Submitted by Niklas Callerström, Miriam Hard, and Niclas Osmund of SEB, republished from the Benche, a financial community for corporate treasurers.
Growing international trade between emerging markets and between developed and emerging markets, paired with the still ongoing global economic crisis has put its finger on an important issue; the physical supply chain must be supported by an equally important and well functioning financial supply chain. The financial supply chain works like oil in the engine, making things run more smoothly without malfunctions.
Ideally corporates should be able to mitigate risks such as suppliers going bankrupt or goods being stuck somewhere due to lack of financial solutions or financial strength. Another important aspect of international trade is of course to apply the right tools to deal with currency fluctuations. The list can be made long of possible results from a poor functioning financial supply chain that could negatively affect a company's focus on its core business. We have all seen that, especially during and in the wake of the financial turmoil.
So, what is the status and priorities within corporates today? A general observation is, e.g. looking at manufacturing companies, that most companies have come a long way in optimizing its physical value chain. Resources and efforts has been focused to make the relationships with suppliers as efficient as possible by addressing everything from sourcing to delivery of components at the right time as well as negotiating pricing and payment terms. It's the same story on the customer side when it comes to inventory/finished goods, logistics and after sales opportunities. Taking a look at the financial side of things there seems to be quite a potential in aligning the financial value chain to work in harmony with and as efficiently as the physical one. Activities are often performed locally, i.e. not as centralized as procurement, production and logistics, and supporting systems are often not aligned. Hence, it is difficult even to find out what the potential for improvement really is.
When addressing the financial value chain of a company there is obviously some hands-on solutions that banks can deliver. E.g. payments infra structure, liquidity management techniques, risk mitigation instruments and different financing alternatives. In order to create real value for the customers however, banks need to put their individual solutions into a greater context -the reality of the corporate. What to do and how to implement is one thing. How it interlinks with the business is something else. The challenge for banks is to really understand what the customer needs to put in place in order to derive value from the solutions provided. The important question is: what does the total solution for the customer look like apart from and complementary to what a bank is delivering?
On the cash management side there should be a potential to get more insights from banks and get a sounding board based on previous experiences of e.g. payment and collection factory set-ups and cash concentration solutions.
When it comes to mitigating risks in trade flows where open account is not desirable, one could expect advise on when to use different instruments for different situations depending on geography, counter party, etc. Also advise related to currency risks, i.e. how and when to take mitigating actions, should be sought in the framework of the financial value chain. Looking at financing linked to the financial value chain, advise should be sought on how to assess different options in order not to get stuck in the middle, bearing the burden from both the company's customers and suppliers. Solutions like receivables financing and supply chain financing should be discussed in this context.
To our knowledge comprehensive solutions still remain to be found. Banks are traditionally quite product driven organizations with a high degree of specialist competence addressing the different parts of the financial value chain of a corporate. The challenge for banks is to get all competencies gathered in one common approach without losing sight of the details. The way to accomplishing this is to build on experience and profound understanding of the customer base and their every day environment as well as their strategic challenges and goals. One way of making use
of this knowledge is to develop tools for benchmarking of performance and a view of what is best practice for the relevant parts as well as the whole.
We believe that banks investing in capacity to set up a framework and tools for bringing advise and guidance to their corporate customers in one common approach will be more successful compared to the banks choosing to stay with a product oriented approach. Banks also need to convert advise and best practice discussions into concrete and comprehensive solutions that corporates can implement in their business driving working capital efficiency, mitigating risks and establishing a robust and optimized financial value chain. In the end it is all about adding value to the relationship.