Beyond the invoice

March 2019

Supply chain finance is growing at 20% a year, with around US$2tn in payables available for financing. But how can this be made safer and more sustainable – and accessible to SMEs? flow reports on key themes at BCR’s 4th Supply Chain Finance Summit in Amsterdam

When around 150 participants descended on Amsterdam’s Grand Hotel Krasnapolsky to hear more about how technology is extending the reach and transaction transparency to SME suppliers, they were taken on something of a roller coaster - and came out smiling.

“Everything links back to understanding the underlying physical supply chain, the trade cycle and the cash conversion cycle,” said Trade Advisory Network’s John Bugeja.  His point is that there needs to be more collaboration between the physical and the financial world and the key stakeholders in that. Ideally, the buyer, the seller, the carrier, the customs authority, the insurers and the inspection agencies all connect to create an ecosystem. While the industry is not there yet, it remains a goal and, he said, it was important to move forward towards that in stages that were beneficial.

It was this grounding in commercial flows that shaped the conversations, covering how supply chain finance (SCF) is reported in financial statements so that analysts know what debt is and what is not, how procurement and corporate treasuries work together so invoices are just touched once, and how SCF can drive sustainable manufacturing processes.

All about the invoice

The business is growing at 20% a year and McKinsey estimates there are around US$2trn in financeable highly secure payables globally.At the same time there is a sense the business is maturing, it is “coming of age”, reflected Deutsche Bank’s EMEA Head of Supply Chain Finance, Anil Walia, in his opening keynote talk. Improving days’ payable outstanding (DPO) is no longer the only reason companies use supply chain finance (SCF) programmes, but procurement teams see SCF is a means of protecting their supply chains by supporting suppliers.

Deutsche Bank’s EMEA Head of Supply Chain Finance, Anil Walia gives the opening keynote talk

Deutsche Bank’s EMEA Head of Supply Chain Finance, Anil Walia gives the opening keynote talk

Digitization will provide impetus to growth. Acceptance of a European standard for electronic signatures (as is being implemented across the EU) will make the documentation process and the due-diligence on suppliers much smoother said Walia. There is huge scope to improve the digital journey as the e-invoice begins to replace paper invoices as the basic financial instrument.

"Once you have got an invoice you have got something pretty tangible and you ought to get it financed unless there is a failure in the system. There are ways of financing invoices and it is harder in emerging markets."
John Bugeja, Trade Advisory Network

He also made the point that SCF does not really help suppliers pre-invoice when the need to “prime the pump” and “get the goods to a stage when you can raise the invoice”. That is the domain of purchase order finance and distributor finance, neither of which are yet connected digitally or integrated into any kind of end-to-end solution. This remains to be an “opportunity”.

Low interest rates have made it possible for suppliers to get cheaper liquidity elsewhere, said Walia, but he explained that SCF is set for growth now that interest rates are rising and crude oil price volatility is waking up some companies to the idea of working capital management. Banks are setting up SCF programs in the Middle East – some for the first time – and the region has become something of a new market for the technique.

Changes in buyer-supplier dynamics have also added to the heightened sense of risk. The whole globalisation vs nationalisation debate has, he added, highlighted how reliant interdependent buyers and suppliers are on each other and how fragile the whole network is.

Accounting treatment

Although current growth rates look sustainable, care needs to be taken on setting standards – be it the terms that that are used to define supply chain finance, or in fact the issues of disclosure in financial statements, said Walia. While the ICC Banking Commission Standard Definitions for Techniques of Supply Chain Finance took two years to come to fruition in the current publication, the official term, “payables finance” has not had significant adoption, and ratings agencies have gravitated towards seeing trade payables as debt, thus potentially rearranging the playing field.

On 16 December 2016, Moody’s Investors Services pronounced that the Spanish energy and telecoms multinational Abengoa’s reverse factoring programme “has debt-like features”; softening its stance a year later to “trade payables in a reverse factoring arrangement will be treated on a case-by-case basis”. However, following the Carillon collapse in early 2018, Moody’s pronounced this “exposes flaws in the accounting for supply chain finance arrangements” in a report published on 13 March that year.

