The recent shortage of tomatoes in UK supermarkets made national headlines and offered a salutary reminder of the fragility of global supply chains. Whether down to Brexit pressures or unseasonal frost in North Africa and Spain, the empty shelves underlined a lesson that supply chains, and their resilience, are at the heart of a company’s ability to continue serving customers and stay in business.
Increasingly, treasurers are at the heart of efforts to shore up supply chain resilience. Driven by a raft of geopolitical and social issues, the focus on supply chains is shifting away from the old ‘just in time’ model. Whatever the driver, treasurers are now integral to maintaining supply chain resilience and sustainability. According to Rebecca Harding, founder of Coriolis Technologies, a data and analytics provider for the trade finance industry, this will bring about a transformation of the treasurer’s traditional role.
“Treasurers are now in a position where they have to manage the reputation, financially and operationally, of large corporates and that’s something that goes way beyond anything that was originally expected of corporate treasurers,” she says.
Supply chains and their management have changed in recent years, pushed by a number of factors all coming together at once: regulatory reform, geopolitical uncertainty, and the battle against climate change. For the UK and Europe, Brexit has obviously had an effect, too.
It was the impact of the COVID-19 pandemic, however, that had the most influence on changing the way companies think about their supply chains. With whole economies brought to a standstill by lockdowns, supply chain managers concluded that ‘just in time’ was to be replaced by ‘just in case’ and that ‘resilience’ was now the key word.
COVID-19 was not the only factor in this shift. Further disruptions were to follow when Russia invaded Ukraine, adding to increased volatility for suppliers, soaring energy prices, and record levels of inflation. The war has also brought sanctions, placing even more focus on supply chains and customers.
In the meantime, a slew of other regulations will force a global focus on supply chains and their sustainability as governments look to battle climate change.
The UK’s Procurement Bill will demand more supply chain transparency, while the EU’s Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive will force big companies to consider human rights and the environment in their supply chains through the imposition of more disclosure requirements. In the US, companies are coming to terms with President Joe Biden’s executive order of 2021 aimed at promoting “resilient, diverse and secure supply chains”.
One of the most significant changes, however, is the Task Force on Climate-related Financial Disclosures (TCFD) rule, asking companies to disclose their Scope 1, 2 and 3 emissions – Scope 3 being emissions in supply chain members. For credit providers, Scope 3 emissions will be all-important, and the need for disclosure is causing banks and lenders to put pressure on clients to not only be transparent about their carbon emissions, but to also bring them down through credible transition plans.
Enter the treasurers. “In effect, it’s becoming not just about credit controls and credit management and budget management, it’s actually, critically, about the reputation of the business,” says Harding. “Reputation of the business in environmental terms is becoming the new financial stability.”
Mirka Skrzypczak, head of working capital and trade product at NatWest, agrees, saying companies now have to assess supply chain vulnerabilities through “a number of lenses”.
“This is no longer just financial; this is no longer about continuity and availability of goods. What we also now have – and this is super serious – is sustainability. We have to always look at ESG [environmental, social and governance] because, going forward, this is what’s going to make or break companies.”
The job now for treasurers is to consider how they secure the resilience and sustainability of suppliers given the tools they have available to them in finance. Luca Gelsomino, a treasury and supply chain expert at the University of Groningen, and author on the subject for the World Economic Forum (WEF), believes treasurers have reached a new “moment” in their role, where they will be using financial tools to help shore up supplier resilience.
“Treasurers are more involved in the discussion around supply chain management than they were before,” says Gelsomino. “That implies new knowledge and skills for the treasurer to understand how intricate a supply chain can be, especially for a global multinational company.”
According to Harding, treasurers have yet to acquire the “horizon scanning” networks and techniques that would allow them to find alternative supply chains. It remains a “work in progress”, from the treasury point of view.
Treasurers will need to know their supply chains in depth, with full transparency, so they can identify and understand where the risks lie, and where financial tools can be applied. “They need to think about the entire supply chain, end to end,” says Skrzypczak, adding: “You need to map your supply chain; you really need to understand it and then start asking questions about where the vulnerabilities are.”
Supply chain transparency is not an easy task. While a large corporate will have sight of who its immediate suppliers are, visibility further down the chain, into the tiers below, may be opaque or very difficult. This may mean treasury will have to be closer to supply chain managers and procurement – the “holy trinity”, as Skrzypczak dubs them – to achieve the kind of visibility required for treasurers to act.
There are a number of tools open to treasurers to support suppliers, but whether they are intended to help them through a difficult patch or support their transition to low-carbon status, they all involve helping suppliers access liquidity.
One approach would be supporting suppliers with purchase order finance – essentially, cash provided to a supplier by a financing company so goods can be produced, then payment is sought from the end client. “It’s critical in apparel, where you receive your order sometimes six months before you send the invoice,” says Gelsomino.
