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Trade Solutions

Supply Chain Finance For All Seasons

Andrew Betts

Andrew Betts
Global Head of Supply Chain
Global Trade
J.P. Morgan

The various economic crises of the past few years have yielded a much tighter focus on risk management, moving well beyond the four walls of an organisation and extending throughout the supply chain. These same organisations also have been under pressure to improve their own working capital arrangements, often including aligning payment terms with many suppliers; something clearly at odds with the need to safeguard the health of key trading partners.

Supply Chain Finance on the Executive Agenda

The twin issues of working capital optimisation and supplier health now command a much greater degree of executive attention than was the case just five years ago. With the economic outlook in
Europe disappointing at best, the last thing an organisation needs to discover is that it is unable to manufacture because a key component is no longer available. Even those suppliers that are not at risk of financial trouble could struggle to finance an uptick in orders.

These inter-related challenges are increasingly being managed at the most senior level within multinational companies. More organisations in B2B sectors are viewing supply chain finance as a solution to both their own working capital requirements, through the monetisation of receivables, and as a means of safeguarding their supply base in turbulent times. By providing suppliers with a means of accessing liquidity through reputable financial institutions based on the strength of their own credit standing, corporates can ensure that their trading partners have the ability to accelerate cash receipt on a truly global scale.

Flexibility in Action

Organisations can now design supply chain finance programmes to be as complex or simple as the business dictates. One European corporate put a scheme in place on a short-term basis for a particular supplier which was critical to its seasonal business and had just received a credit downgrade, putting it at risk of failure. Others may offer the ability to access liquidity to as many as 500 suppliers across multiple countries, enabling them to use the facility whenever it is crucially required.

Some leading corporates are going much further, institutionalizing supply chain finance into wider working capital management strategies, which allows their own organization to consistently monetise receivables from well-rated counterparties to a panel of banks. These companies – particularly those in Europe, where this is more readily established – have been able to generate millions of euros of working capital as a result while keeping this off balance sheets. There is also greater corporate demand for the monetisation of inventories as part of this expanding trend, putting supply chain finance at the heart of many financing discussions in companies today.

Engaging Partners in Supply Chain Finance

So times are changing. The current economic circumstances have undoubtedly garnered far greater attention on the subjects of supplier health and working capital optimization but a number of senior protagonists have to be engaged, which causes untold dramas in the coordination of key stakeholders across sprawling multinational corporations. Procurement and Treasury are always at the management table, while the CFO will make the ultimate call on whether the business can afford to allocate part of its credit in this manner. Technology is also increasingly involved, as organisations are looking to streamline the number and complexity of their integration projects, and this has to compete for resources like any other as companies invariably scrutinise costs across their businesses.

Normally, though, there is a catalyst for such discussions. It could be very real concern that one key strategic supplier has been identified as being particularly vulnerable, or a subsidiary could face the pressures from head office of internal charges for negative working capital. Often it falls on the senior business director to identify the problem and initiate discussions internally which could ultimately result in a holistic approach that benefits the business on many levels. This may not always be bread and butter for those individuals, and it can sound complex and somewhat daunting. With the knowledge and expertise of a truly global partner bank these concerns are alleviated.

Evolving with the Times

Over the course of the last five years, the capabilities of supply chain programs have evolved dramatically. J.P. Morgan runs supply chain finance programmes across 30 different countries and at least 10 currencies, which simply wouldn't have been an option in the past. Now, it's possible to offer finance in currencies such as U.S. dollars, pounds, euros, rupees, renminbi, pesos, reais to hundreds of suppliers across multiple jurisdictions, from Europe and the U.S. to Asia and South America, and wrap one technology package around that.

Sometimes organisations have legitimate concerns about financial institutions withdrawing credit lines or dropping out from offering such programmes altogether. It is well documented that some lenders have had challenges accessing U.S. dollars, too, which accounts for almost 80 per cent of international trade. It's something heard on a daily basis, which is why choosing an established provider that is committed to this space is critical to give the degree of reassurance clients require.

It would be wrong, though, to merely view supply chain finance as a means of tackling risk issues posed by poorly rated suppliers. It can also be a vehicle for facilitating growth, helping suppliers cope with increased order requirements or developing new partners in emerging markets; in heavy industry or with retailers expanding globally, for instance. Many corporates use supply chain financing as a means of building up their order books as they look to expand.

Any corporate looking to set up such an arrangement must have executive commitment and tenacity to pull it all together, strong stakeholder buy-in across different competing internal departments and phenomenally good relationships and connections with their subsidiaries around the world. Properly executed globally, these timely solutions can be an effective means of overlaying financial strength at critical stages in the supply chain, ensuring companies and their key partners are well placed to survive the current conditions and capitalize on the growth opportunities that will ultimately appear.

It takes you from head office into the depths of your subsidiary structures in mainland China, rural India and the countryside of Brazil. There aren't many financing solutions you can call upon which do that.

About the Author

Andrew Betts, Global Head of Supply Chain Finance at J.P. Morgan, leads a team responsible for delivering global modular and integrated solutions to address clients' financing and broader needs across the global supply chain. Andrew has considerable experience in international trade, supply chain financing and trade logistics services. He has previously held senior management positions at Deutsche Post/DHL, ABN AMRO and RBS.

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