5. Evolving Client
Requirements

5. Evolving Client Requirements

Regardless of their industry or geographic location, corporates have had to come to terms with significant changes in the past few years – the disruptive power of technology, trade disputes, the Covid-19 pandemic, changing consumer preferences and an evolving regulatory landscape, to name some of the most significant forces at play.

In the nascent days of the new year, some of these challenges persist while new ones have emerged. Macroeconomic factors are top of mind. So, too, are preoccupations around sustainability and the uncertainty created by fraught geopolitics, as well as the impact of domestic political cycles.

So, how are corporates coping? This section aims to provide insights from a supply chain finance perspective, shedding light on how corporates are adapting to the dynamic landscape described in this report.

STRIKING A BALANCE BETWEEN JUST IN TIME AND JUST IN CASE

The Covid-19 pandemic clogged global supply chains while driving demand for consumer durables,⁷⁸ making inventory management among the thorniest issues for companies. As factory and port closures become a thing of the past, companies are recalibrating their strategies to address new challenges like high inflation and interest rates, which have raised the cost of working capital and dulled consumer appetites.

Companies that pivoted from time-tested techniques such as “Just in Time” to a “Just in Case” inventory model during the Covid-19 pandemic, now aim to strike a balance between the two in a bid to control costs and ensure stocks are available without building up too much inventory. Juggling these conflicting needs, companies are also rethinking their supply chain finance strategies, including turning to technology, diversifying their supplier base and reaching out to their banking partners and third-party fintechs for support.

QUEST FOR GREATER VISIBILITY ACROSS THE SUPPLY CHAIN

While technology is a major disruptor, companies are also viewing it as an enabler – as evidenced by the growing demand for digital solutions that provide greater visibility across all layers of the supply chain.

“Our clients are looking to build sophisticated supply chain platforms. They’re not just seeking a financing tool but end-to-end solutions."

Mary Ng – Director, Head of Supply Chain Sales, North Asia, ANZ

Specifically, companies are not limiting themselves to working capital management tools that help raise invoices, reconcile accounts, and better deploy their surplus cash. They are also seeking solutions that provide enhanced enterprise resource planning (ERP) data, enable provenance-tracking and help monitor the financial health of suppliers. These capabilities in turn feed into companies’ ability to track and reduce emissions across their supply chain and address other ESG metrics.

“Customers are starting to understand the visibility offered by an end-to-end digitalised supply chain ecosystem and its impact in terms of better decision-making. That’s driving demand for exploring different technological solutions,” says Iacobucci.

Adopting such an approach not only enhances visibility; it also aids firms seeking a transition to a more sustainable model – a goal pursued by many. According to a joint study by Accenture and the UN Global Compact (UNGC), 49% of CEOs are moving their companies towards a circular business model. This shift aims to help build resilience against market and geopolitical trends, address resource availability challenges, and includes efforts to improve the measurement of sustainability data and understanding of social impacts in their supply chains.

Creating responsible supply chains

This is being driven in part by the global push towards decarbonisation as well as growing calls for changes to business practices from increasingly environmentally conscious consumers. As a result, more companies across industries are framing sustainability policies and embedding ESG considerations into their supply chains, including by defining key performance indicators (KPIs) for their business partners across the value chain.

At the heart of this are Scope 3 emissions, which, as the World Economic Forum has noted, can comprise up to 90% of a company’s total emissions across the supplier and customer value chain. That makes focus on Scope 3 emissions crucial in efforts to tackle climate change.⁷⁹ However, this won’t be easy. While Scope 1 and Scope 2 emissions are relatively straightforward to monitor, determining Scope 3 emissions is significantly more challenging.

This is because Scope 3 emissions are broader, more complex and harder to track, encompassing, as they do, “the emissions of purchased goods and services… to the life-cycle footprint caused by customers using the goods, and the waste footprint to dispose of them”.⁸⁰ Tracking suppliers' emissions, which are typically 70% of a firm's total emissions is a common priority, the WEF says. However, doing so successfully requires much more measuring and use of data as well as greater application of technology.

“The increased focus around Scope 3 emissions, especially the provenance aspect of it, is an important part of the evolving supply chain finance space and has become a key agenda for our customers,” notes Iacobucci.

In response, banks like ANZ are collaborating with technology companies to build supply chain finance solutions that not only offer tools like dynamic discounting to help treasurers maximise the yield on their cash positions, but also enable the kind of data-driven supply-chain mapping capabilities that companies now desire.

“We are collaborating with third-party entities – like fintechs and AI companies – to provide solutions, not just on the finance side but also on the supply side to give clients the visibility and tracking capability they are looking for,” says Ng.

ANZ’s strategic relationship with Taulia and Pollination are prominent examples of third-party firms helping a leading bank in the Asia–Pacific to offer a sophisticated supply chain finance platform to mid- and large-size firms across industries.

Supply chain innovation by industry

CHINA PLUS ONE: DIVERSITY IS KEY

While embracing technology is top of the list for corporates, they are simultaneously looking to mitigate geopolitical risk by diversifying their supplier base. This has led to a rise in near-shoring and friend-shoring with the China Plus One strategy where companies look to diversify their supply links beyond mainland China by carrying out some of their manufacturing outside China.

