New York — January 31, 2008 — Supply chain management is certain to sizzle on through 2008. Integrated physical and financial supply chains were once a possibility for successful trade; now they're essential.
For supply chain managers and their partners — from the finance department to the factory floor — there's fresh interest in understanding how supply chain practices help define effective working capital management. How you move goods and make payments related to your sourcing and inventory can dramatically affect the amount of cash your business carries in its "wallet."
But as you shop for the tools, tactics, platforms and partners that will help you manage your supply chain holistically, be sure to insist on a key component — visibility. Navigating through your strategy for global growth could be tough without it.
"WWWH"
Effective supply chain management is based on your ability to know the "what, where, when and how" of your trade operations in real time. The Web-enabled platforms, software programs and paper-to-electronic processing available through your banker can help you manage information and keep your operations as transparent as they need to be.
Remember, though, that another kind of visibility and transparency is also required for supply chain efficiency — an ability to "see" the ripple effects and consequences of changes you make in the way you're handling payables, receivables and inventory. What you anticipate as a solution may not be what you're really getting; and what looks like a major gain in efficiency for you may have an adverse financial or operational impact on partners and providers who constitute the other key links of your chain.
Visibility into your supply chain via certain tools and applications enables efficiencies, helps mitigate risk and maximizes use of your working capital. Here are some examples of what visibility of all kinds has meant to importers and exporters who, in partnership with their banker, are bringing their businesses to the next level through global growth.
Seven Studies in Visibility
1. From Letters of Credit to Open Account: Avoiding the Ripple Effect
Challenge: A U.S.-based mega-retailer pressed a key U.S. supplier to move from letters of credit to open account. The supplier had been using those letters of credit to finance their sourcing by transferring them to their Asian vendors. The move to open account risked causing a major disruption in the financial supply chain of the U.S. supplier and a major disruption in the physical supply chain of the mega-retailer. A solution was needed to keep goods moving and credit risk manageable.
Action: Both the mega-retailer and its U.S. supplier were clients of the same trade bank. The mega-retailer engaged the trade bank to manage their open account processing. The supplier agreed to present their open account documents to the trade bank. Based on the visibility into these flows and their control of both sides of the transaction, the trade bank was able to grant a large credit line to the U.S. supplier for issuance of letters of credit to their Asian vendors. Without the opening of that window of visibility into the activities of these three key players, further increased financing for the U.S. supplier would have been problematic.
Result: The ultimate buyer's supply chain "efficiency move" had potentially negative ramifications for a major supplier. But pain was avoided through analysis of the supply chain finance options and development of a solution that met the credit and operational processing needs of all parties.
2. Back-to-back Letters of Credit and Doc Prep: Market Scare, Credit Crunch, Holiday Scramble
Challenge: A toymaker selling to major U.S. retailers has always paid its China vendors 30 percent down six months before shipment, and the remainder 15 days after shipment — despite the fact that retailers pay as late as 21-30 days after shipment. The recent lead paint scare has caused a product backlog in China and a credit crunch for the toymaker. How could they keep their supply chain moving through the holiday season?
Action: The toymaker's bank stepped in with a temporary extension to get them through the holiday season, then provided an additional line of credit in the form of back-to-back and transferable letters of credit for their 2008 needs.
Result: The trade bank was able to cover inherent risks in extending this kind of credit by having the toymaker use its document preparation services as a condition of extending credit. With this supply chain solution, both the bank and the customer had visibility into the movements of goods and money.
3. Letters of Credit to Open Account: A Move that Missed the Boat
Challenge: A U.S. apparel wholesaler has been importing a substantial part of its inventory from Asia, with a particular concentration with one vendor. When they made the decision to move from letters of credit to open account, using a third-party payment processing vendor, they didn't anticipate the resulting negative domino impact on the credit and financing needs of that supplier. While the processing vendor had assured the apparel wholesaler that there would only be positive results — including cost savings — this turned out to not be true. Without the commercial letters of credit previously issued by the apparel company's trade bank, their Asian vendor could no longer get financing from their local bank, risking a disruption of supply of product to the U.S. buyer. In moving from letters of credit to open account, the buyer would have shifted pain, not eliminated it, risked disruption of supply, loss of sales and damaged customer relationships.
Action: The apparel company asked its trade bank to issue a standby letter of credit in favor of the vendor's bank to support his purchases of raw materials for production of goods for the importer for the full season.
Result: Any company can miss basic issues when making changes in the way they finance their supply chain. A banker's consultative input, along with the ability to offer classical trade finance and open account payment solutions, can prevent the problems that arise from lack of visibility into the potential pain points of suppliers and vendors. Promotion of visibility and effective communication to anticipate unintended consequences are the key needs met by this solution.
