Treasury Practice

Supply chain centres

Published: Jan 2017

Container ship importing and exporting goods for trade

Optimising supply chain activities is a priority for many companies in Asia. As well as centralising procurement processes, some companies are seeking further efficiency by setting up global supply chain centres which can centralise both procurement and treasury activities.

For companies in Asia, managing supply chain activities effectively is an essential component of a business’ success. Companies which do not perform well in this area can be at a considerable disadvantage when it comes to reducing costs, minimising risk and ensuring the quality of goods.

“Companies increasingly recognise their supply chain as a competitive advantage and acknowledge that failure to optimise its performance can lead to extra costs such as lead time, flexibility, quality, lost sales and added risk in a global environment,” comments Hari Janakiraman, Head of Core Trade at ANZ. He notes that there is “increasing recognition of the relationship between optimised supply chain management and financial performance”.

In order to manage this area effectively, companies are adopting different approaches tailored to their industry profile, customer needs and size, Janakiraman says. “There’s no longer a one-sized approach to supply chain management, as product positioning and distribution is becoming more decentralised into multiple local or regional centres,” he adds. “Adoption of this model enables global synergies, while also remaining sensitive to local requirements.”

Locations

While the concept of supply chain centres or hubs is nothing new, the way in which companies approach this area is evolving – as are the geographical locations being chosen for centres. Supply chain centres tend to be closely associated with global manufacturing locations.

“Typically many of these manufacturing locations are in Asia – especially in countries such as China, Vietnam, India, Thailand, Malaysia and Indonesia,” says Venkatesh Somanathan, Global Head, Supplier Finance Solutions at Deutsche Bank. “We are also seeing a lot of new manufacturing companies coming up in Eastern Europe, while agreements like NAFTA have created significant manufacturing bases in Mexico. The architecture and the formulation of global supply chain centres have basically been to map this location out.”

Somanathan says that in addition to existing supply chain hubs and logistic centres, newer centres are also emerging in other locations. “We’ve seen the emergence of Dubai within the MENA region, while in Asia, Sri Lanka is positioning itself as the critical supply chain hub between the Middle East, Europe and Africa on one side, and the Asian bloc on the other.”

Somanathan says that companies need to locate their supply chain centres in jurisdictions which have open economies and which are relatively close to the relevant supplier communities. “For example, many of the largest industries around the world have suppliers based in China,” he says. “As well as controlling the quality and quantity of output, it is also essential to speak to suppliers in their local languages in order to understand their challenges and concerns and avoid any shocks being transmitted into the supply chain.”

This doesn’t mean that centres are needed in every country, however. Somanathan says that a global supply chain centre based in Hong Kong can be used to talk to suppliers in Korea, Japan, China and Taiwan in the same time zone and in the relevant languages. “If there are any issues or bottlenecks downstream, companies can be quick to react and do their part in addressing those issues,” he explains.

In addition, Somanathan says that different industry sectors may have different requirements when it comes to setting up global supply chain centres. For example, many garment and textile companies based in the US and Europe have suppliers located in Vietnam or Bangladesh.

“It is essential for them to have somebody on the ground to assess the quality and quantity,” Somanathan says. “In order to have that capability, global buyers have inspectors or agents who ensure the quality and quantity and supervise the purchase. It is essential for companies to be close to suppliers – but they don’t have to be located in each of these locations.”

Combining treasury and procurement

Companies have long been developing techniques and structures to centralise their procurement processes in order to operate more efficiently. Likewise, many companies have taken steps to centralise some of their treasury activities. While these activities have tended to be managed separately, some companies have now developed structures which can be used to centralise both the treasury function and the procurement and sales function.

Michael Vrontamitis, Global Head of Trade, Product Management at Standard Chartered, says that global supply chain centres can combine both the treasury function and the procurement and sales function. “We are increasingly seeing that companies have centralised procurement, they have centralised sales – and they are now moving into these centres which manage not just the treasury piece of it, but also the logistics of the whole supply chain.”

Aziz Parvez, Head of Asia Pacific Trade and Supply Chain Finance at Bank of America Merrill Lynch adds, “In some cases, we have seen supply chain hubs develop very closely with the treasury. While treasury may not be involved in the logistics side, treasury is very closely involved in working capital.” Parvez points out that procurement and treasury can have competing goals in some cases: the treasury might see the benefit of increasing DPO in order to improve working capital, whereas procurement may be focused on getting early payment discounts from suppliers. As such, hubs which combine treasury and procurement can support a more consistent approach.

