Margins for Suppliers 2. 3. Jump up^ Global Business Intelligence, 2013 Jump up^ E.Hoffman, O.Belin, Supply Chain Finance Solutions, Springer, 2011, http://www.amazon.com/Supply-Chain-Finance-SolutionsSpringerBriefs/dp/3642175651/ref=sr_1_1?ie=UTF8&qid=1373396691&sr =8-1&keywords=oliver+belin 4. 5. 6. 7. Jump up^ Demica, 2012 Jump up^ PrimeRevenue, 2013 Jump up^ Global Business Intelligence, 2013 Jump up^ http://primerevenue.com/news/press-releases/primerevenueand-lowe%E2%80%99s-to-speak-on-supply-chain-finance-(scf).html 8. 9. Jump up^ Demica, 2013 Jump up^ http://www.lecomptoirfinancier.com/Affacturage_affacturage_confiden tiel_societe_daffacturage_factor/104-FRAffacturage_gt_Reverse_factoring_affacturage_inverse_financement_des _fournisseurs 10. Jump up^ http://www.miag.com/ 11. Jump up^ http://www.gtreview.com/trade-finance/global-trade-reviewnews/2007/September/Volvo-adopts-PrimeRevenue-solutions_4322.shtml 12. Jump up^ http://finance.siemens.com/financialservices/global/en/products_soluti ons/treasurysolutions/pages/treasury_solutions.aspx?stc=dexfs120003 13. Jump up^ http://resources.procurementleaders.com/PIU/Supply-ChainFinance-Full-Report-no-download/files/assets/seo/page19.html 14. Jump up^ http://primerevenue.com/about/
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