Page 15 - MUFG Spring 2021

Q Where does the bank make its money on such transactions?
A The bank is serving as a facilitator for the liquidity that's needed within the supply-chain cycle. We will offer an early payment to a supplier so they can receive that cash and deploy it for other operating purposes while waiting to get repaid by the buyer. There will typically be a financing charge associated with that.
Q Are interest rates a factor in the popularity of this practice, being especially low in the last few years? Does that have any impact on the degree to which it is being embraced?
A Generally speaking, supply-chain finance programs have grown in popularity since the 2008 financial crisis, primarily predicated on the importance of ensuring suppliers' stability and the opportunity to optimize working capital for both buyer and supplier. Lower interest rates probably have a minimal impact. It's more around working capital optimization as the driver to the popularity of supply-chain finance over the last 10 to 12 years.
QDo you believe this problem is going to become even more acute for suppliers, now that we’re in a recession or uncertain duration?
A Yes. Again, we're seeing higher demand from both our supplier and buyer customers to find ways to expedite the receipt of cash in a cost- effective manner.
supply-chain management to diversify your source of supply, so that when one supplier is impacted, you can turn to another.
In addition to developing alternative supply outlets, companies are looking at building
safety stock, or supply sources that are closer to home. However, cost will remain a significant driver, as companies continue to march to the mantra of having the right product at the right place at the right price.
Q Do you see a reversal of the trend toward just- in-time deliveries and minimization of safety stock? Are we seeing a turnaround in that philosophy?
A I think it's a little too soon for us to have a good line of sight of the impact of deepening sourcing strategies, including the cost of holding additional safety stock. It's definitely going to have an impact on company financials, with inventory holds increasing over time. We think it's a trend that will surface, but the real implication that it may have on a company's financial performance
remains to be seen.
Q Are there any other creative supply-chain financing solutions out there that can be deployed by buyers or suppliers, in order to protect against the current situation, and going forward as well?
Q
How can buyers hedge against supply-chain disruptions in this particular environment?
A Certainly, in terms of sourcing behavior, I think there will probably be some new disciplines that evolve as a result of COVID-19. That has been evolving prior to the pandemic due to heightened trade tensions across the globe. However, I think COVID-19 might be expediting the need to adjust strategy. It's crucial in
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I do think there’s still a lot of upside for companies to embrace the power of supply- chain finance programs. As we go through the next iteration of what this economic cycle is going to look like, suppliers and buyers alike will continue to focus in on the importance of working capital optimization.
SPRING 2021 / MUFG TRANSACTION BANKING AMERICAS GROUP