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.”
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.”