Deutsche Bank Focus on Supply Chain Finance “Not a trend, but an infrastructure.” Over the years, supply chain finance (SCF) has developed into a comprehensive solution for both corporates and suppliers who seek to manage risk and optimize working capital and cash flow. Rather than being a new-found trend, SCF has grown into a full-blown infrastructure linking corporates, suppliers and banks – spurred by the economic climate of the past five years and far-reaching technological developments. Highlights: – SCF is much more than reverse factoring: it’s an end-to-end infrastructure – SCF offers comprehensive solutions covering payments, FX and finance – Aligning internally as well as with your trading partners is a key ingredient of successful growth – Awareness among Dutch midcaps of the benefits of SCF is steadily growing According to Alexander Mutter, Trade Finance – Financial Supply Chain EMEA at Deutsche Bank, the retail sector in Asia pioneered the concept of attuning financing solutions to supply chain dynamics more than 20 years ago. “Whereas Letters of Credit were often the go-to instrument for cross-border financing, the retail sector slowly became used to more ‘open’ alternatives that offered support to suppliers. Today, supply chain finance covers many more sectors and funding needs. For one, it’s no longer limited to cross-regional flows largely because technological developments have made it possible to interlink various systems for monitoring and executing trade flows; be they import, export or domestic.“ “SCF will become as standardized as regular payments.” Alexander Mutter, Director Trade Finance – Financial Supply Chain EMEA at Deutsche Bank Strategic impact of SCF Supply chain finance is not a stand-alone instrument. It can help corporates identify and remedy roadblocks in the value chain. In that sense, Alexander argues, “SCF is a methodology for analyzing the chain and pinpointing where costs can be saved and risk can be mitigated.” He continues: “Corporates are becoming more and more aware of the complete solution set and actually replicate ‘best cases’. They are reducing their dependency on debt by improving working capital management and working more closely with trading partners. That mind-set flows throughout the entire organization. This ranges from business units becoming more integrated to, for instance, formulating joint KPIs regarding working capital ratios. In addition, the treasury department is getting much more involved in the physical supply chain and procurement is increasingly being centralized with regional hubs in charge of global procurement.” 1/3 Deutsche Bank Emancipation of suppliers “And it’s not just on the ‘buyer’s’ side that we are witnessing change,” says Alexander. ”Suppliers too, are becoming more aware of the benefits that SCF offers them and how they can achieve a win-win situation visà-vis their buyer and their bank. In a way, supply chain programmes have emancipated suppliers by providing them with a mechanism to more efficiently manage their place in the value chain and make use of more comprehensive solutions including services of payments, financing and risk management. Of course, there will always be conflicting interests between buyers and suppliers, with the former calling for relaxed payment terms and the latter desiring earlier payment. SCF solutions are now well recognized for being the best way to deal with these matters.” Flexible liquidity for midcaps SCF has evolved from an ‘Asian programme’ to a global phenomenon, but there are some notable differences between regions and industries, explains Alexander. “In Europe, corporates find that liquidity to support their business is limited, making growth strategies more difficult to implement. We have witnessed a reduction in availability of bank-supplied credit lines and more limited access to capital markets. Unlike other sources of liquidity, such as credit from the capital markets, SCF solutions are flexible and serve as an incremental source of credit as they add to, rather than consume, existing cash resources.” Alexander observes that more and more midcaps are taking full advantage of this ‘flexible liquidity’. “Midcaps are global niche players and are therefore well placed to use existing supplier finance infrastructures and replicate best practices. They all seek the same enhancement. They all look into improving their working capital and equity ratios. If there is one lesson they’ve learned post-crisis, it is that immediate liquidity is key. SCF offers that and more. Its programmes can, for instance, be used to bridge seasonal peaks and make treasury forecasts. Several global banks, including Deutsche Bank, have invested heavily in such functionalities, also on the legal side – for instance, in relation to rights, receivables and how to act in different jurisdictions. “ Physical and Financial In addition to providing flexible liquidity, SCF solutions can improve working capital cycles, which in turn will enhance cash flow management. Extending this cycle, through increasing the days payable outstanding (DPO) – from, say, 45 to 60 days – is one way to improve working capital. In exchange for these terms, suppliers can leverage the creditworthiness of their larger trading partners to obtain more favourable access to non-recourse cash than they could in a bilateral situation. According to Alexander, this is an example of how SCF is attractive on the payment side, because it limits cash exposure. “Ultimately, the physical and financial supply chains are going to integrate further. The ‘physical’ flow of commodities is increasingly becoming more interlinked with the financial side. Procurement, for example, is aligning more closely with finance.” Avoiding ‘old traps’ Only a few banks offer the full package of SCF programs, including a platform, a legal framework and supplier care. Deutsche Bank has long been considered a global leader in this field. It provides service in all regions, has dedicated in-house trade advisors and supports both clients and their suppliers. In addition, Deutsche Bank boasts a network of hubs in all regions offering level 1 support that is multilingual and dedicated to all SCF services. Alexander: “Our network and expertise allows us to support cross-regional trade flows and provide support to suppliers on a local level. Because of our efficient onboarding process, we are able to avoid the old trap of long-term implementation cycles.” 2/3 Deutsche Bank Dutch midcaps find their place in the chain Suzan van Toorn, Head of Trade & Cash Solutions and Market Management at Deutsche Bank in the Netherlands, has a clear view on how the potential of supplier finance translates to the Dutch midcap market. “Dutch corporates realize that attracting traditional forms of financing is increasingly a challenge. As a result of the current economic climate and ever-stricter banking regulation, such as Basel III, it has become apparent that alternatives should be considered. Most Dutch midcaps turn to their local principal banks, and understandably so. However, as globalization continues to gather momentum, supply chains have lengthened and become more complex. Corporates in the Netherlands might already be looking at their accounts receivable with partners in Germany. Also, midcaps are often prime suppliers and have everything to gain from looking at ways to strengthen their position in the chain.” “Midcaps have everything to gain from looking at ways to strengthen their position in the chain.” Suzan van Toorn, Head of Trade & Cash Solutions and Market Management Deutsche Bank Nederland N.V. Dutch specifics? Dutch midcaps often specialize in niche markets and as a result engage in a broad sales-range and multiple trade flows. “This creates a substantial amount of exposure and arbitrage costs,” explains Suzan. “SCF can help them manage those effects. It's my experience that corporates in the Netherlands are relatively critical about these programmes, but once they become more aware of the tangible positive effects, the uptake improves significantly. Of course, the rationale and impact varies between industries and sectors. The automotive sector, for instance, prefers to keep suppliers as close as possible as these are often strategic partners that supply specific high-tech goods. Products supplied to retail companies are generally more interchangeable. In this sector, the cost aspect features more prominently and improving on KPIs is an even stronger component. One common denominator is that you don’t want to improve your own situation at the expense of another partner in the chain. Strong relationships are important, you are all in the same boat. This mind-set is prevalent among corporates in the Netherlands as well.” This article is based on a joint interview with Alexander Mutter ([email protected]), Trade Finance – Financial Supply Chain EMEA at Deutsche Bank, and Suzan van Toorn, Head of Trade & Cash Solutions and Market Management Deutsche Bank Nederland N.V. ([email protected]). 3/3