United We Stand, Divided We Fall:
Risk mitigation and financial relationships in the supply chain
by Transaction Banking, Standard Chartered Bank
The current economic conditions have obviously precipitated many shifts in financial and commercial behaviour, with some of the most intriguing of these changes currently taking place in supply chains. This was readily apparent during the ongoing series of thought leadership forums organised for senior Asian corporate treasury personnel by Standard Chartered Bank’s Transaction Banking team, where participants discussed the increasingly symbiotic nature of their supply chain relationships.
In many cases the change was already underway, but the current market uncertainty appears to be reinforcing corporations’ awareness of their mutual dependence on suppliers and buyers. This has in turn driven a greater degree of transparency and co-operation among organisations within both the physical and financial supply chains. While the ultimate objective remains the prosperity of one’s own organisation, a growing number of treasurers are evidently aware that this cannot be achieved in isolation; therefore the quality of relationships with both trading and banking partners is a major priority for them.
The motives for this emphasis on relationship quality and mutual assistance are entirely logical. For example, a large multinational (MNC) that depends upon suppliers who produce components or services that are not easily sourced from elsewhere has obvious operational risks to manage. If a key supplier fails, the MNC will suffer disrupted production and in the current economic conditions where sales are hard to achieve, being able to deliver on them is clearly imperative. Obviously an MNC will have alternative suppliers, but these may not be able to ramp up production fast enough to plug the gap. As forum attendee Wildrik de Blank, Group Treasurer, Noble Group remarked, “The relationship between supply chain participants is increasingly critical; we need to ensure that no one fails.”
While business continuity risk is already a well-established motive for supply chain financing schemes, its significance is currently increasing. As economic conditions worsen, the probability of supplier failure increases and therefore the need to strengthen the supply chain becomes even more critical.
In certain cases, banks also have a risk incentive to provide supply chain finance. A bank may already have credit exposure to some of the suppliers proposed by an MNC for inclusion in a supply chain financing scheme. Therefore the scheme’s ability to mitigate the risk of supplier failure acts to the benefit of the bank as well as the multinational.
Suppliers (or buyers in a sales chain anchored by a large corporate) have obvious motivation for developing closer relationships; ultimately it could be a matter of survival. This is apparent in the greater level of transparency (see below) that these smaller companies are exhibiting with anchor credits regarding their financial and other data.