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Blog for updates and happenings in logistics in the Asia-Pacific region

February 11, 2014

Focus from Physical to Finance Supply Chains in Asia

Filed under: Newsletter — admin @ 10:36 am

As supply chains stretch across the globe with multinational buyers on one side of the equation and a diverse spread of suppliers in emerging markets on the other, businesses have become concerned with the viability of their supply chains, particularly after the tragic event at Fukushima and widespread flooding in Thailand.

During recent years the focus has moved from the physical supply chain to the financial side with suppliers having insufficient working capital and having poor access to credit opportunities from local banks. In fact, direct lending from financial institutions in Asia has decreased since the financial crisis began. Hence businesses understand the need to step in to reduce disruptions and inject liquidity in their supply chain by leveraging their creditworthiness.

Strong demand in Supply Chain Finance

The arguments in favour of Supply Chain Finance have proven to be prescient. The clear and present need for improved liquidity management and diversification of funding sources has translated into a heightened interest in Supply Chain Finance programs. Such programs allow buyers to extend their payment periods for supplier invoices (increasing Days Payable Outstanding), while shortening the payment collection period for their suppliers (reducing Days Sales Outstanding), thus resolving the conflicting interests of each party concerning payment periods.

Compared to a few years ago when Asian companies were awash with liquidity, many Asian companies today find themselves operating in a very different environment. This trend is reflected in strong growth rates in Asia Pacific, which are expected to be in the double-digit range, since Supply Chain Finance is a relatively new financing solution in the region. In addition, there was little incentive for Asian companies to explore Supply Chain Finance solutions as they had relatively cheap access to bank credit in the past. This attitude has changed, however, against the backdrop of credit ‘rationing’ in areas of China and South East Asia where local suppliers have become much more receptive to joining Supply Chain Finance programs.

Especially in China with the appreciation of the renminbi, and with the government and central bank tightening onshore lending, the cost of funds is increasing in dollars, there is strong demand from the local suppliers in Supply Chain Finance as a way to ease working capital.

Multi-bank platforms managing Supply Chain Finance programs

Supply Chain Finance has been widely explained as a method to help reduce inefficiencies and mitigate financial risks in the supply chain. However, many market participants argue that the use of a single, proprietary banking platform is not completely addressing these issues. Gone are the days of a corporate having a relationship with just one bank. Shrinking balance sheets have made it harder for corporates to source funding and the retreat of some banks from Supply Chain Finance has resulted in corporates setting up many facilities with different banks.

This however raises issues in terms of efficiency and complexity around the implementation of different Supply Chain Finance platforms, the handling of legal documentation and the onboarding of suppliers. The new paradigm in Supply Chain Finance centers on the rapid deployment of programs managed by open platform providers that provide multi-bank funding for the corporate while preserving customer standardization a single platform. The recent financial crisis has proven to be a reminder of the importance of ensuring multiple sources of liquidity and avoiding over-reliance on any single bank for funding. Therefore, corporates are increasingly recognizing the value of multi-bank platforms such as PrimeRevenue including the centralized coordination of liquidity within the SCF program. Adopted by a rapidly increasing number of corporates globally and supported by a growing number of financial institutions, multi-bank platforms solve the problems associated with closed, bank-proprietary solutions giving buyers the control and flexibility required to unlock more cash from their supply chains.

As businesses look to offer opportunities on a global level, there is a growing trend for independent multibank platforms such as PrimeRevenue to be set up with different banks funding the program in different jurisdictions throughout the Asian region and beyond.

This and other interesting and relevant topics will be discussed at LogiSYM next month. To find out more, log on to www.logisym.com. This article was contributed by PrimeRevenue. PrimeRevenue provides cash flow to more than 13,000 buyers and suppliers through their OpenSCi platform which offers the control and flexibility required by organizations to optimize their working capital and reduce costs and risks throughout the financial supply chain. Headquartered in Atlanta, PrimeRevenue also has offices in London, Paris, Frankfurt and Prague, as well as in Melbourne and Hong Kong, and operates some the largest supply chain finance programs for clients around the globe. For more information or to contact us, please visit http://www.primerevenue.com

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