In this interview, Ruud Nijs, Head of Financial Logistics, Rabobank, digs deep into the area of supply chain management, identifying the three layers to the supply chain – physical, information and financial. He looks at new technology including portals, mobile payments, XBRL (eXtensible Business Reporting Language) and RFID, as well as the role SWIFT Trade Services Utility (TSU) can play in making the supply chain more efficient.

Let’s start off with the phrase ‘old wine in new bottles’ – why are you applying this to supply chain management?

Everybody is talking about the supply chain – you can’t go to a seminar without hearing about it. But this is a very old topic that we’ve been hearing about for twenty years and probably 80-90% of this area is recycled topics. I’m tempted to say to my colleagues at the other banks, wake up – don’t use this as a commercial tool to get more companies into your banking arena, but really dig into the area and see how you can help to make processes for industries more efficient.

What is of interest here are the innovations that we can link into this topic. Under the heading of supply chain management we are now focusing on innovations in areas such as portal technology and international standards, for example. I believe this should be done on a multi-bank level.

So what is actually new about this topic?

Supply chain as a whole has three layers. There is the physical supply chain – the actual movement of goods. Then there is the information supply chain – the movement of data. And there is the financial supply chain – the movement of money. The trick is to combine these three layers – which stimulates new product development to optimise the processes aligned by SCM. For example, you can do reversed factoring, where you actually finance the customers’ suppliers. There are a lot of things which can be done to manage the supply chain from beginning to end:

• First of all technology has been developing, so now for example there is portal technology where you as a user group can use your own white labelling on portals. That’s where you create a financial platform for the supply chain for a specific industry, rather than for the bank.
• Portal technology is increasingly being created for PDAs. This can play a big part in areas such as transport and distribution (eg speeding up the time for releasing goods).
• Portals are now completely multi-bank, so it’s not a question of one bank dominating this kind of change or only using it to bring customers into their account structures.
• Another area is formats such as XBRL (Extensible Business Reporting Language). Companies can exchange data without printing it out, putting it in an envelope and sending it by post, only for someone else to type it in again. This speeds up the business between suppliers and buyers and reduces the risk involved. The electronic exchange of data between companies and banks is much more possible than ever before.
• Swift TSU (Trade Services Utility). The implementation of Swift TSU can really help to decrease costs in the financial supply chain and can speed up processes in the physical supply chain.
• New portal technology enables us to integrate Cash Management, Trade and Treasury far better into one complete proposition and sync that with the physical layer.

Will SEPA influence the supply chain?

SEPA is an important factor here. The credit transfer is more or less a done deal, the card schemes are done as well, and the pan-European direct debit is still under development. We foresee a fourth stream in SEPA, and that’s e-invoicing/m-payments (mobile payments). The idea is that at least in Europe and hopefully worldwide we will have a full standard of exchanging invoices between countries which will immediately drive supply chain management forward as well.

As a result of all this the role of banks within the supply chain will change. The bank used to come and say, do you want an account? Do you want a credit facility? Trade services? Now the banks are asking customers, what is your export policy? What are the payment terms between you and suppliers and customers and how can we help with that? What prevents you from making your (financial) targets? If you ask these questions you open up an abundance of new possibilities of innovation between banks and corporates, particularly in the financing area.

Another thing is the reduction of working capital by the reduction of days payable outstanding and the reduction of outstanding days of storage. The automation of processes can also reduce the risk of fraud. Insurance is another angle. If you can understand the risk in your supply chain you can mitigate it. You can do this using treasury and banking instruments but you can mitigate with insurance as well. Companies tend to start off by managing the credit risk of their suppliers, which is their number one problem. At the EuroFinance conference in Vienna I saw that most of the big companies were very interested in this approach. At SIBOS we learned that companies don’t want banks to sell products but to assist them in optimising the end-to-end process.

Ultimately I see the role of the bank changing – the bank is no longer coming in and selling; it is stepping into the supply chain as a partner.

Rabobank is traditionally very strong in the food and agricultural sectors – what can supply chain management do for these sectors in particular?

We believe that supply chain management will play a big part in these sectors. Sustainability is a key issue here. You can take the example of an orange that is hanging on a tree in Brazil and destined for a supermarket shelf in France. If you can actually manage that supply chain and know exactly where that orange has been and what has happened to it you can certify the supply chain by giving it a green certificate confirming for example where it has come from and what chemicals have been used. That’s a new angle for us – it’s extremely important because sustainability and corporate responsibility is high on the agenda for most of the banks.

