SPECIAL REPORT TRADE FINANCE
disruption. Unless care is taken to align and monitor incentives, collaborative activity—in design, planning, marketing or inventory management— may yield small or negative benefits. Western initiatives, such as vendor-managed inventory (VMI), collaborative forecasting, planning and replenishment (CPFR), and continuous replenishment, score benefits for apex buyers like Wal-Mart and lead suppliers such as Procter & Gamble. Note that such collaborations are almost always monogamous: between one buyer and supplier. Asian collaboration models, such as the Japanese keiretsu, are multilateral. Leveraging a network of time-tested relationships with strategic suppliers, some buttressed by cross-holding, original equipment manufacturers (OEMs) can manage costs based on histories of trust and mutual obligation. Though it is still based on ambiguous contracts, over time, the keiretsu model evolved to include explicitly spelled-out collaboration on product and process design, customer intelligence-gathering and defect remediation. Keiretsu-like formations are also observed in Europe (e.g., in the supply chains of truck giant Scania and furniture vendor IKEA). A slightly different collaboration model is emerging in China. OEMs, such as Xiaomi, focus on developing a supplier ecosystem, often through the injection of capital into small and medium suppliers. The suppliers are incentivized via profit-sharing to provide goods at cost to the OEM, reducing the overall product price. Note that collaboration here is built on a financial rail, not custom or history. In fact, the success of Asian manufacturing— Japan following World War II and China recently—owes significantly to multilateral collaboration, often mediated by financial cross-involvement. Profit potential is a universal measure
BLOCKCHAIN DEFINED A BLOCKCHAIN IS A TYPE OF ELECTRONIC LEDGER created to ensure that, once a party transfers a digital asset, it cannot transfer it to anyone else. Unlike other ledgers, a blockchain is owned by participants, and decisions about what it records are subject to participant consensus. Recording accuracy is ensured by duplication: Every participant has a copy of the ledger. Discrepancy-resolution mechanisms ensure that all copies reflect identical histories. Though permissions can be managed, by default any permitted participant can view all transactions. Thus, with immutability, notarization and assured provenance, transparency is a core blockchain attribute. Blockchain isn’t simply a secure collective database. In addition to transactions, it also records and executes simple programs. In the context of supply chain management, such programs can be self-executing smart contracts that manage the flow of money. Blockchain smart contracts may also influence, or be influenced by, product movements. For instance, a positive quality assurance test indication can release a part for assembly. However, today that role is played by enterprise resource planning (ERP) systems. Blockchain technology doesn’t necessarily add value in such traditional operations management tasks.
of a firm’s self-interest. Profit, especially for SME firms, is directly correlated with the availability and price of financing. Can this observation enable collaboration based on financing rather than on produ ct flows? Can such collaboration extend beyond the buyerseller dyad?
SUPPLY CHAIN FINANCE Recent studies show that roughly 75 percent of working capital is tied up in the supply chain itself. It is not common in traditional supply chains, such as apparel or durables, to have cash-to-cash cycles of six months or more. Working capital inefficiencies combines with cross-border risks related to exchange and interest rate movements to increase the cost of goods and reduce service levels. Supply chain finance (SCF) refers to the use of short-term credit to balance
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working capital across a buyer-seller pair, and thus minimize aggregate supply chain cost, i.e., the usual supply chain costs plus the cost of money. SCF lets buyers keep their long payment terms and simultaneously ensures that suppliers are paid quickly. SCF works on interest rate arbitrage between a credit-worthy buyer and a less well-established seller. The financier purchases the seller’s accounts receivable at a discount, securing cash against the buyer’s credit. The discount assessed on the seller’s invoice amount, minus the risk premium, constitute the financier’s profit. Typical SCF spreads range from around 20 to 500 basis points. Compared to the medieval letter of credit, SCF encompasses new trade finance instruments, and thus, is a field still gaining definition. Depending on whom you ask, SCF includes or is synonymous with reverse financing,
SDCExec.com | September 2016 | SUPPLY & DEMAND CHAIN EXECUTIVE
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