Perhaps the most significant tool to hand for treasurers, however, is supply chain finance (SCF). In this tripartite structure, suppliers sell their invoices to a financing company, which then invoices the buyer, or end user, when goods are delivered. The advantages are clear. It aids suppliers, cements the bond between them and the client, and, according to financing companies – many of them banks – it is easy to implement.
That it has become popular is clear from the activity under way. The World Supply Chain Finance Report finds that, in 2021, volumes reached $1.8tn, up 38% on the previous year. In 2015, the supply chain finance market stood at just $330bn. Asia has seen the biggest growth (50%), but Europe and America have also clocked hefty spikes of 45% and 37%.
According to the report, much of the growth “reflects the huge impact of the coronavirus pandemic and the recent Ukraine-Russia conflict”.
SCF has not been without its hiccups, however. Scandal over the collapse of Greensill in 2021 cast a shadow over SCF, with many concerned that it could cause a loss of confidence. However, scrutiny of Greensill’s business model, appears to have allayed fears.
What some observers now advocate is increased use of a specific kind of SCF – reverse factoring. Though first used 40 years ago, this structure sees the end buyer enter the arrangement to provide an ‘obligation’ to pay invoices to a finance company, usually a bank. The finance company then pays the supplier up front, easing their liquidity needs. The great advantage of this arrangement is that the buyer, very often bigger and with healthier finances than their suppliers, assumes the credit risk.
The arrangement has drawn real support as a means of securing suppliers and stabilising supply chains. But the structure is also being used as a means of encouraging lower carbon emissions. Writing for the WEF website, Gelsomino – along with Frank Waechter, head of group treasury at sports brand Puma – describe how new reverse factoring models have been used to persuade suppliers to reduce their carbon emissions by offering the incentive of lower fees if they score well on a ‘sustainability rating’.
Puma has a programme called the Forever Better Vendor Financing Programme, while German consumer goods company Henkel, partnered with Deutsche Bank, won the 2022 Global Supply Finance award with a programme that linked lower costs for suppliers to ESG scores from rating provider EcoVadis.
Of the 400 suppliers involved in an earlier SCF programme, almost all moved to the sustainability scheme. Judges noted the scheme relied upon “close cooperation” between treasury, procurement and sustainability teams at Henkel. “The treasurer,” says Gelsomino, “is playing much more of a role in working together with the procurement officer and the supply chain officer, and that is, indeed, a trend that we have seen much more strongly in the past two to three years.”
There are also alternative support structures in use, in particular what is known as ‘deep tier’ financing. This approach sees treasury at end customers provide support not just to tier 1 suppliers, but also to those in tiers further along the supply chain. Such suppliers are mostly smaller companies and more likely to be vulnerable to economic disruption.
Like SCF, the approach uses the end buyer’s credit rating to support financing for suppliers. But instead of extending that aid only to tier 1 suppliers, it goes deeper, to benefit the ‘supplier of suppliers’. Blockchain technology is used to link the supply chain ecosystem and the credit rating to suppliers further down the chain, and maintain confidentiality over supplier pricing.
Deep-tier financing is regarded by many to be in its infancy, though there are headline examples, such as DBS Bank in Singapore with what it calls its “multitiered financing facility”.
Concerns remain, however. One worry is that it puts too much power in the hands of large corporate buyers when it comes to negotiating terms, and lacks transparency. Some speculate that suppliers seeking to access a deep-tier scheme could be forced to discount their services too much and, therefore, undermine their own working capital.
That said, in March last year Citi Bank said it was working with Stenn, an online SME financing platform, to provide a deep-tier solution. According to Parvaiz Dalal, global head of payables finance at Citi, deep-tier financing – although it may be in its infancy – offers the opportunity of improving liquidity beyond tier 1 to suppliers further along the chain who may be the key point of ‘value’ in a supply chain.
Citi uses a digital platform to connect the suppliers with finance and buyers. Digitisation, he says, helps establish the authenticity of purchase orders and helps eliminate fraud. Dalal adds that, though there are criticisms of deep-tier finance, suppliers have “100% discretion” whether they use it or not. If a supplier chooses to go ahead, “it definitely adds a lot of value”, he says. It offers an “incremental line of credit”, a digital solution and “flexibility to increase supplies to a buyer”.
Supply chain finance may be useful, says Dalal, but deep-tier financing goes further. “If you really use that solution, end to end, then the entire resiliency that you want to create can actually happen.” The pandemic and the war in Ukraine have shifted attention to supply chain resilience, while the climate crisis has underlined the importance of sustainability. Growth in the use of SCF, and innovation with deep tier financing, demonstrate that not only are companies intensely focused on the resilience and sustainability of suppliers, but treasury is now at the heart of these efforts. Supply chains are the new frontier for treasurers.
Gavin Hinks is a freelance business journalist
This article was taken from Issue 2, 2023 of The Treasurer magazine. For more great insights, members can log in to view the full issue. If you're not an ACT member, you can sign up for eAffiliate membership.
