Global Logistics and Supply Chain Strategies - May 2008 - (Page 46)

their cash,” says Heuser. “One thing those companies can measure and well understand is the value of their own working capital.” Third-party financial institutions are able to step in and meet both player’s needs, he says. “If a supplier has met its terms and obligations to the buyer, the buyer will approve an invoice for payment, but often its terms call for that payment to actually be made 60 days or 90 days out,” says Johnson. “A financial institution can step in and finance that particular invoice, or pay it immediately at a slightly discounted rate. That puts cash into hands of the supplier, who may be very anxious to get that capital and drive it back into production.” Since the bank’s risk is minimal, it charges the supplier less for this service than the supplier would have to pay to borrow the money, “so it is really a win/win/win,” he says. “The supplier gets cash sooner at a favorable rate, the bank is able to make the loan and process the transaction and the importer still gets the payment terms it is looking for or can even extend those terms to hold its cash longer.” Another goal that large, global companies can achieve with a smart supply chain finance program is to keep inventory off their balance sheets until closer to the time of sale, says Vukas. Again, this is accomplished through partnership with a thirdparty financial institution. “Balance sheet optimization is critical for buyers and suppliers, so the idea is to get someone else to own the balance sheet item called inventory for a period of time,” he says. This use of “credit arbitrage” also brings down the cost of goods sold. UPS Capital has partnered with a European bank to execute this process. “The bank takes ownership of the goods at some point between the hand-off from the supplier to the buyer,” Vukas explains. “For example, if a supplier is manufacturing in China, our partner bank can take ownership of the goods in China or while they are en route to destination. That ownership can continue while the goods are in a supplier’s warehouse in the U.S. and are turned over to the buyer only when it is ready to have those assets on its balance sheet.” This arrangement can be financed at much lower rates that the weighted average cost of capital for either the supplier or buyer, he says. UPS, as the physical mover of the goods, administers the ownership transfer. Because of its unique position between the physical and financial supply chains, UPS Capital can serve as a bridge between the two, Vukas says. “The biggest challenge for the financial services industry is to understand how to translate the physical movement of goods into more efficient lending in the supply chain. Because we ship goods for a living, we believe we can provide that information to the lenders out there.” Just providing financial managers with visibility to milestones in the physical supply chain enables them to use the milestones as triggers for numerous financial processes, says Johnson. “Financial terms of the deal typically include and reference physical supply chain events, so if you are able to provide a window into those events for your financial supply chain, you can really improve the speed and efficiency of financial transactions.” Again, he says, this means a shorter procure-to-pay cycle and lower capital requirements. Education Needed While solution providers are actively pursuing the area of supply chain finance, they are finding that a lot of education still needs to occur among potential customers. When JPMorgan acquired Vastera, a global trade management software company, it envisioned a solution “that would tie together management of the physical piece and the financial piece in such a way that one plus one would equal more than two,” says Heuser. “What is coming up in discussions with clients, however, is that companies are really out of sync on this issue. They really haven’t thought much about how the negotiation of terms impacts their working capital or how to bring buyer organizations together with supply chain managers and finance managers. So we find we have to do a little work ahead of time just to make sure we get the right people in the room—the treasurer and the vice president of supply chain and someone from the sourcing group, and maybe even a technology person. “We have these cross-functional solutions with great value propositions, but we have to start earlier with our clients to help educate them on the value of even going down this road,” Heuser says. “This is an argument that we find often resonates more with the CFO than with the supply chain guy.” “At UPS Capital we have been some- what frustrated because in trying to bring down these departmental silos we really have to educate both sides,” says Vukas. One problem, especially among larger companies, is that a reward system is in place that reinforces a silo mentality. “Someone in the transportation department is rewarded for reducing the cost of transportation, but from a holistic viewpoint, driving down the cost of transportation may increase the cost of procurement. What we are suggesting is that CFOs in these larger organizations take control of this strategic imperative and bring together a cross-discipline team of people to study this.” Vukas says UPS Capital is actually finding this concept easier to sell among smaller companies, where it offers a bundled solution that includes physical and financial services. “We are beginning to see traction with smaller companies because they invariably need working capital and when they get a concept that makes sense, it usually takes only one decision maker to get things going.” Another approach UPS Capital is taking is to convince companies to run a pilot in a contained environment to show the benefit, Vukas says. “We are finding that an easy way to introduce this is with a small trial. We advise a company to test the concept on a given trade lane or with one supplier. Then if they see a benefit, as we believe they will, they can expand it to other parts of their business.” Once a few industry leaders start adopting supply chain finance as a strategy, there will be a “waterfall” effect, he says. “I think companies will start to see the power in bringing the financial and physical worlds together,” he says. “Until they are brought together, we can’t truly synchronize commerce.” To access this article online, visit The Digital Edition at www.SupplyChainBrain.com. Resource Links JPMorgan Chase, www.jpmorganchase.com TradeCard, www.tradecard.com Management Dynamics, www.managementdynamics.com Aberdeen Group, www.aberdeen.com UPS Capital, www.upscapital.com GXS, www.gxs.com BB&T, www.bbt.com QuestaWeb, www.questaweb.com GT Nexus, www.gtnexus.com 46 MAY 2008 www.SupplyChainBrain.com http://www.SupplyChainBrain.com http://www.jpmorganchase.com http://www.tradecard.com http://www.managementdynamics.com http://www.aberdeen.com http://www.upscapital.com http://www.gxs.com http://www.bbt.com http://www.questaweb.com http://www.gtnexus.com http://www.SupplyChainBrain.com

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Global Logistics and Supply Chain Strategies - May 2008

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