More resilience through supply chain finance
Pandemics, geopolitical upheavals, material shortages, climate change: the pressure on supply chains is enormous. The 4th Supply Chain Finance Hub at the Technical University of Munich at Campus Heilbronn investigated whether supply chain finance can promote supply chain resilience. The 2022 theme: "Increasing Resilience with Supply Chain Finance." Two hundred interested participants from 25 countries followed the discussion of leading SCF experts and connected in lively network sessions.
"We need innovative approaches to bespoke resilience that are as individual as companies' supply networks," emphasizes Prof. Dr. David Wuttke, Professor of Supply Chain Management at Technical University of Munich at Campus Heilbronn and host of the event. Companies need to understand their supply processes, the flexibility of their networks and the limits of flexibility in order to better manage unforeseen events.
More liquidity in the supply chain
Supply chain finance (SCF) frees up liquidity in the supply chain by allowing purchasing companies to extend payment terms and suppliers to pay ahead of schedule. Interim financing is provided by a financing partner. For suppliers, the improved creditworthiness of their customers results in an interest rate advantage. Douglas Schoch, Vice President Siemens Financial Services, confirms that the financial advantage stabilizes supplier relationships. "Supply chain finance is a key to greater resilience, which we have integrated into our risk management practices," explains Schoch, drawing the following comparison: supply chain finance supports the functioning of supply networks "like an apple supports health".
Using blockchain
Supply chains and their financing need transparency and end-to-end information exchange. Describing the technical possibilities, Rebecca Liao, Co-Founder and CEO of Saga, says: "For supply chain finance programs, blockchain is a useful technology, but it's not the only option." The advantages are obvious, she says, because blockchain allows material and financial flows to be mapped transparently. "Blockchains are decentralized, secure systems for sharing all the information you need," Liao explains, encouraging, "The technology is mature, companies can use public blockchains to privatize their programs for their own purposes."
Regulation can help
With regard to financing partners, Inés Lüdke, Head of Working Capital Sales Germany at UniCredit advises balance: "A good mix of financing instruments and funding partners is considered a plus for supply chain resilience." Tighter regulatory requirements, for example to combat money laundering or for business partner screening, as well as ESG compliance, also have an impact on the tool. The associated transparency is welcomed, and not just at UniCredit. "Regulatory requirements reduce risks in supply chains and enable secure trade relationships," says Dr. Jan Conrady, a partner at the international law firm Clifford Chance. Still, the regulation drives firms to focus primarily on compliance rather than supply chain resilience.
Enforcing ESG goals
Can supply chain finance help enforce ESG goals? This is the question the SCF Hub explored back in 2020. How does it look today, two years later? "Supply chain finance is initially a neutral tool," emphasizes Thomas Dunn, CEO of London-based supply chain finance provider Orbian. Companies need to actively determine what specific goals they want to pursue with SCF. Then SCF programs can play an important and integral role in the transition to sustainable, climate-neutral value creation.
Diversifying supply chains
Supply chain finance is also an effective means to enable the diversification of supply chains and finding alternative supply partners. "Immediate payment means that suppliers are more willing to cooperate with companies in these difficult times," observes Douglas Schoch, referring in this context to the trust between supply partners that always has to be established first.
Staying ready to act
Will supply chain finance remain interesting in the face of rising interest rates? After all, this makes programs more expensive. "The situation tends to be neutral for supply chain finance, as rising interest rates affect entire currency areas and thus increase financing costs equally for all parties," explains Inés Lüdke from UniCredit. Suppliers would tend to benefit if the financing costs of purchasing companies that offer such a program for their suppliers rise proportionately less than those of suppliers. Reasons include differences in the credit ratings of the parties and/or the countries in which they refinance themselves. "The principle remains that liquidity is provided to the supply chain from another often less expensive source of credit," Lüdke explains. "Cash makes you flexible and therefore resilient," is how SCF expert Douglas Schoch sums up the effect.
Balancing efficiency and resilience
The conclusion of the SCF Hub: Supply chain finance increases the ability to act and the flexibility of a company and its partners through increased liquidity. This increases their resilience, which is becoming increasingly important for risk management. "The requirement to be able to react flexibly to unforeseen events will lead to a rethinking of risk management, which until now has focused on the systematic identification of risks, their evaluation, and mitigation strategies," predicts Prof. Dr. David Wuttke. This requires a harmonization of physical information, and financial flows along the supply chain, as well as a reconciliation of the competing goals of efficiency and resilience. "On this issue, each company must find its own balance. Supply chain finance can help to establish this balance," Wuttke concludes.