Supply Chain Finance is what you need in these challenging times, says Eugenio Cavenaghi, Managing Director – Trade, Export and Supply Chain Finance of Santander.
Have banks shown enough support to companies during the COVID-19 crisis?
There was a huge peak in demand for financing and the banking system is still struggling to satisfy all of it, but the reaction has been in most cases constructive. Even before the crises, Santander was heavily engaged in the day-to-day financing of thousands of supply chains. In fact, for lack of official statistics and league tables, Santander considers itself the larges Supply Chain Finance bank globally, which meant for us a lot of stress and hectic days since January until now to support the orderly deployment of liquidity to suppliers. Our service was high in demand and we had to jump in to plug a huge financing gap in manufacturing chains that were considered solid up until the end of 2019, and we are really proud of our job during the pandemic.
Which sectors were financially most impacted by the negative consequences of the crises?
Almost everyone got impacted. E-commerce and food retail enjoyed a surge in demand for their products, so financially they fared well, although they had to cope with punctual deficit of supply. Most others had to deal with both supply and demand disruptions, which put enormous strains to the cash flow of several industries. Fashion and luxury, impacted by high seasonal effects, as well as automotive, where consignment warehouses amplify the issue, were among the most affected. Everywhere buyers were trying to delay their cash outflows, coping with factory shutdowns, lower production rates and subdue sales orders, while suppliers needed liquidity to flow quickly to stay afloat. Actually an unsolvable dilemma, until a bank comes in and tries to solve the problem.
How does it work? Can bank really mitigate the conflict, when both buyers and suppliers pull in opposite directions?
One of the most effective tools a bank can apply in these circumstances is Supply Chain Finance. The principle is simple: the buyer agrees the longest possible payment term with his suppliers, in order to provide relief to his own treasury organisation. The suppliers, however, are not left alone with the burden but can be invited to join a Supply Chain Finance programme. Under such a programme, the buyer cooperates with a bank to share real time information about the suppliers’ invoices that have been received, validated and confirmed by the buyer. For this reason, Santander calls the product “Confirming”, for example. The real advantage is that, thanks to the data about the confirmed invoices, the bank can turn to the suppliers and offer them the possibility to accelerate the payment of those invoices. So, regardless of how long a payment term has been negotiated for, the supplier can receive the money from the bank right after the buyer’s confirmation.
Sounds interesting but is it not cumbersome to manage, when complex buyer – supplier relationships generate hundreds or even thousands of invoices every month?
The key here is digitalisation. A bank like Santander, for example, has invested for decades in the automation of its own Supply Chain Finance platform. Everything is now managed online, through secure web portals that aggregate payments and invoices and manage the communication flow with thousands of counterparties. The most successful programmes run with one large buying organisation and a few thousands of suppliers connected worldwide. The lead relationship is the one between the bank and the buyer, whose confirmation enables the bank to extend the payment acceleration service to a vast network of suppliers.
Bankers normally talk to CFOs and Financial Directors; they rarely mingle with procurement officers. How does the collaboration work out, when these Supply Chain Finance projects take place?
We prefer to start a Supply Chain Finance programme when we are certain that also the procurement department is fully onboard and shares its rationale and objectives. Santander also makes the point of employing project teams that have a diverse background and include bankers with previous experience in supply chain or procurement functions, which facilitates the communication. In the last three to four years the collaboration has really become intense and fruitful. We like to use the analogy of the 3PL (3rd Party Logistics) providers in the world of logistics. Buyers and suppliers always have to overcome a logistical challenge to ensure that goods are delivered from A to B. This task can be taken over by the buyer, by the supplier or by an external specialist, like DHL, UPS, FedEx, etc. In many circumstances, the option of using a specialist is the most efficient one and reduces the overall costs for the entire chain. Same thing for the financing of working capital: whenever goods or services are delivered, there is working capital that needs to be financed. This can be arranged individually by the supplier or by the buyer, but in most cases the most efficient solution is one that involves a third party specialist, i.e. a bank that arranges a concerted Supply Chain Finance programme. Once procurement officers have embraced this concept, it becomes very easy for them to embed this banking service into their own strategic thinking and use it to achieve their goals.
Many thanks for your time, Mr. Cavenaghi.