Benefits of a combined approach

Vrontamitis says that where supply chain management is concerned, the benefits are about optimising the gross profit margin. “Then you get the treasury benefits, which are around managing FX risk,” he explains. “If you are doing all the purchasing and selling into the local market, you sell in local currency and buy in whatever currency is most appropriate, depending on your inputs. You can therefore do all the basic treasury techniques to eliminate and reduce FX risk.”

Vrontamitis notes that companies using global supply chain centres can also manage the leading and lagging in order to take control of the working capital side, as well as building liquidity management structures and structures such as receivables finance or supply chain finance.

Parvez adds that cost savings are a key goal when setting up a supply chain hub. “The more decentralised the set-up is, the higher the cost in terms of both infrastructure and people, so bringing it all together in one location means saving on the cost,” he says. “This model also increases efficiency: if people are more aligned, there is a more standardised approach in terms of both procurement and financing. Combined with this, companies can then link procurement with the financial part of the supply chain.”

Reconfiguring global supply chains

Hari Janakiraman, Head of Core Trade at ANZ, says that the following six trends are driving the reconfiguration of global supply chains across various industries:

  1. Emerging markets as an economic opportunity with simultaneous rising labour costs.

    Janakiraman says that emerging markets have had the dual effect of becoming increasingly attractive distribution locations in their own right, while being affected by rising labour costs. “Global dynamics can change the relative attractiveness of these countries as manufacturing locations, but also necessitate the development of distribution capability,” he adds.

  2. Near-shoring and re-shoring supply chain operations.

    Janakiraman comments, “A report by the Global Supply Chain Institute found that focusing on short-term cost reductions can neglect the hidden costs associated with an offshoring decision. Hidden costs identified include: (in)flexibility, cost to quality, cost of lost sales and added risks. Optimising the customer service offering and rapid response times by locating near home markets is an important consideration for organisations today.”

  3. Trade agreements focusing on trade facilitation.

    With increasing numbers of trade agreements being negotiated globally, Janakiraman says that companies should consider multiple opportunities and challenges. “These include duty expenses, compliance costs and harmonised trade finance (including supply chain finance) procedures between markets to maximise the efficiency of their supply chain.”

  4. Supply chain risk.

    According to Janakiraman, the changing nature of supply chain risks includes reputational risk quality and safety, supply disruption/shortages, legal issues, security challenges and regulatory and environmental compliance requirements. “Each company considers its unique footprint and exposure to these risks in the design of their supply chain,” he says.

  5. Digital supply chain evolution.

    “Increasing adoption of technology such as RFID, GPS and sensors have enabled business process automation, greater organisational flexibility and enhanced visibility into supply chain and opportunities for data analysis,” Janakiraman says.

  6. Advances in supply chain finance (SCF).

    Janakiraman points out that in March 2016, a set of standard definitions were launched for terminology, nomenclature and techniques related to SCF (the Standard Definitions for Techniques of Supply Chain Finance), which was released by a joint initiative of the International Chamber of Commerce (ICC) Banking Commission, BAFT, the Euro Banking Association (EBA), Factors Chain International (FCI) and the International Trade and Forfaiting Association (ITFA).

“This was a joint initiative amongst major bodies in the trade finance community and is an enabling framework for SCF,” explains Janakiraman. “These standardised definitions are intended to support the use of SCF in international and domestic supply chains by creating a consistent understanding of SCF.”

Integration and centralisation

While more companies are reportedly bringing treasury and procurement together in supply chain hubs, in practice this can mean different things to different companies.

Vrontamitis says that such centres can operate using different models where treasury is concerned. “One is a fully integrated model, where the global supply chain centre runs the treasury as well. Then you see centres which see treasury as a functional service alongside.” According to Vrontamitis, companies which have a decentralised treasury tend to opt for the integrated treasury model, whereas companies with a more centralised treasury team may choose to keep treasury as a centralised function.

Parvez says that companies with suppliers in multiple locations may prefer to use the hub model in order to bring in more standardisation and cost control. However, companies with fewer suppliers in fewer locations may continue to use a semi-decentralised model – such as having a hub in China to cover Chinese suppliers, as well as a hub in Hong Kong to cover the rest of Asia.

