Procurement Finance

The Digital Revolution in Commercial Banking

Bernardo Nicoletti

• Publisher: Palgrave Macmillan
• Year: 2018
• Print ISBN: 9783030021399
• eBook ISBN: 9783030021405
• Topic: Business
• Subtopic: Financial Services
• Index: Business

This book presents a business model on how to structure the relationship between financial services and procurement. The needfornew models is particularly important to support small and medium enterprises (SMEs) where there is an evident difficulty in accessing credit. Due to this context, innovative solutions must be introduced.

The objective of this book is to determine how innovation can support the dynamic and volatile international context and the increasingly relevant function of procurement. It isbecomingmore and moreimportant to take into account complex international transactions with notably long payment terms. Organizations need to managethe best way tohandle the financial relationships and the risks related to credit provision and payments. This bookpresentsan end-to-end support to procurement, including trade finance, supply chain finance, and related payments.

In addition, the enterprises need to keep sufficient liquidity levels in the short and medium term. This is a constant challenge today, with theturbulence of financial markets and a continuing climate of economic uncertainty makingit harder to obtain external funding. Businesses need to optimize the working capital. This can be done through the innovative concept of procurement finance, which allows SMEs to benefit by the new vision of collaborative procurement.

This bookprovidesseveral practical examples of advanced procurement finance solutions. It demonstrates how the use of process improvement and technology can help in overcoming the current financiallydifficult situation. In addition, based on the business model presented, the integrated approach to procurement finance allows sustainable solutions which will be of interest to academics, researchers, managers, and practitioners in both buyer and vendor companies, as well as in banks and other financialinstitutions.

© The Author(s) 2018

Bernardo NicolettiProcurement FinancePalgrave Studies in Financial Services Technologyhttps://doi.org/10.1007/978-3-030-02140-5_1

Begin Abstract

1. Introduction to Procurement Finance

Bernardo Nicoletti¹

(1)

Rome campus, Temple University, Roma, Roma, Italy

Bernardo Nicoletti

Email: [email protected]

Keywords

Procurement abbreviationsProcurement finance institutions

End Abstract

Concept of Procurement Finance

The financial crisis of 2008 brought strong competitive pressures on the organizations. Large organizations are challenged by small ones that are more specialized. On the other side, the small and medium-sized enterprises (SMEs) have difficulties in accessing to the credit.

The aim of this book is to demonstrate how it is possible and useful to exploit the digital transformation to support and innovate the procurement organizations and the financial institutions . The aim is to demonstrate that all the actors involved in the procurement ecosystem can benefit from the digital transformation.

To reach this objective, it is important to consider an integrated approach, including¹:

• trade finance;
• supply chain finance;
• payments management.

This integrated vision is called procurement finance. It is represented by the dashed lines in Fig. 1.1. Procurement finance goes beyond the trade finance , supply chain finance, and payments management. It encompasses the entire extended procurement processes. To clarify this statement, it is useful to consider what has been defined as the ultimate supply chain.² More and more of the operations of an organization are network shaped rather than single flow shaped. Besides, the real objective of the process is to add value to the organization: the supply should involve co-design, co-development, cooperations, and co-marketing and sales. For all these reasons, this book considers procurement finance as an optimization of the value network processes rather than only of the supply chain.³

Fig. 1.1

Procurement finance

There are several pillars to consider in procurement finance (Table 1.1).⁴

Table 1.1

Pillars in procurement finance

Financing	Risk management	Payment	Information
Available to all parties (buyer/vendor/logistical operator)	Risk sharing	Secure	Shipment and storing status
Available at several steps in the transaction	Country, financial institutions, and transaction risks	Timely and prompt	Quality of products shipped and services delivered
	Logistics risks	Global	Total cost of products shipped and services delivered
	Export credit	Taking into account currency fluctuations
	Insurance

Adapted by the author based on Malaket, A. (2014). Financing Trade and International Supply Chain. Gower Publish, Farnham, UK

All three components of procurement finance are challenging. In approaching procurement finance, it is necessary to consider the current global scenario. Globalization creates a complex combination among outsourcing , global supply, and distribution networks. This leads to an increase in the number of actors and of their relationships. Globalization of processes and relationships is commonly referred to as one of the underlying factors of the ever-increasing vulnerability of procurement for the organizations.⁵ In this new situation, multinational organizations, followed more and more by SMEs, need to take new approaches to better support the increasing global trade and at the same time to act on the new challenges and remediate to the risks.

