Supply Chain Synergy

10 11 For companies across Asia and the world, the Covid-19 pandemic dealt the biggest blow to supplier terms and balance sheets, pushing liquidity management to the top of treasury departments’ priorities. The aftermath of higher inflation, rising interest rates, heightened risk- management concerns and a paucity of cash gave rise to critical questions around how best to manage liquidity. Trapped working capital Against that backdrop, and given Asia’s place as the world’s biggest manufacturing centre, just how healthy are corporate credit profiles? And what tools are they using—or not using—to improve liquidity management? Research carried out by Citi in partnership with East & Partners found that one in two Asian corporates have between 20% and 40% of their working capital trapped in so-called days payable outstanding (DPO)—a ratio that indicates the average number of days it takes for a company to pay its bills and invoices. Taking liquidity management mainstream At the same time, the research showed that 57% of companies in the region have between 20% and 40% of their working capital trapped in so-called days inventory outstanding (DIO)—the average number of days that a company holds its inventory before selling it. Behind those startling figures lies a complex mosaic of supply chain relationships, which makes it all but impossible for companies to adopt a one-size-fits-all approach to liquidity management. SUPPLY CHAIN SYNERGY Since the pandemic, managing working capital has become a strategic imperative but companies in Asia aren’t using all available tools Megha Chopra, Asia Pacific Head of Trade Sales and Client Management, Treasury and Trade Solutions, Citi, believes that SRF’s example illustrates the tools that companies in the region have available, but don’t always use. Chopra says that companies can look at their receivables and arbitrage on the good customers to generate liquidity. They can also unlock liquidity problems in the supply chain via supply chain financing. A third avenue is to conduct inventory management, for example by securing suppliers at a competitive rate through structured-finance solutions. As Chopra puts it: The companies that prioritize liquidity management are the ones that survive the storm and thrive.” Working with Citi’s Treasury and Trade Solutions, SRF came up with a suite of solutions to optimize working capital. On distribution finance, an accounts receivable financing solution gives the company the flexibility to cover a substantial portion of its sales on a portfolio basis and provide liquidity. For export letter of credit (LC) discounting, the solution identified credit-worthy banks for the core banking partner and worked with customers to restrict LC issuance with the selected banks. These LCs were then centrally discounted by the core banking partner. Additionally, the Account Receivables cycle is also lengthening as customers demand more credit terms to manage their own working capital. To add to this, 76% of corporates reported that their customer credit profiles were weakening. Creating liquidity buffers At a time when companies face challenges on both payables and receivables front, unlocking liquidity from multiple avenues provides the necessary cushion, helping companies to become both more agile and more resilient in the face of many unknowns. For example, companies now must have sufficient liquidity to provide better credit terms to push sales in newer markets or increase market penetration by grabbing market share in existing markets. Added cushions are required to bolster stocks in the event of supply chain problems and absorb periods of rising costs. As supply chain finance solutions are a good fit, another key working capital management tool that is generally less utilized is Receivables Finance. The Research with East & Partner reveals that only one out of six corporate use Receivable Finance as an option in trade financing. At SRF, an Indian manufacturer that produces everything from textiles and chemicals to packaging, rapid global expansion in recent years has required its treasury to be an enabler across business units and geographies. This means it has to deliver on working capital optimisation, credit risk mitigation, reduction in days sales outstanding (DSO) and increase in DPO. The treasury team also delivers on increased debt capacity. consumer wholesale retail telecom APAC manufacturing health care Average DPO Average DIO 40% 32% 45% 24% 24% 33% 37% 22% 30% 32% 13% 21% 23% 16% Working capital trapped in DPO and DI0 by sector What is weighing down your working capital? APAC firms APAC firms 1%–20% tied up in DPO 1%–20% tied up in DIO 20%–40% tied up in DPO 20%–40% tied up in DIO 40%–60% tied up in DPO 40%–60% tied up in DIO 60% and more tied up in DPO 60% and more tied up in DIO 11.1 20.7 48.1 56.5 36.2 19 4.6 3.8 The amount of funding tied up currently in DIO is causing a lot of stress for the business and under-funding of other needs for our working cap [capitalization].” Treasurer, US$800m Singapore Health Services Group What percentage is tied up in DPO and DIO? Megha Chopra Asia Pacific Head of Trade Sales and Client Management, Treasury and Trade Solutions, Citi