• TRADE FINANCE

    Supply chain finance boosts resilience

30 November 2022

Covid-19 exposed supply chain vulnerabilities as borders closed. With a move to near-shoring, inventory increases, putting pressure on costs prompting an acceleration in demand for payables finance solutions. flow shares insights from Asia’s The Asset featuring Deutsche Bank’s Steven Yu’s observations on the new working capital ecosystem

Recent developments have highlighted the importance of supply chain resilience as companies seek to insulate their businesses from rising market volatility and uncertainties. New trends have emerged, with banks supporting their clients on their journey towards digitalisation and sustainability.

From JIT to JIC

The just-in-time (JIT) inventory system, a major strategy in supply chain management, aims to keep the minimum amount of inventory to align with production schedules. Recently, however, this trend has shifted towards keeping large inventories on hand, which has given rise to the just-in-case (JIC) approach.

“As more businesses are moving from JIT to JIC, it is necessary that they increase inventory holdings,” says Steven Yu, Head of Working Capital APAC at Deutsche Bank. “An increase in payables on balance sheets has fostered closer relations with banks to provide better inventory financing solutions or payables financing solutions.”

To further improve resilience in the supply chain, and reduce reliance on a single country, many corporates have adopted dual or multiple sourcing.

“We have seen clients moving their sourcing from China to ASEAN countries for cost reasons”, Yu says. However, the bank has also observed a growing number of firms making the shift for strategic sourcing reasons during and after the pandemic. This diversification has increased the relevance of global banks.

Deutsche Bank also sees digitisation and platformisation as “inevitable business trends”. Clients are actively integrating their business partners into their digitised ecosystem and moving their business processes onto a single platform and collaborative ecosystem, Yu adds.

With businesses embracing digitalisation and new technology tools, the need for a more integrated ecosystem has become pronounced, Yu notes. Banks should take a more proactive approach in providing financial services to their clients through closer ecosystem integration.

Supply chain financing

As more players enter supply chain financing, distribution capability has become a vital component. Some blue-chip companies have started to incorporate their upstream suppliers and downstream distributors into their supply chain finance programme. To further enhance their business model, some of these companies have launched more intensive programmes. In China, many big companies such as conglomerate manufacturing corporate BYD have set up their own supply chain finance platforms, Yu adds.

At the same time, a growing number of fintechs are now offering receivable financing to small and medium-scale suppliers. Thus, they need to access to competitive funding while ramping up their distribution capabilities as well. Providing such capabilities is becoming an increasingly important activity for banks, Yu says.

Yu continues, “In the past, it was usually our clients who came to us for financing. Their ecosystem, however, has become more connected under digitisation. Banks, essentially, have to go into their ecosystem to provide them the services.

Supply chain finance is a very traditional banking service and has been around for many years. However, we are seeing a trend shifting from financing only to servicing first, then followed by financing,” Yu explains.

The future of banking lies in integration. “Our multinational clients started to move their sales distribution online two to three years ago. Back then, they created their own website where their distributors were able to log in and place orders. Thereafter, the clients have started to cooperate with tech companies to further enhance their services. They are adding the payment collection services on their own E-shops,” he says.

“Supply chain finance has much lower volatility or lower correlation compared to other types of assets”
Steven Yu, Head of Working Capital APAC, Deutsche Bank

Many multinationals have moved their sales distribution online and are working with fintech firms to improve their services. Some companies are also looking for distributor finance in order to offer “buy now, pay later” options to their distributors, especially the smaller ones. They want to collaborate with banks to provide payment collection and financing services in their ecosystem. Banks need to work very closely with fintechs to be able to offer such services to clients, Yu notes.

Deutsche Bank now looks at supply chain financing as an emerging asset class. “It has much lower volatility or lower correlation compared to other types of assets. Its performance is also much more stable. That’s why distribution has become an important area in order to further grow the supply chain finance business,” Yu reflects. “I think this is a very interesting area because we are seeing more and more new investors showing strong interest in trading such assets.”

Deutsche Bank has been investing a lot in enhancing such capability. With over a decade of track record in the region, the bank has set up its own digital supply chain finance platform and launched a new supplier portal with a self-onboarding feature. It has also come up with a user-friendly data analytics dashboard that gives clients a clearer overview of their payables and receivables.

ESG

Meanwhile, environmental, social and governance (ESG) principles have made inroads into supply chain finance. Deutsche Bank has launched a supply finance programme to help renewable energy manufacturers and suppliers to access liquidity. For traditional players such as pharmaceuticals and chemical industrial firms, sustainability-linked products are provided.

Inventory financing is another area of focus. The bank is now supporting Chinese companies in the electric vehicle (EV) battery value chain, he says. “It is our goal to help these companies with European markets obtain inventory financing more efficiently based on their inventory in hand.”

“In terms of sales and distribution, we also help small resellers or even farmers to access liquidity. This is a more in the area of social responsibility,” Yu concludes.

This article was first published in the Asset on 11 November 2022 together with two explanatory videos from Steven Yu, Head of Working Capital, APAC at Deutsche Bank providing further insights around supply chain resilience and digital transformation

Watch Steven Yu on video

Crafting a resilient supply chain in the post-Covid era – Part 1

In the above video Steven Yu trade traces the supply chain journey from optimisation to resilience. JIT has made way for JIC, along with larger inventories and higher costs, generating a need for inventory and payables finance solutions. He also explains how Covid-accelerated digital transformation has improved cash conversion cycles “because they digitalised the supply chain end to end and moved sales from offline to online”

Crafting a resilient supply chain in the post-Covid era – Part 2

In the above video Steven Yu reflects on how Deutsche Bank has provided supply chain finance solutions in the APAC region for more than ten years. He explains how, in response to the current levels of demand, the bank is launching a new portal where suppliers can self-onboard and both suppliers and buyers can view the status of their transactions on dashboard. He also discusses why the supply chain finance asset class has further distribution reach potential, thanks to rising investor appetite

Steven Yu

Head of Working Capital APAC, Deutsche Bank

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