Shifting Supply Chains and Working Capital Solutions
Global Head of Trade, Treasury and Trade Solutions, Citi
Global Head of Citi Commercial Cards, Treasury and Trade Solutions, Citi
COVID-19 has created significant implications for physical and financial supply chains as corporates reconsider their contingency arrangements and the nature of resilience in the new normal. Innovative solutions and new technologies have the power to support suppliers in a wide range of circumstances and across the payments continuum, while helping to improve efficiency, visibility, and control for both buyers and suppliers.
Before the COVID-19 pandemic, corporate treasuries across many industries and around the world appeared to be primarily focused on improving efficiencies (especially in relation to receivables flows), and optimizing working capital and costs. Buyers had the power to extend terms and shift working capital pressure on to suppliers. At the same time, while small and medium-sized enterprise (SME) suppliers faced some funding challenges, many appeared to be able to leverage buyer-backed programs if necessary.
Insofar as supply chain resilience was a consideration, the primary focus seemed to be on the potential for nearshoring given a backdrop of growing geopolitical tension and the increasing focus on sustainability, which can encourage shorter supply chains.
A starkly different environment
The experience of the COVID-19 pandemic and governmentimposed lockdowns, designed to help slow its spread, has had a transformative effect on how corporates view their supply chain and have consequently changed their priorities.
Most obviously, there has been an increased focus on the resilience of the physical supply chain. Many corporates experienced challenges due to a geographical concentration of suppliers (especially during the early stages of the pandemic when the greatest impact was felt in China). Additional problems were felt in relation to cargo management and delayed shipping. In response, many corporates have added inventory in order to maintain operations.
To a large extent, we have seen that COVID-19 has exacerbated existing trends in the financial supply chain: those SMEs that already faced significant challenges in accessing finance at an affordable cost now find it difficult to access finance at all, as the risk environment has worsened and liquidity has tightened in the marketplace.
The impact on the financial supply chain has varied significantly by industry. In particular, companies in sectors such as travel, automotive and aviation may be likely to be stressed given credit downgrades following the reduction in their business activity. In contrast, some firms such as online retailers, food manufacturers and grocery retailers have benefited from increased revenue during the pandemic. Overall, many corporates have had to reassess the sustainability of their suppliers.
Meanwhile, the almost overnight shift to working from home has prompted many companies to review their continuity planning, as well as systems connectivity and accessibility. The good news is that many companies adapted extremely quickly to the new environment. The necessity to work remotely has helped to accelerate the adoption of digital channels and self-service tools. For example, the use of Citi’s digital trade tools has increased by 20% during this period and anecdotal evidence suggests that corporates are also increasingly interacting with suppliers in a digital way.
The potential long-term implications of COVID-19
While the COVID-19 pandemic appears far from over, many countries and regions have begun to review lockdowns and allow the resumption of economic activity. It does appear clear, however, that COVID-19 will be with us for some time, with sporadic outbreaks and consequent local lockdowns a possible reality for the foreseeable future. Corporates will not want to be unprepared again: as a result, there are likely to be significant long-term changes to physical and financial supply chains, and greater adoption of digitization.
In terms of physical supply chains, there could be permanent geographic shifts as corporate seek greater diversification of suppliers. There will likely also be greater consideration of logistics routes and contingency arrangements in the event of existing supply disruption. Increases in inventory could potentially become permanent, reversing the decades-long shift towards just-in-time inventory management in many industries. In some instances, governments may need to intervene to help ensure future supply chain stability in critical industries such as agriculture, energy or pharmaceuticals.
With regard to the financial supply chain, in order to further safeguard the supply chain, industry leaders will need to consider increasing their commitment to suppliers. Even before the COVID-19 crisis, we noted a number of corporates recognized the need to go deeper into the supply chain by looking at purchase orders, and pre-shipment and postshipment needs with regard to financing to help ensure viability and predictability in the supply chain. This trend will intensify given the increased needs of suppliers for support. Citi has a number of products in this area, including distribution finance and Pay Early - a new product that allows suppliers to receive early payment at a discount while simultaneously giving the buyer extended terms without interest charges.
Given the experience of working from home, digitization will be further elevated in importance for corporates. Companies are looking for new ways to digitize end-to-end processes, including digital communication with clients and key partners such as shippers, logistics companies, and customs authorities. Tools such as digital signatures have become increasingly important during remote working and their adoption appears to be expanding. The goal for many solutions providers will be to deliver consumer-like experiences, and integrate with mobile wallets and POS technologies to enable increased spend capture. Digital service tools will help to drive efficiencies and support corporates on a real-time basis through their choice of channels
At the same time, efforts to digitize documentation in trade could receive a boost. While consortium-based trade solutions (such as the Trade Information Network, which aims to address the unmet demand for financing earlier in the supply chain, Contour, which is digitizing the letter of credit process, and komgo, a blockchain-based platform for commodity trade finance) have gathered pace in recent years; they could gain additional traction. SWIFT solutions such as FileAct, a secure, reliable and efficient way to transfer large data files, may also see an increase in uptake.
How can corporates find the right solutions?
As corporates seek to adapt to the new normal, many may be looking to their banks for ways to help identify and deploy appropriate payment solutions to drive supplier adoption and maximize financial benefits and process improvements.
At Citi, we think about payment solutions as a continuum: there are many different ways in which suppliers can be paid and Citi works with corporates to help segment their suppliers in the most effective way, in order to help create working capital benefits for both buyer and supplier.
Solutions range from supplier finance (where buyers maximize payment terms while suppliers receive early payment or at maturity) which may make sense for large invoice values and direct suppliers, to EFT payments and dynamic discounting (where buyers’ cash is deployed for supplier AR discounting in order to earn yield). Further along the continuum as invoice values become smaller, virtual cards can be used for accounts payable in order to help mitigate risk, while corporate and purchasing cards help improve convenience, drive working capital benefits and ensure procurement follows corporate policies.
Both at Citi and across the industry, there are significant innovations underway in relation to the financial supply chain – these have been accelerated by the COVID-19 pandemic. For instance, in relation to sustainability, Citi is developing a supply chain finance solution that incentivizes sustainability practices across the supply chain. Citi is also a founding partner of Mastercard’s Priceless Planet Initiative which offers a turnkey reforestation program that aligns with corporates’ ESG goals.
Another key theme for the future is the integration of various platform solutions to broaden the reach of card payments. As part of the overall strategy, Citi is working to embed virtual cards as a payment type into client payment platforms. For clients, the integration creates a seamless purchasing experience. For example, Citi Virtual Card Accounts are fully integrated into Coupa Pay in 35 markets and 23 currencies, creating an end-to-end digital experience when buying from Coupa’s e-catalogue.
To broaden the scope of cards, Citi is also working with payment facilitator providers who help companies migrates their payment flows onto purchasing cards even in cases where the suppliers do not accept cards. On the meeting and event front, Citi is working with Cvent, a market leader in meetings, events and hospitality technology, which enables Cvent and Citi clients to quickly and easily settle meetings and events expenses with a Citi payment product without leaving the Cvent event management platform.
The TTS Working Capital Advisory team can help corporates look at their B2B payments as a continuum in order to tailor a holistic and integrated suite of solutions that aligns with their operational and treasury objectives. Supply chains and working capital are undergoing great change. Nevertheless, there is a wide range of opportunities available for companies to help enhance their working capital – and that of their suppliers – while strengthening their supply chain in the new postCOVID-19 environment.