“The biggest obstacle is to understand the regulations around this as multiple countries are involved,” he notes. “Once you move to a centralised location, there could be certain regulations governing the entire process, how the information flow, and how the financing aspect can work.”

Vrontamitis says that while this can be a very effective model from a corporate point of view, it is also extremely hard to execute. He adds, “These centres tend to be in pretty developed locations, with good infrastructure, telecommunications, tax regimes and transparent governments – and in locations which are fairly core and central to the company.”

Challenges

It is also important to note that integrating treasury and procurement can be challenging. “I have a pretty simple view on this, which is it has to be strategic to the company, and has to be recognised as strategic to the company,” says Vrontamitis. “This means that you need senior sponsorship. This isn’t a situation where one day the treasury guy can say to the procurement guy, ‘Why don’t we work together?’ If you want to have a fully integrated global supply chain centre, or a centralised one, you’ve really got to have this sponsored from the top.”

Janakiraman adds that companies setting up global supply chain centres “need to consider tax and transfer pricing mechanisms, given the increasing regulatory sensitivity around these areas.” He also says that companies should consider both direct and indirect costs incurred within the supply chain. “For example, impact on customer service, lead times, potential for lost sales, added risk, quality levels, etc should also be considered in this decision.”

Bridging the trade finance gap with supply chain finance

The adoption of supply chain finance has become increasingly widespread in recent years, with more companies choosing to set up structures in order to benefit suppliers. This is a particularly relevant topic in Asia: the Asian Development Bank (ADB) has identified a global trade finance gap of $1.6trn, with developing Asia accounting for $692trn of the gap. The report also found that small and medium-sized enterprises (SMEs) face the greatest obstacles when it comes to accessing affordable trade financing.

Supply chain finance is one type of arrangement which can give SMEs access to the finance they need. Somanathan says that a few years ago, the companies typically adopting supply chain finance structures were in sectors such as garments, textiles, retail and consumer durables. “Increasingly, what we are seeing is that newer industries are also adopting supply chain finance solutions,” he says. “In the last 12 to 18 months, we have seen the entry of companies in mining, tyres, fertilisers, agro-chemicals and aerospace for example.”

Somanathan adds, “Many of these suppliers are SMEs, which are typically also the industries that help create job opportunities, so there is a social angle to it. There is a lot of support from governments and regulators to give further impetus to supply chain financing which will help suppliers’ viability. To further support this, there have been various initiatives from multilateral agencies and even global financial institutions.”

Future developments

As this model matures, companies are continuing to achieve greater levels of efficiency. “One key thing that seems to be improving over time is the technology part of it,” says Parvez. “Companies tend to have a higher amount of integration across their processes, and are moving away from manual processes.”

But despite the work that some companies are doing to unify procurement and financial processes, there continues to be a disparity in the level of automation available in the physical and financial supply chains. Vrontamitis explains, “Some large global corporates are talking about using mass customisation robotics in the factories, which means you can order something online it goes straight to the machine that makes the product without any human intervention, before being shipped to the end buyer and potentially delivered by a drone. That’s what the future could look like for some of these products. In contrast, the data in the supply chain is completely underutilised.”

Nevertheless, Vrontamitis says the bank is improving its analytics capability in order to help clients as part of its ‘Banking the ecosystem’ strategy. “If we can analyse data to improve risk management, and how we extend credit within the supply chain, we think that our clients can benefit from the same kind of information and data. It’s about taking the information you have and creating data pools, being able to merge data well and then use machine-based analytics to improve on it and understand what’s happening with your supply chains.”

This may, in turn, enable companies to gain a clearer view of who they are selling to and buying from, the terms on offer and whether there is scope to work with banks to offer finance. Vrontamitis adds that this involves banks shifting the way in which they think about credit from a backward-looking approach to real-time monitoring and understanding.

Janakiraman says that new challenges and opportunities may emerge in the future for companies designing their supply chains. He notes that the ability to adopt and leverage new technologies such as RFID, GPS and sensors may lead to improvements in areas such as supply chain visibility, analytics and process optimisation. Meanwhile, increasing the harmonisation of definitions related to supply chain finance will enable companies to optimise their working capital positions.

As Janakiraman concludes, “The most effective supply chain strategies support the business strategy. Whether this is product differentiation, price leadership, exceptional customer service or focused markets – the design of the supply chain is what ultimately delivers value for the customer.”

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