Recent shock events have exposed the pitfalls of confusing maximum financial supply-chain efficiency with a focus on the benefits of immediate returns and savings. The mantra of the good times – when the political and economic landscape was apparently stable and buyers and suppliers enjoyed easy access to banksupplied credit lines – was to keep costs as low as possible. But the dangers of such narrowmindedness are swiftly becoming apparent.
While the importance of treating the physical and financial supply-chains as
integrated and mutually-dependent processes has been recognised for some time, the increasingly widespread use of just-in-time practices, means that there often remains too great an emphasis on immediate or shortterm benefits, at the expense of the ongoing health and maintenance of a stable workingcapital cycle.
In the longer term, successful financial supply-chain management now requires a forward focus and an eye for the bigger picture. This, in turn, calls for an understanding and appreciation for the importance of the diversification of risk and liquidity management solutions.The importance of ‘what if?’
While many worst-case scenarios may be perceived to be highly unlikely, potential
catastrophes merit continual focus. Buyers and suppliers alike need to ask themselves what would happen if their bank(s) were to take a hit (the crisis of 2008 proves that even the most seemingly secure institutions are notimmune to tough times) or if their transaction management platform crashed. Could they manage interruptions to international settlement transactions, and would they have the technical and financial means to keep the fiscal supply-chain going?
In the majority of cases, the answer to these questions is a resounding ‘no’, and the upshot (particularly in light of the aforementioned use of just-in-time practices) is potential supply-chain disaster. Such eventualities, therefore, cannot be disregarded, and the need to plan for possible liquidity and working capital disasters, is a concept that is gathering increasing momentum.
Indeed, even regulatory compliance is now making this a compulsory issue. To use the insurance industry as an example, the Solvency II directive, which goes live in November 2012 and aims to establish a revised set of EU-widecapital requirements and risk management standards for insurers, is designed to mitigate systemic risks of this nature.
In order to do this, Solvency II imposes strict rules on the retention and concentration of liquidity, preventing an insurer’s workingcapital funds from being deposited with a single provider; regardless of how highlyrated the provider in question may be. Such diversification of liquidity management solutions and working capital funding sources is the direction that buyers and suppliers need to take for future, long-term supply-chain success.Barriers to diversity
Diversification is a far from straightforward process. Systemic risk-diversification for buyers and suppliers requires two things: access to liquidity and working capital management solutions that allow them to spread risk and maximise returns; as well as flag-up concerns that may pose a threat to the physical and, by extension, financial supply-chain. However, these solutions come hand-in-hand with problems of their own.
Increasingly complex international commercial networks result in a need for in-depth risk assessment and credit analysis. In this respect, local banks, which are best placed to perform these tasks at local level, should be a key component of these supply-chains. This is frequently not the case, however, as the gradual shift from a localised risk-assessment model to a head-office style transaction banking model means that, in recent years, lending decisions have been made on an industrialised basis, resulting in the disintermediation of local banks by the global players. Indeed, many local banks have lost the ability to accurately assess counterparty risk as a result.
While such standardised risk-assessment models may work effectively at a multinational enterprise level, their very nature means that they usually fail to cater for the business needs of smaller companies, who are the lifeblood of the majority of international supply-chains. Of course, this does local banks a great disservice. Yet risk-assessment is not the only hurdle at which they fall. Sophisticated working-capital and liquidity management solutions, not to mention risk-mitigation and data management platforms, require significant investment, beyond the reach of many local institutions in the current climate.The collaborative ecosystem
Given the increasingly onerous regulatory demands and the working capital constraints that the majority of organisations now face, the proprietary development of such solutions is simply out of the question. In light of this, the next port-of-call for many would be to enter into a partnership with a global provider of liquidity, data and supply-chain management solutions.
Yet partnership is only the best solution if it is the right form of partnership. The more conventional modes of partnership, such as outsourcing, can be a cause for concern in themselves. For example, the traditional outsourcing model creates inherent competitor conflict, which makes some smaller institutions understandably wary. Regardless of the contractual arrangement between the insourcing and outsourcing banks, loss of business to the larger provider is always a possibility, causing many local banks to think twice. In addition to this, outsourcing rarely delivers a real exchange of value up and down the supply-chain, so end-users are frequently ‘short changed’ in terms of service delivery.
Yet this is not to say that the more modern variants of this original bank partnership can provide a definitive solution to the myriad of challenges local banks face, when it comes to meeting their clients’ needs. While undoubtedly a step in the right direction in being more strategic, flexible, collaborative and client-focused in nature, they still focus on single supply-chains. As a result, they fail to facilitate diversification. It is for this reason that BNY Mellon advocates an evolution of the linear, ‘two-way’ approach to partnership (mirroring the supply-chain) towards what we call a ‘collaborative ecosystem’.
Under this model all supply-chain players, including those from outside the traditional finance sector, interact with each other in a multi-dimensional marketplace that places the needs of the end-client at its heart. The benefit of this approach is that it recognises both the need for supply-chain diversity and the role that different organisations can play in creating value for end-user clients, in a cross-border trade and payments context.
By promoting the multi-directional flow of data and information (and therefore value) as well as the importance of diverse sources of liquidity and working capital (which may mean looking beyond bank deposits), this ecosystem model puts all stakeholders on an equal footing and allows them to work together to their mutual benefit. In this sense, the end result is a combined offering that is greater than
the sum of its parts: particularly in situations where some of those parts are unable
The future of supply-chain management is dependent on the timely and accurate provision of, and access to, data, information and working capital funding. An increased focus on ‘just-in case’ scenarios, and a subsequent move to diversification, means that many risk scenarios can be mitigated, if stakeholders are linked to open channels of transactional communication. This is where the industry needs to be heading for long-term supply-chain reliability.Dominic Broom
Dominic Broom is managing director & head of market development for BNY Mellon Treasury Services EMEA. Dominic has many years of experience in the transaction services field and he is responsible for developing the company’s range of transaction banking services (including working capital solutions) and for growing the sector’s business activities across the EMEA region. He sits on the firm’s EMEA Operating Committee and is a frequent chairman of industry conferences and a regular contributor to leading industry publications.BNY Mellon
BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team.
It has $25.5 trillion in assets under custody and administration and $1.2 trillion in assets unde management, services $11.9 trillion in outstanding debt and processes global payments averaging $1.7 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation.
For further information visit: www.bnymellon.com