Managing Global Trade Finance

In the past decade, thousands of companies worldwide have embraced strategic sourcing and international distribution. About 90 percent of all companies in North America now import and/or export goods and products. Effective management (and financing) of global supply chains is increasingly important to the economic health of companies across all industry sectors. Yet many supply chain managers do not fully understand the economics of these global movements or the best practices to manage them effectively.

The guidelines that Tompkins Associates developed for the Institute of Management Accountants, “Managing the Total Costs of Global Supply Chains,” emphasize the need to identify all costs of sourcing and distribution, and make intelligent use of innovative financing methods.

Although an in-depth knowledge of global trade financing is not always necessary, supply chain managers at least need a working knowledge and awareness of the key related issues and solutions. This column provides an overview of three basic categories of global trade finance awareness for supply chain managers: (1) the terminology of global trade finance; (2) the key business processes involved; and (3) the methods and technologies available to help manage the financing.

Global Trade Finance Terminology

The most understandable of the supply chain cash flows—the speed at which cash flows through supply chains—is a key performance indicator (KPI) that supply chain managers need to tightly grasp. The main indicator, known as the Cortera Supply Chain Index (SCI) (http://www.cortera.com), tracks the length of payment periods among suppliers, transporters, and customers. The Cortera SCI currently reports at nine days beyond the average payment terms that are specified by accounts receivable. Because of low cash flow and increased debt caused by the recession, the SCI is almost 20 percent less healthy now than in January 2009.

Most supply chain managers have become familiar with terms such as costs of goods sold (COGS), total landed/delivered costs, and working capital—all of which are impacted directly by lengthy supply chains. Few, however, are able to explain the terms that represent the “financial supply chain”; that is, the supply chain flow of funds associated with the movement and storage of goods throughout the chain. The flow of funds may be enabled by letters of credit (LCs) or by open accounts.

The costs of customs, taxes, and security compliance are part of the trade finance equation. The Incoterms (International Chamber of Commerce Shipments and Delivery Terms) that surround these financing requirements have somewhat rigid definitions. Supply chain managers do not have to become experts in these terms or regulations. Yet they need to know where to go with questions or for clarification. Key resources include their freight forwarders, logistics services providers, customs advisory firms, their banker’s advisory services, or globally experienced consultants.

Key Business Processes of GTM

Global Trade Management is (GTM) is the umbrella term that describes the processes required to support cross-border transactions. It’s the holistic framework against which companies view their global supply chains—from end-to-end, involving the multiple partners that comprise the chain. Global trade finance is one component of GTM; thus, there are several processes that address the financial flows.

One very useful resource is the Stanford University 2009 research report titled “How Enterprises and Trading Partners Gain from Global Trade Management: A New Process Model” (http://www.gsb.stanford.edu/scforum). Sponsored by Trade Beam, this work identifies 106 “process steps” in the importer/exporter trade flows.

Supply chain managers involved in these processes are typically aware of the steps associated with efficiencies in global trade. Yet the intricacies of global trade finance are such that gaps frequently exist in their knowledge and ability to fully understand and to gain the benefits of tightly managing financial flows.

The Stanford report cites numerous categories of financial flows that all supply chain managers should be familiar with. They need a basic understanding of these costs—which cover procurement, inventory, financing, logistics insurance, and more—and their underlying processes. Once supply chain managers achieve that level of understanding, they can decide on the best approaches to identify, plan, manage, and control the costs.

Methods for Managing Costs

Over the past decade, several methods and technologies have been developed to respond to the rapid growth of global trade flows. These can be viewed with two broad categories: services and technologies.

Services. Global trade groups at leading banks specializing in global finance assistance provide trade services such as LCs, collections, bankers’ acceptances, and risk mitigation tools. They also provide support services for growing open account trade business. In addition, they look for ways to optimize tied up working capital.

Recently, due to the economic impacts of global trade, the burden of financing has fallen on suppliers and has pushed banks to focus on vendors. Larger buyers have the leverage to push payment terms to the cost of suppliers’ DSO. Thus, the leading banks have designed services to create more balanced risks for the buyer, seller, and the bank.

Technologies. The leading GTM applications support many of the 106 processes identified by the Stanford report. (See accompanying exhibit.) Through trade portals, trading partners can interact with either LCs or open accounts. The systems generate export/import documentation, provide tax and duty rates, and enable trade finance objectives such as reducing transactions fees while supporting compliance controls and providing visibility.

GTM systems also help supply chain managers determine total landed/delivered costs. The ability to calculate these for various scenarios or orders to delivery is critical to effective supply chain costing and product pricing.

In summary, companies stand to benefit significantly by improving their global trade processes, information, and knowledge. To assure that finance is considered comprehensively in global supply chain plans, supply chain managers should develop a working awareness of trade finance and the key methods and technologies of supply chain finance.