Blog article
See all stories »

The Next Generation: Bringing Supply Chain Finance into TMS

Overview

At present, the limited selection of software that automates supply chain finance (SCF) arrangements tends to be bank-centric. That is, if you want to use software to access a given bank’s SCF credit facilities you must use the software offered by that bank — software that typically comes with a variety of non-banking functionality such as electronic invoicing and online reconciliation. The unstated goal of this approach is to bind the corporation to the SCF-supplying bank as closely as possible.

Beyond constraining the corporation's options for sourcing SCF, this approach imposes yet another stand-alone system on corporations whose IT portfolios are already cluttered. In fact, these drawbacks in the available SCF software may be a key reason why corporations are not yet capitalizing on the large returns SCF seems to offer. So, who is in a position to initiate a more rational approach? Why, the software vendors themselves, of course.

I believe that, sometime in the not-too distant future, software automating the sourcing and application of SCF across all points in the financial supply chain will be offered as an extension of corporate treasury management systems (TMS). A key feature of this software will be its support for a virtual SCF marketplace, in which a corporation can invite a wide range of banks (and perhaps other credit providers) to participate in meeting a specific SCF need as easily as today’s consumer can search airlines, hotels, and travel agencies for specific travel needs.

Such software would be very attractive to corporate users seeking to liberate cash that is currently tied up in their supply chain operations. Increased flexibility in the application and sourcing of SCF would make it much easier for chief treasury officers (CTOs) and chief procurement officers (CPOs) to collaborate in optimizing their working capital requirements.

In order to facilitate this alternative approach to delivering SCF, banks would first have to be willing to make their SCF offerings readily accessible via corporate TMS software. To tempt them to do this, the software vendors who build TMS software for corporations would have to take the initiative by making it easy for banks to market their SCF offerings via that software.

I suggest that a viable model for this transformation can be found in the world of smart phones. Smart phone manufacturers have made it easy for banks to build “apps” that allow consumers to use those smart phones to access their bank accounts. Presented with this new opportunity to win new clients, leading banks are now elbowing one another aside trying to convince consumers that they are the most smart-phone-friendly.

If TMS software vendors were to mirror this approach with a "send us your SCF apps" model, the result might well be an open and efficient SCF marketplace in which corporations could readily connect to the SCF products and sources that made the most sense for them. In parallel, banks could focus on creatively automating the assessment and management of risk, leaving the provision of software automating non-banking functions to the TMS vendors.

Current State

Trillions of interactions between buyers and suppliers are processed by banks each day, with an extremely high level of automation. Software vendors offer a vast range of modules designed to help corporations execute these financial supply chain transactions. Let’s call these modules SCT (Supply Chain Transaction) enablers. Dedicated to managing invoices, payables, receivables, and many other non-banking functions, these extensions of the corporation’s TMS interact smoothly with bank-hosted systems as required, based on the high level of commonality among banks regarding file formats and business processes.

Conversely, software that automates a corporation’s interaction with a bank’s supply chain financing services is seldom available as an extension of the corporation’s TMS. Rather, most such software in the market today is designed as an extension of the bank’s system. Let’s call these applications SCF (Supply Chain Finance) enablers. Corporations must adopt and employ each bank’s SCF enablers separately, and those wishing to link their own TMS (or ERP) to a given a bank’s SCF enablers typically face a significant build.

As stated above, this imposition of yet another stand-alone system on corporations whose IT portfolios are already cluttered may be one of the key reasons why most corporations are not yet taking advantage of the generous returns SCF seems to offer. At a minimum, it must be a source of frustration for corporations who would like to be able to "shop around" for a suitable credit vehicle freely from within their own TMS whenever a new SCF need arises.

So, why have software vendors developing SCF enablers focused their attention almost exclusively on software designed to be hosted by banks? Is this divide between SCT enablers and SCF enablers a necessity — perhaps driven by lack of commonality among banks with regards to credit adjudication rules and processes? Or is it simply an anachronistic gap? I believe the latter.

Future State

From the corporation’s point of view, the ideal SCF enabler would allow them to explore and tap into a wide range of credit sources as their needs and opportunities evolved day by day. Unlike today's SCF software, which is usually focused exclusively on receivables, this ideal SCF enabler would also allow the corporation to tap into alternative SCF options such as inventory financing, purchase order-based financing, asset-based financing. In an even more ideal state, the corporation could use their SCF enabler to make a specific SCF need known to a wide range of participating credit providers. Each credit provider that was interested in meeting the need could then respond with their best offer of rates and terms, and the corporate could accept the most attractive "bid." Similarly, credit providers could join forces to offer a structured financial solution to the requesting corporation.

With the full gamut of SCF options visible on their TMS, and with the ability to factor in TMS-based cash forecasting, analysis of investment options, trade finance options available, sophisticated CTOs and CPOs could work together to develop modeling that continually compared different options for financing the supply chain to determine optimum approach at any given point in time. A full-function SCF enabler might even allow the corporation to seamlessly switch to using its own capital, instead of bank-provided credit, to provide SCF to their suppliers during periods when surplus cash happened to be available.

A precondition to this happy state, of course, will be buy-in from the banks. That should not be a tough decision for them, however, especially once the first few have made the plunge and the others begin to see their market share of the lucrative SCF marketplace shrink as a result.

So How Do We Get There from Here?

One of the greatest challenges in setting up the model described above — once the banks agree it is in their best interest to participate — would be establishing communication between the SCF enablers and the banks’ automated credit adjudication systems. Specifically, just as software vendors today have to build solutions that are interoperable with multiple IT standards and protocols, vendors building SCF enablers will have to ensure interoperability with the major banks’ payments, cash, and trade finance processes and support systems.

The fastest way to meet that challenge might be to mirror the "app" approach that has proven so remarkably successful in the smart phone world. In this approach, the software vendor might create, as an extension of their TMS systems, an SCF module designed to serve as a platform for competition among credit providers. Banks would then be provided with relevant details on the platform’s code and invited to build apps for it. A bank that chose to participate would provide their app to credit-approved corporations who, with the app installed, would be able to tap into the bank’s SCF offerings from their TMS.

This approach would relieve the TMS software vendors of the need to work out the details of linking their TMS platforms to each bank's unique, proprietary credit- adjudication system. Both the software vendors and the banks would be allowed to focus on the portion of the developmental work that naturally falls into their domain, and the end clients (the corporations) would have access to the greatest possible range of SCF options and the greatest possible level of integration across all aspects of their financial supply chain management.

Perhaps best of all, this approach would put the focus of credit competition among banks where it probably belongs — i.e., on creativity in assessing and managing risk — and would leave the technological competition over who can provide the best support for non-banking functions to the TMS software vendors.

 

4929

Comments: (0)

Enrico Camerinelli

Enrico Camerinelli

Supply Chain Blockchain Personal Coach

Aite Group

Member since

26 May 2008

Location

Boston

Blog posts

78

Comments

73

This post is from a series of posts in the group:

Financial Supply Chain

In the world of international trade, the process of exchanging payments, information and documents between buyers, sellers, banks, and other involved parties is becoming increasingly important for financial institutions. This community aims at presenting views and innovative ideas related to this financial supply chain space.


See all