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Supply Chain Finance: Challenges & Opportunities

About a decade ago, when new supply chain acronyms were created on an almost daily basis, SCF started finding its way into conversations. SCF, which stood for Supply Chain Finance, was discussed as a workable way to pay for goods as they moved through the supply chain, injecting much-needed capital into specific buyer-supplier relationships.

Banks, with their credit know-how and massive IT databases and systems, would play a central role in this kind of trade finance, where liquidity needs are balanced within a well-defined regulatory framework. Looking at it from a CFO's point of view, SCF, theoretically, would provide a sense of fiscal security, help mitigate risks, and allow access to capital at lower rates.

Now in the midst of a debt crisis and anemic economic growth, there are some mixed perceptions about whether SCF could feasibly evolve from its current “wishful” status into a viable real-world solution.

For instance, this week, Demica, a provider of working capital solutions, released its latest research, which on the surface offered positive news. The firm's survey found that 75 percent of the top 40 European banks still believe growth prospects for SCF remain “strong” or “very strong.”

By the respondents' own admission, the growth potential has been hampered by a “somewhat more cautious outlook compared to 2010 opinion.” As pointed out in this blog post, last year's research pegged that same figure at 90 percent.

No surprise either that a significant need for SCF solutions exist in emerging markets where there is more rapid expansion and a greater need to plug finance gaps. According to Demica, survey respondents expected SCF growth rates in mature markets to be between 10 percent and 30 percent per annum, and between 20 percent and 25 percent in emerging markets. The company says growth in the developed world will continue to come from the US and Europe, despite overall market softness, and China and India will lead the emerging economies on the SCF front.

{complink 7473|McKinsey & Co.}, a global management consulting firm, points out in an extensive 2010 report some challenges and opportunities in this segment. On one hand, trade finance revenue makes up barely 4 percent to 5 percent of corporate banking revenues, banks are struggling to protect margins on these kinds of deals, and there is a lack of a unified cross-border standards associated with SCF. But, as McKinsey notes, “Trade services play a vital role in economic growth. The inability to finance trade contributed significantly to the unprecedented 25 percent drop in international trade in 2009, as demonstrated by the $250 billion G20 support package of April 2009.”

What appears to be echoed in all of these reports is the need for a successful SCF business model that works across different markets and lives up to the promise of being win-win-win for buyers, sellers, and banks. As with most things in the electronics industry, though, the pros and cons of implementing something like this probably depend on where the company sits in the supply chain, how far-reaching its supply chain pull is, and the contractual terms struck between buyers and suppliers.

What SCF models have you worked with, and what challenges and benefits have they yielded?

1 comment on “Supply Chain Finance: Challenges & Opportunities

  1. techendeavour123
    October 26, 2011

    It is of utmost importance to be in sync with the availability and the cost of the capital. The value trapped in the SCF techniques is enormous and the companies seeking the external help from the global SCF experts are the better players in the finance business. Great analysis detailed here! Thanks.

    mhealth

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