4. Export-import Internal Controls: Seeing the Risk in Unsupported Growth
Challenge: A U.S. equipment manufacturer was excited to be experiencing rapid and significant growth in international markets. The future looked very bright for a business that had previously prospered only in domestic markets and achieved growth only through acquisitions. But without proper internal controls, the company's export operations were at risk to create unacceptably high levels of compliance risk to the entire franchise.
Action: The company's senior managers recognized the need for outside expert help. They consulted with their trade banker about the best way to establish internal controls for export compliance. The banker arranged a consultative export compliance assessment in order to chart out the regulatory environment as it applied to their business and a compliance program for this aspect of the company's operations.
Result: Outside expertise helped a growing company implement an export compliance program to support the company's global growth plans. This aspect of the process is vitally important to ensure that future global growth will bring rewards, not pain — and treats rather than tricks.
5. Strategic Consulting: Managing Costs and Risk in an Expanding Footprint
Challenge: A leading communications solutions provider, already operating in more than 90 countries through a network of resellers and partners, is planning substantial changes in its manufacturing, distribution and process execution. How can they best ensure that their new strategy is planned and executed properly, at minimum cost and risk?
Action: The company engaged their trade bank for consulting services that would provide visibility into their growing global supply chain and promote best practices for effectively managing the compliance risk in their expanding footprint.
Result: In a high-voltage growth period, the company's strategic deployment of consulting services helped them control risk and costs — not only in their expanding field of operations, but also in their current business footprint. They're now positioned to reap the rewards of further global expansion without putting their franchise at risk. "Yes" to global revenue growth — and "No" to non-compliance penalties.
6. Keep It Moving: Cross-Border Logistics Challenges
Challenge: A chemicals distributor serving customers throughout the United States and Canada moves product between its branches in both countries. But they have faced customs product classification and valuation challenges when moving products between U.S. and Canadian branches.
Action: Working collaboratively with their trade banker, the company's chief financial officer and her lead team obtained consulting services that included a review of their existing materials classifications and gaps in compliance with U.S. and Canadian customs regulations. The review identified deficiencies in their customs processes and helped prioritize corrective next steps.
Result: With the enhanced visibility into their product distribution processes and movement toward consistent regulatory compliance, the company's relationships with their major chemical and materials manufacturers were no longer subject to intermittent and unpredictable supply chain disruptions. Properly classified and valued goods kept moving across the border, and their nearly 10,000 customers were assured of receiving their goods on time.
7. Cost of a Trade Lane: Standardizing U.S.-Mexico Flows
Challenge: A U.S. company provides machine repair services for manufacturers in Mexico. If machines can't be repaired in Mexico, the components are exported to the company's U.S. facility for repair, then shipped back to Mexico. Classification, country of origin and valuation issues surrounding used and repaired products are causing logistical problems, including unexpected expenses. Many shipments are ad hoc and considered a cost of doing business.
Action: The company and its trade banker worked to obtain a logistics assessment that identified inefficiencies in their cross-border transactions and provided the information they needed to make border crossings more reliable and minimize unexpected costs.
Result: The company is now proactively managing the customs requirements of this Mexico-U.S.-Mexico trade lane and has a better understanding of the cost and flow of the logistics services it uses. Their price estimates for repair services now include their true costs giving them better management of their working capital as well as a positive impact on their bottom line.
Conclusions
Supply chain efficiencies must be judiciously implemented and tailored to fit the needs of your supplier network. Work with your banker to be sure that the moves you make in this direction are part of a long-term plan that helps — or at least doesn't hurt — your partners.
Visibility into all your processes and links and a picture of how they affect or impact each other are now something you can demand from a provider. Let your banker work with you and your partners to integrate your supply chain in ways that free working capital for investment in new infrastructure, new products and future growth.
About the Author: Jackie Kaiko is senior vice president for global trade sales at JPMorgan Chase and manages a national sales team responsible for assisting companies and community banks with their trade finance needs. Jackie joined JPMorgan Chase in 1978. During her career at the bank, she has worked extensively with small and midsize enterprises (SMEs), correspondent banks, multinational corporations and international non-governmental organizations. A graduate of Dartmouth College and a 1996-7 Rockefeller Fellow, Jackie has also been a Director of the British-American Business Council; has served on the Advisory Committee of the U.S. Export-Import Bank; and is an active volunteer with the Financial Services Volunteer Corps, consulting with central and commercial bankers in developing economies. She is currently co-chair of the Bankers' Association for Finance and Trade (BAFT) Trade Finance Committee. More information at www.jpmorgan.com/trade.