Organizations are adapting to the new competitive scenarios by managing complexity, disintermediation, innovation , networking, and flexibility. This is the base to rethink, restructure, and innovate all processes and relationships along the value network , starting with the procurement. It is important to take into account that an innovative solution brings benefits but can bring also several risks and uncertainty regarding the desired results with the actual ones. This aspect is one of the main barriers to innovate. It is essential to manage it. This book considers the ways to cope with these risks, by managing them and understanding the main key factors within procurement finance.

The creation of value by an organization is determined by its ability to generate long-term cash flows through operational management.⁶ Cash flows are an indicator of an organization’s sustainable development capacity and the ability to remunerate and repay debt and capital. This is an objective measure of the organization performance.

The digital transformation is introducing deep changes also in treasury tools, systems, and processes.⁷ Treasury needs to be prepared for these changes not only to capture all the potential benefits but also to manage possible challenges and risks.

Treasury is the underlying asset of the correct cash inflows and cash outflows management. It is required to help maintain an efficient structure of working capital, given the increasing competitive environment. To maintain the proper day-to-day management, treasury needs to lean and digitize as much as possible its own processing. It must have secure systems and processes to minimize operational risks by maximizing efficiency in managing working capital and optimize liquidity.

Technological evolution in payment systems is perhaps one of the most obvious aspects for procurement finance since scope, cost, and quality performance are perceptible in day-to-day business management. The main efforts are focused on shrinking payment execution times, visibility, and traceability of transactions.⁸ In addition, the digital transformation is deeply changing the architectural landscape of payment systems.⁹ It could turn towards distributed solutions that can potentially provide faster and traceable transfers between counterparts. New solutions bring improvements and benefits. They also bring operational risks and potential frauds that must be known, monitored, and mitigated.

Being in an increasingly globalized ecosystem , the international trade transactions are increasing. With the slowdown in the world economic growth, the trade finance industry has also suffered a certain impact. It is still maintaining a relatively optimistic growth. There are several estimations not completely consistent for this potential growth. All of them confirm the growth of the market. Trade finance market size is expected to maintain the average annual growth rate of 10.58 percent from $25,290 million in 2014 to $34,200 million in 2017.¹⁰ BisReport analysts believe that in the next few years, trade finance market size will expand. They expect that by 2022 the market size of the trade finance will reach $54,890 million.¹¹ With increased focus on global trade, the trade finance market is likely to witness a strong growth in the coming years. The global trade finance market is expected to reach USD 71,000 million by the end of 2023, growing at a compound annual growth rate (CAGR) of 3.0 percent between 2017 and 2023.¹²

For this reason, it is necessary to consider an advanced payments management taking into account especially the different currencies in the international transactions. New solutions are important in facilitating the cross-border transactions. In this international ecosystem , the actors require innovative solutions of procurement finance oriented to increasing value added. Innovative procurement finance solutions allow especially SMEs in financing their operations in an effective, efficient, and economical way.

To deal with the changes in the current trade, it is necessary to consider not only the physical flow of procurement but also the financial and information flows with an integrated vision. It is necessary to bridge the gap between the business and financial worlds. An integrated approach is necessary while being useful for taking into account simplification and digitization at the same time.

The development of smart approaches and collaboration in procurement can accelerate the modernization and transformation of the entire organization. The task of the procurement is to be a model of use of new soluti...

Table of contents

• Cover
• Front Matter
• 1. Introduction to Procurement Finance
• 2. Procurement Processes and Finance
• 3. From Trade Finance to Supply Chain Finance to Procurement Finance
• 4. Agile Procurement Finance and Its KPI
• 5. New Solutions for Procurement Finance
• 6. Fintech and Procurement Finance 4.0
• 7. Procurement Finance for the Small and Medium-Sized Enterprises
• 8. Conclusions on Procurement Finance
• Back Matter