Supply Chain Finance Techniques and Solutions

How to choose the most suitable and beneficial Supply Chain finance solution?

In order to determine which supply chain finance solution will be of the most benefit to meet the customer's need, it is necessary to understand the business of the client and its trading cycle.

Application of Trade Cycle Analysis

The output of the trade cycle analysis is used to finalise the supply chain finance facility structure and specify any non-standard operational or collateral management control that may be required.

The output of the trade cycle analysis is used to finalise the supply chain finance solution structure and to specifty any non-stand

It is feasible noting that supply chain finance is a primarily finance solution, and in some cases it can provide some degree of risk mitigation and incorporation of the settlement process.

 Trade Cycle Analysis:

Conducting in depth- trade cycle analysis helps the finance provider to understand the needs of its customer in terms of risk mitigation, payment and finance.

Trade cycle analysis process starts with a detailed analysis of the physical supply chain.

Undertaking trade cycle analysis of business helps the customer as well. By playing back the outcome of the trade cycle analysis to the client, the finance provider enables the client to see the impact of their trading agreements on their cash conversion cycle.

Understanding the needs of customer:

Supply chain finance is relevant to all segments ( small-medium enterprises, mid-market companies and large corporates). And regardless of the segment, it is necessary to understand the business and its trade cycle to decide which supply chain finance solution is the most beneficial for the business.

Understanding Small-Medium Enterprises needs in terms of supply chain finance solution:

It is feasible to conduct a trade cycle analysis for small-medium enterprises for the entire business in a single view.

Understanding Large corporates:

Large corporates often have multiple trade cycles depending on where and how they operate its business and where they are selling their products. In such cases, it is important to pitch the trade cycle analysis at the line of business level and conduct different trade cycles analysis. In addition it is feasible to achieve qualitative and quantitative detail for the business to understand the needs of the customer in terms of supply chain finance solution.

Qualitative Detail:

This provides a base of risk assessment, and it includes:

• The reliability of any pre-sale agreement 
• The nature and salability of the goods 
• The price volatility of goods
• Trace record of successful sale to buyers ( performance and credit risk)
• Trace record of successful sourcing from supplier ( performance risk)
• Disputes and history of dispute resolution

Quantitative Detail

This gives clarity regarding the funding gaps, risk exposure and payment flows, areas the should be examined include:

• Credit period
• Values
• Transit time ( the time taken for the goods to arrive after dispatch)
• lead time ( the time between commitment and shipment)
• Insurance
• Inspection 
• Suppliers and Buyers ( who are they and where they come from)
• Shipping method

To achieve such qualititive and quantitative analysis requires capturing different events in the physical and financial supply chain from sourcing, inventory and selling data, together with the detail of the financial flows.

 

It is important to note that conducting trade cycle analysis sometimes gives an outcome that the risk mitigation and funding requirements my not be address by using only supply chain finance solution. In such cases, the finance provider may conclude that a structure incorporating supply chain finance as well as trade finance instrument provides the optimum solution.