For supply chain managers and their partners — from the finance department to the factory floor — there's fresh interest in understanding how supply chain practices help define effective working capital management. How you move goods and make payments related to your sourcing and inventory can dramatically affect the amount of cash your business carries in its "wallet."
But as you shop for the tools, tactics, platforms and partners that will help you manage your supply chain holistically, be sure to insist on a key component — visibility. Navigating through your strategy for global growth could be tough without it.
"WWWH"
Effective supply chain management is based on your ability to know the "what, where, when and how" of your trade operations in real time. The Web-enabled platforms, software programs and paper-to-electronic processing available through your banker can help you manage information and keep your operations as transparent as they need to be.
Remember, though, that another kind of visibility and transparency is also required for supply chain efficiency — an ability to "see" the ripple effects and consequences of changes you make in the way you're handling payables, receivables and inventory. What you anticipate as a solution may not be what you're really getting; and what looks like a major gain in efficiency for you may have an adverse financial or operational impact on partners and providers who constitute the other key links of your chain.
Visibility into your supply chain via certain tools and applications enables efficiencies, helps mitigate risk and maximizes use of your working capital. Here are some examples of what visibility of all kinds has meant to importers and exporters who, in partnership with their banker, are bringing their businesses to the next level through global growth.
Seven Studies in Visibility
1. From Letters of Credit to Open Account: Avoiding the Ripple Effect
Challenge: A U.S.-based mega-retailer pressed a key U.S. supplier to move from letters of credit to open account. The supplier had been using those letters of credit to finance their sourcing by transferring them to their Asian vendors. The move to open account risked causing a major disruption in the financial supply chain of the U.S. supplier and a major disruption in the physical supply chain of the mega-retailer. A solution was needed to keep goods moving and credit risk manageable.
Action: Both the mega-retailer and its U.S. supplier were clients of the same trade bank. The mega-retailer engaged the trade bank to manage their open account processing. The supplier agreed to present their open account documents to the trade bank. Based on the visibility into these flows and their control of both sides of the transaction, the trade bank was able to grant a large credit line to the U.S. supplier for issuance of letters of credit to their Asian vendors. Without the opening of that window of visibility into the activities of these three key players, further increased financing for the U.S. supplier would have been problematic.
Result: The ultimate buyer's supply chain "efficiency move" had potentially negative ramifications for a major supplier. But pain was avoided through analysis of the supply chain finance options and development of a solution that met the credit and operational processing needs of all parties.
2. Back-to-back Letters of Credit and Doc Prep: Market Scare, Credit Crunch, Holiday Scramble
Challenge: A toymaker selling to major U.S. retailers has always paid its China vendors 30 percent down six months before shipment, and the remainder 15 days after shipment — despite the fact that retailers pay as late as 21-30 days after shipment. The recent lead paint scare has caused a product backlog in China and a credit crunch for the toymaker. How could they keep their supply chain moving through the holiday season?
Action: The toymaker's bank stepped in with a temporary extension to get them through the holiday season, then provided an additional line of credit in the form of back-to-back and transferable letters of credit for their 2008 needs.
Result: The trade bank was able to cover inherent risks in extending this kind of credit by having the toymaker use its document preparation services as a condition of extending credit. With this supply chain solution, both the bank and the customer had visibility into the movements of goods and money.
3. Letters of Credit to Open Account: A Move that Missed the Boat
Challenge: A U.S. apparel wholesaler has been importing a substantial part of its inventory from Asia, with a particular concentration with one vendor. When they made the decision to move from letters of credit to open account, using a third-party payment processing vendor, they didn't anticipate the resulting negative domino impact on the credit and financing needs of that supplier. While the processing vendor had assured the apparel wholesaler that there would only be positive results — including cost savings — this turned out to not be true. Without the commercial letters of credit previously issued by the apparel company's trade bank, their Asian vendor could no longer get financing from their local bank, risking a disruption of supply of product to the U.S. buyer. In moving from letters of credit to open account, the buyer would have shifted pain, not eliminated it, risked disruption of supply, loss of sales and damaged customer relationships.
Action: The apparel company asked its trade bank to issue a standby letter of credit in favor of the vendor's bank to support his purchases of raw materials for production of goods for the importer for the full season.
Result: Any company can miss basic issues when making changes in the way they finance their supply chain. A banker's consultative input, along with the ability to offer classical trade finance and open account payment solutions, can prevent the problems that arise from lack of visibility into the potential pain points of suppliers and vendors. Promotion of visibility and effective communication to anticipate unintended consequences are the key needs met by this solution.