Physical goods have an international focus – they have to travel from country to country. It is a perfect industry in which to start piloting new approaches. I see supply chain management more as a way of thinking that aligns business processes, rather than a new product and therefore there will never be a big bang launch. We believe that the way forward with supply chain management is to make this area less vague by piloting new approaches and building open standards.

From the point of view of the corporate treasurer are there genuine benefits here?

Absolutely. There are new developments, for example RFID (radio frequency identification) technology, which enables wireless payments to be made by mobile phones. There are mobile phones with RFID at this moment. The key is to use the technology and work together in these pilots with companies such as transporters and distributors to come up with ideas about using it better. But this should be done based on open standards and not in a closed, proprietary manner. That’s the important message there.

Mobile payments is a topic we have been hearing a lot about recently. Do you think this is going to become mainstream?

I do believe that it will become mainstream but it will take a couple of years. I always joke that we didn’t notice the mainframe turning into a desktop because mainframes became smaller and smaller. I believe that a large part of the market now doesn’t see that laptops are turning into PDAs. If you only focus on desktop and laptop solution technology you will absolutely miss the boat. If you have a PDA in your hand and can see on a real time basis whether or not a particular company has paid its bills you can immediately improve the sales productivity. So there is a sales productivity angle, as well as a financing angle and a working capital reduction angle. For companies this will bring a lot of advantages.

Do you think the security implications will hinder take up of this type of product?

There is always a security implication. If you approve a payment instruction on a piece of paper, you put it in an envelope and you put it in a mail box, it can be tampered with. You can never guarantee 100% security. I believe that the security standards at this moment are so high that people are more willing to accept the residual risk.

In practical terms, we currently offer online banking via PDA for information purposes only. On a technical level we can easily link payment instructions to it as well but of course we want to be sure before we roll this out further.

This type of technology can actually enhance security as permissions can be tailored to individual users. People will be allowed to see and do only those things they are allowed to see and do. So a sales person for example might only be able to see the account of company X, whereas a corporate treasurer is authorised to access information at a more detailed level.

What is Rabobank doing in the supply chain area?

The Financial Logistics offering can be divided into two areas. First of all, we have liquidity management: cash flow management and payments and receivables. Automation and commoditisation are the key words there. By implementing those we are helping the whole philosophy of supply chain management to take a step forward. If corporates grant us insight into their purchase orders and the invoice data, the bank can combine liquidity with cash flow forecasting and with that reduce the need for working capital. In addition the bank can provide all kinds of finance (eg factoring) instruments.

The second area focuses on consultancy and risk management. We are training our people in this arena, we have our FL consultants in place who are able to sit down at the board table and ask the right questions and act as a consultant. Our products are tailored for working within this philosophy. I like to call this next level banking.

We are now involved in some tangible pilots:

• We are creating a food and agri marketplace (‘Agroportal’). Companies working in food and agri can have access to this environment, and use it to exchange ideas and track their own goods. It’s like a closed user group for specialised food and agri companies – not necessarily just Rabobank clients.
• As I mentioned earlier, we are working on a second pilot for companies who are (for example) getting oranges out of South America. Companies in Europe really want to know where the oranges have come from, whether forced labour was involved, what kind of chemicals were used, how long it has taken to get the oranges off the tree and into the shop. We are working with a couple of companies to see if we could deliver that.
• A third one relates to credit risk. By providing supplier finance to our customers’ suppliers, we can finance goods by looking at the deal rather than the customer itself. So we are working to see if we can use this to help customers to increase their business and mitigate their risks.

What topics will we be talking about next year?

In 2008 SEPA is starting to become a reality. Up to now, it was the banks that needed to do all the work but next year companies will be able to benefit from it, provided that they themselves are ready for it as well. Corporates will need to understand the advantages of having SEPA. One of these has to be European cash management. I believe that the creation of payment factories will increase and that companies will focus on payments rather than receivables. On the payables side it really makes sense to try to concentrate on one set of accounts. On the receivables side it is much better to leave the banking structure as it is country by country in most of the cases. In 2008 you will not benefit from changing that set-up.

Again, supply chain will be on the agenda but hopefully in a much more tangible form than it is now. I hope that we will see a lot of pilots coming up and companies working together, making use of new technology.

On the treasury side, in 2008 we would hope that the existing liquidity crisis will be short-term. The whole credit industry however will see the impact of this in 2008 as well, as solvency with banks will be getting more scarce. In light of that, what we expect is that for companies with excess cash, the industry will come up with new products especially for that excess cash. At this moment most of the excess cash is simply put on the account of deposits – in the future there will be more and more treasury instruments to manage your excess cash, such as money market funds. So that’s a more general forecast for 2008.