news - The Growing Need for Supply Chain Finance

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The Growing Need for Supply Chain Finance
May 19, 2009

LONDON, May 19, 2009 (GTNews) - Corporates are increasingly using financing techniques to improve their supply chain efficiency, and banks are becoming more active in the supply chain finance portfolio.
Supply chains are certainly undergoing increased pressure. Over the last decade huge efforts have been made to improve the efficiency and effectiveness of supply chains, extending them into more distant and low cost geographies, using sophisticated analysis and planning routines to predict and meet future demand, as well as refining international logistics. In fact, it is often said that the physical supply chain has become just about as efficient as it can be. Yet the current global economic downturn is putting increasing pressure on those supply chains, especially in wholesale/retail, automotive, hi-tech, telecoms and specialist chemical sectors, to name a handful. When customer demand falls, large companies at the end of the supply chain tend to look to their suppliers to share the burden of that downturn. However, now that the supply chain has been subject to such fine-tuning since the 1990s, supplier margins have been pared and payment terms so extended that virtually no room for manoeuvre is left. One major study of supply chain management trends released late last year identified supplier failure amongst its top ten risks. The same organisation also estimated that risk associated with ‘volatility and supplier failure’ had increased 54% between mid-2007 and mid-2008. Yet many supply chains rely on a set of specialised suppliers who cannot be easily replaced, if at all. It is therefore in the interests of large firms to preserve the health of their supply chain, while at the same time maintaining pressure for economies and efficiencies. The risk of supplier failure is highlighted in other economic statistics. In 2008, insolvency rates increased by some 24% in the UK, 11% across Europe and by a more modest 3% in Germany. Access to corporate credit in Germany has historically been easier in an economic downturn than in the UK and its densely banked economy still remains culturally committed to supporting industry and business through thick and thin, despite the removal of previous long-term state guarantees for bad debt. A troubled German automotive sector is under pressure from a downturn in the market, which in turn renders them a higher risk to lenders.Evidently, Germany fears that its insolvency rates may climb to match those of the rest of Europe in the course of this year.
Overall economic indicators tend to suggest that pressure is increasing for supplier firms. In October 2008, European countries established pledges and guarantees collectively worth some €2 trillion to prop up their banking systems.Yet too little commercial finance seems to have become available as a result. Creditreform projects that 35,000 German companies will face bankruptcy this year. A survey from Close Invoice Finance points to a huge contraction of SME credit availability this year. Other factors essential to the smooth running of the supply chain are also at risk. Credit insurers in Germany have both shortened capacity and raised rates - reportedly by some 25%. In Britain, legislators are scratching their heads over how to deal with the withdrawal of trade credit insurance for many businesses. In addition, late payment is freezing some €250bn of liquidity annually.

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