4. Export-import Internal Controls: Seeing the Risk in Unsupported Growth
Challenge: A U.S. equipment manufacturer was excited to be experiencing rapid and significant growth in international markets. The future looked very bright for a business that had previously prospered only in domestic markets and achieved growth only through acquisitions. But without proper internal controls, the company's export operations were at risk to create unacceptably high levels of compliance risk to the entire franchise.
Action: The company's senior managers recognized the need for outside expert help. They consulted with their trade banker about the best way to establish internal controls for export compliance. The banker arranged a consultative export compliance assessment in order to chart out the regulatory environment as it applied to their business and a compliance program for this aspect of the company's operations.
Result: Outside expertise helped a growing company implement an export compliance program to support the company's global growth plans. This aspect of the process is vitally important to ensure that future global growth will bring rewards, not pain — and treats rather than tricks.
5. Strategic Consulting: Managing Costs and Risk in an Expanding Footprint
Challenge: A leading communications solutions provider, already operating in more than 90 countries through a network of resellers and partners, is planning substantial changes in its manufacturing, distribution and process execution. How can they best ensure that their new strategy is planned and executed properly, at minimum cost and risk?
Action: The company engaged their trade bank for consulting services that would provide visibility into their growing global supply chain and promote best practices for effectively managing the compliance risk in their expanding footprint.
Result: In a high-voltage growth period, the company's strategic deployment of consulting services helped them control risk and costs — not only in their expanding field of operations, but also in their current business footprint. They're now positioned to reap the rewards of further global expansion without putting their franchise at risk. "Yes" to global revenue growth — and "No" to non-compliance penalties.
6. Keep It Moving: Cross-Border Logistics Challenges
Challenge: A chemicals distributor serving customers throughout the United States and Canada moves product between its branches in both countries. But they have faced customs product classification and valuation challenges when moving products between U.S. and Canadian branches.
Action: Working collaboratively with their trade banker, the company's chief financial officer and her lead team obtained consulting services that included a review of their existing materials classifications and gaps in compliance with U.S. and Canadian customs regulations. The review identified deficiencies in their customs processes and helped prioritize corrective next steps.
Result: With the enhanced visibility into their product distribution processes and movement toward consistent regulatory compliance, the company's relationships with their major chemical and materials manufacturers were no longer subject to intermittent and unpredictable supply chain disruptions. Properly classified and valued goods kept moving across the border, and their nearly 10,000 customers were assured of receiving their goods on time.
7. Cost of a Trade Lane: Standardizing U.S.-Mexico Flows
Challenge: A U.S. company provides machine repair services for manufacturers in Mexico. If machines can't be repaired in Mexico, the components are exported to the company's U.S. facility for repair, then shipped back to Mexico. Classification, country of origin and valuation issues surrounding used and repaired products are causing logistical problems, including unexpected expenses. Many shipments are ad hoc and considered a cost of doing business.
Action: The company and its trade banker worked to obtain a logistics assessment that identified inefficiencies in their cross-border transactions and provided the information they needed to make border crossings more reliable and minimize unexpected costs.
Result: The company is now proactively managing the customs requirements of this Mexico-U.S.-Mexico trade lane and has a better understanding of the cost and flow of the logistics services it uses. Their price estimates for repair services now include their true costs giving them better management of their working capital as well as a positive impact on their bottom line.
Conclusions
Supply chain efficiencies must be judiciously implemented and tailored to fit the needs of your supplier network. Work with your banker to be sure that the moves you make in this direction are part of a long-term plan that helps — or at least doesn't hurt — your partners.
Visibility into all your processes and links and a picture of how they affect or impact each other are now something you can demand from a provider. Let your banker work with you and your partners to integrate your supply chain in ways that free working capital for investment in new infrastructure, new products and future growth.
About the Author: Jackie Kaiko is senior vice president for global trade sales at JPMorgan Chase and manages a national sales team responsible for assisting companies and community banks with their trade finance needs. Jackie joined JPMorgan Chase in 1978. During her career at the bank, she has worked extensively with small and midsize enterprises (SMEs), correspondent banks, multinational corporations and international non-governmental organizations. A graduate of Dartmouth College and a 1996-7 Rockefeller Fellow, Jackie has also been a Director of the British-American Business Council; has served on the Advisory Committee of the U.S. Export-Import Bank; and is an active volunteer with the Financial Services Volunteer Corps, consulting with central and commercial bankers in developing economies. She is currently co-chair of the Bankers' Association for Finance and Trade (BAFT) Trade Finance Committee. More information at www.jpmorgan.com/trade.