This trend is in turn benefiting a number of economies around Asia. Vietnam, Thailand and Malaysia are among those poised to reap the benefits,⁸¹ while India – the other Asian giant – is also seeking to attract manufacturers to set up shop and encourage global corporations to source from domestic producers.⁸² This strategy makes sense from a cost perspective too as Chinese labour has become more expensive,⁸³ and supports the growth of domestic industries.

However, as noted earlier in this report, decoupling longstanding ties with Chinese entities is neither desirable nor feasible, given China’s position as a major supplier of in-demand raw materials like rare earth metals and minerals.⁸⁴ Moreover, China’s manufacturing prowess and unparalleled logistics network – built up over decades – cannot be easily replicated,⁸⁵as is evident from the practice of many Southeast Asian nations importing intermediate goods from China to fuel their export-oriented industries,⁸⁶and China’s continued dominance of global exports.⁸⁷

GROWING LOCAL CURRENCY USAGE TO REDUCE FX RISKS

With macroeconomic and geopolitical factors pushing up the cost of manufacturing,⁸⁸ US dollar financing, and volatility in FX markets, corporates in Asia–Pacific are increasingly considering reinvoicing in a major local or regional currency, or by drawing credit in a local currency to keep costs and FX risks low.

While the US dollar’s primacy as the currency of global finance is not at risk yet, there is a rise in the use of alternatives like the renminbi, which is being promoted by China with the country settling about half of its cross-border trade and investment transactions in local currency. India has also stepped up efforts to use the rupee for cross-border payments while the ASEAN and BRICS blocs are working on plans to promote local currency transactions and boost regional connectivity and trade.⁸⁹

BUILDING A RESILIENT GLOBAL SUPPLY CHAIN TO FACILITATE SUSTAINABLE TRADE

Going forward, two factors will become increasingly prominent in the evolution of the global supply chain:

Navigating the transition to a low carbon economy, including how that transition intersects with enduring challenges like liquidity management, risk management and digital transformation.
The impact of technology on supply chain finance.

The shift towards ESG – and the broader movement towards sustainability – has raised a major challenge for the industry as companies try to understand the diverse taxonomies around the topic, gain better access to sustainable finance products, raise the green profile of their business, and prepare to comply with a raft of evolving regulations. To do this, they are looking to banking partners like ANZ and third-party entities for guidance on how to operate their business in a more ESG-centric way.

For their part, banks like ANZ are involved with working groups in various markets aimed at easing the way towards better ESG compliance, including helping regulators test initiatives to see how they work in the real world so they can set realistic standards that all parties can achieve.

US preferred trading partners: A changing line-up

“Customers would love to be able to see something labelled by a bank as sustainable across the product suite,” says Sally Robinson, Head of Guarantees, ANZ. “But that’s going to take time as banks and third-party agencies get comfortable with how we classify that trade flow or that corporate as sustainable. But who determines that, and who’s on the hook for that decision?”

Resolving this requires agencies and governments drafting taxonomies to clarify issues – which itself highlights another gap: a lack of standardisation when it comes to taxonomies and requirements across different markets, says Devidas. He points out that standardisation was crucial when digitising trade to boost cross-border and domestic trade, as was cooperation between agencies and government. It is no less important here.

That brings us to the second factor: the impact of technology, including AI, machine learning and data analytics, in scaling up sustainable and supply chain finance. When it comes to moving away from paper-based trading systems, for instance, nations like Sweden and Singapore are far ahead. Singapore, for example, is on its sixth version of a single trading window. Many countries, by comparison, lack even an initial digital window.

Success requires a push by regulators, as is underway in Australia, says Simone Fynmore, Head of Trade & Supply Chain Sales, Victoria, ANZ. The federal government is supporting corporations and industries to make progress in their technology journey.

“It’s about the use of data, the use of AI, and reducing complexity in our systems. And while it could be a few years before we see real outcomes, there is now real support and action from the government.”

Simone Fynmore – Head of Trade & Supply Chain Sales, Victoria, ANZ

Meanwhile, banks like ANZ are constantly looking to deploy technological tools to help supply chain financing, including in areas like due diligence and risk planning, and make them more robust and compliant with know your customer (KYC) and anti-money laundering/counter-terrorism financing (AML/CTF) considerations. Within the bank, ANZ is deploying AI to create machine-learning capabilities that could generate deeper insights into areas of data that are more interpretative. ANZ is also deploying innovative technological solutions to corporates’ working capital needs by working with firms like Taulia.⁹⁰

The platform works by plugging into the client’s ecosystem and ensures they can support their suppliers by, for example, early payment and data transparency, with an end-to-end working capital solution that supports them through the economic cycle. In this way, clients can benefit from a solution that is sustainable in a manner broader than ESG: it also supports customers and minimises supply chain disruption.

Finally, when it comes to the future of sustainable finance, says Kwok, digital solutions will confer enormous benefits across the supply chain, including in areas like analysing data, meeting ESG goals and stabilising supply chains. Linked to this, he adds, data transparency “will be absolutely critical”.

“It’s about the use of data, the use of AI, and reducing complexity in our systems.”

Simone Fynmore – Head of Trade & Supply Chain Sales, Victoria, ANZ

No Longer Cheap: Rising Manufacturing Labour Costs

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