"Carillion's approach to its reverse factoring arrangement had two key shortcomings: the scale of the liability to banks was not evident from the balance sheet, and a key source of the cash generated by the business was not clear from the cash flow statement"
Trevor Pijper, a Moody's Vice President, Senior Credit Officer and author of the report

Procurement-led supply chain finance

It was good to hear Stefan Windisch, Senior Cash Manager, Treasury Operations at Roche and Boris Huttenlocher, Senior Manager, Receivables & Supply Chain Finance at Siemens demonstrate how they support their networks of suppliers. Roche, said Windisch, runs the SCF programme jointly between its Procurement and Treasury department offering it as Switzerland native in 11 countries, multiple currencies and through 19 connecting group entities to it suppliers. With a programme spend of currently but growing +EUR550m, the Roche corporate treasury has had the SCF payment process as an additional payment option since 2011 and is currently implementing it in Canada, the UK and China. Roche is also implementing e-invoicing with a purchase order flip (addressing the earlier point made about the invoice processing being the crux of the whole transaction journey).

Huttenlocher shared the Siemens SCF global programme coverage, demonstrating how the EUR3.5bn scheme connected 105 Siemens entities in 25 countries (the map only seemed to have gaps in Africa and parts of South America), comprising more than 3000 suppliers from 31 countries. Supported by 22 funding banks from North America, Europe and Asia with 16 currencies. Next steps, he said were to increase regional coverage and intensity of utilisation of the SCF offerings, and ensure the receivables side of the business was stable. Data analytics are deployed to examine the full picture – “the more information we get the easier it is to predict events and market reactions,” he said. Siemens is also working with third parties to come up with holistic self-service solutions so that “the whole experience is more interactive”.

Both corporates made it clear that they saw onboarding support and pricing flexibility from their relationship banks as “very important”.

Sustainable supply chain finance

“Supply chain finance is the only way to positively incentivise your suppliers to improve their sustainability performance,” said Michael Kobori, Chief Sustainability Officer at Levi Strauss at a BSR Conference in 2018.

BSR’s Managing Director Tara Norton explains why sustainable supply chain finance is responding to changing consumer standard
BSR’s Managing Director Tara Norton explains why sustainable supply chain finance is responding to changing consumer standard

In one of the closing sessions with a slide including Kobori’s quote, BSR’s Paris-based Managing Director Tara Norton said that while the IFC/GTNexus/Levi Strauss & Co demonstration that improved sustainability scores from garment suppliers rewarded with better financial terms did incentivise compliance with its Global Trade Supplier Finance terms of engagement, more could be done to transform supply chains so that such schemes were no longer exceptions. “There is the opportunity to do more to drive sustainable manufacturing among suppliers, not only at the first tier, but also at tiers deeper in the supply chain,” she said.

According to Norton, the growth of SCF, its rapid transformation away from paper-based processes into digital delivery, and the corresponding technology to capture and integrate sustainability data from the supply chains means that embedding environmental, social and governance risk management in supply chains – and their financing – has no reason not to be business as usual. BSR explains the rationale behind this in more detail in their report, Win-Win-Win: The Sustainable Chain Finance Opportunity, published in June 2018.

Norton’s talk set the scene for the final panel of the event that looked at how the SCF roadmap for 2019 and beyond might be drawn.

Left to right: Martin Hommes (IFC); Anil Walia (Deutsche Bank); Peter Mulroy (FCI), Martin van der Hoek (credit insurance consultant)
The final panel of the event looks at a roadmap for 2018 and beyond. Left to right: Martin Hommes (IFC); Anil Walia (Deutsche Bank); Peter Mulroy (FCI), Martin van der Hoek (credit insurance consultant)

Walia called for the industry to sit down with ratings agencies, regulators and accounting bodies and agree on how supply chain finance should be treated in company accounts. Trade payables still have to be paid – even if it is not bank debt. Further clarity of the product offering and structure is needed, he said, to avert the danger of “a negative watershed event for the SCF business”.

BCR’s 4th Annual Supply Chain Finance Summit took place 24-25 January 2018 at the Grand Hotel Krasnapolsky, Amsterdam

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