Siemens’ Doug Schoch talks supply chain finance

Doug Schoch, vice president of Captive Business at Siemens, talks to TXF's managing director Dan Sheriff about Siemens' supply chain finance programme and the direction of the SCF industry as a whole.

TXF: Can you update us on how the Siemens supply chain finance programme has developed and what the next steps are?

Doug Schoch (DS): The Siemens supply chain finance programme has been growing at a healthy rate over the past five years and I use a five-year timeframe because I think there is a sense of maturity of the programme. The first three-and-a-half years were more of a development stage and so we have seen the adoption by more suppliers. This rate has been accelerating over the last five years.

Where are things going within Siemens? We are going to continue to expand to different markets. This is because the value that we see and that suppliers are enjoying is going to apply in Europe and the US of course, but also just as well in Mexico, in Asia and that’s where we see our growth. The fact of the matter is that the supply chain itself is very complex and international, and that’s a theme that we are going to continue to experience. I don’t know that we are going to see a lessening of that over the next five to 10 years. I believe we will always be seeking to realise more value out of our supply chain and that could very well mean that suppliers will be located in different countries around the world. So we have to look to that as our future and work with providers that will be able to bridge across different countries, and work within different roles set in those different countries.

TXF: What KPIs do you use? How do you evaluate the success of the programme?

DS: There are a number of KPIs that are tracked on an ongoing basis: simple things such as the number of suppliers in the programme to a little bit more complex KPIs. For example, the percentage of spend managed under the programme and then the effect on payment terms and the DPOs by divisions. Of course that means we review the effect on our cash conversion cycles for individual Siemens divisions. Those are the measures that we use going forward to measure success.

TXF: So choosing a provider is a more complete process than ever. How did you originally go about that and with the benefit of hindsight what advice would you give to any treasurer or CFO looking to find the right provider?

DS: That is an interesting question because you are asking a question that has, by its very nature, a timeline associated. When you ask for my experience in that particular effort, we are talking about the timeframe of 2006/2007 versus today. Sometimes in a business cycle that can be an eternity. But thinking back to that 2007 timeframe, there were not as many opportunities in the market and there were not as many potential providers in the market. With that being said, it was mostly research on platforms and organisations who had some experience in this service at that time. Additionally, we were talking with some of the large ERP providers as to what they thought would be the future of the SCF service.

There’s a lot more choice in the market today. Back then there was research on three or four, maybe five, different potential providers and that was also being pitched by a number of banks who wanted to do a single-bank model. We quickly looked at the risk profile there and discounted that entirely – meaning that we would not choose a single-bank model. Why? Optimism that’s why. Because I thought in my gut that there was the potential for a large programme here. And there is. And there’s still a large potential for growth. So from a risk management perspective we decided that was not going to be a model that would fit Siemens’ needs. So it was basically a buy/make kind of decision. Looking at the number of the banks that had sunk significant research and development resources into creating a platform, I discounted an internal make decision. Why? To me there were at least three options in the market at that point in time, where there was enough flexibility, where I thought there was enough robustness around the IT infrastructure. Why should we spend the money and the significantly additional time on developing a platform internally?

I will tell you that was not an easy item to get over. You may know Siemens’ background a bit, but there’s an awful lot of pride in being able to develop technology and be innovative in the marketplace. So I think it was the right decision.  At that time, we did not do a full blown RFP but we did have help from some of our procurement officers looking at some of the particular aspects of the relationship we were looking for in a provider. So they were very helpful in that analysis. Today it’s different. You know there are multiple options and many different platforms that can do this work and can be a provider. I would encourage others to follow a full RFP process and make sure that it is well documented because this is not a light decision. This is a decision that has longer term effects on financial ratios, on the efficacy and reputation of the treasury and financial functions of the firm, as well as potential changing of relationships between buyers and suppliers. Let’s face it, you know it’s that business relationship and the stability of those suppliers to provide goods and services on time at high quality that helps you as a firm compete in the marketplace. So, it is not a light decision. I would take time and I would seek out external support if possible to make this decision, because it is a critical one.

Thankfully, we are very happy with our current provider and there’s been a lot of value that’s been proven over time. So I would say in summary: don’t be afraid. We have to compete by having as efficient a supply chain as we can and part of being efficient is de-risking the supply chain. Supply chain financing is a way for our suppliers to be in a better financial position than they otherwise would be and we get to act as a true partner with them in not only helping their business from a cash flow perspective but helping us as a provider of product out to the marketplace to be a more reliable supplier ourselves to our customers. Overall, that’s the value here, and I would encourage all treasurers and chief procurement officers to think of it that way. It is a competitive advantage type of decision, not just simply a financial one, or one that’s more of an effective method of procurement.

TXF: What is the next stage in the development and sustainability of supply chain finance? Any new innovations?

DS: I mean, look, the topic of sustainability is not a Siemens-only topic. I’m not going to speak for Siemens at this point, but Siemens is a multinational with a reputation to uphold and to improve as time goes on. You know our competitors are in the same position. They have a stated set of values. They want to perform and be a good partner or business community partner in their communities. There’s lots of things that each organisation has as a set of values to put forth as part of their identity. 

To me, supply chain finance is one of those tools that can be used to recognise partners in the supply chain who align with our values and help us to achieve the good things, the right things. For example, if Siemens finds it very important to avoid business relationships with certain customers perhaps that are not able to prove that they are not using child labour, or if there is some risk there on the financial side that Siemens would rather avoid, there’s no reason to continue to do business with these folks if there are alternative sources we can go to. And, you know, offering a supply chain financing option to those favourable suppliers is something that we should consider. And, in my opinion, any multinational should consider offering a supply chain financing option if they want to be true to their values and to bring suppliers along that align with those values. That’s one way that supply chain finance might be considered to be used in the future.

I mean you can use varying forms of trade finance, you can use varying insurance products to mitigate risks. There are different ways to work with providers of quality assurance testing to make sure that things are at the required quality levels you demand. These are all discreet things, discreet decisions. Today, I see a vision where all of those particular services that support the procurement and physical movement of goods, the protection of those goods in transit, are incorporated into a holistic service. So that from a tertiary or a fourth-tier supplier in a country halfway around the world to the point where you are delivering a finished product – say a windmill to England or to the Bay of Fundy – those services should be able to be seen and employed on a single platform. Financing, insurance and all of those services that support the import and export of the final product should be conveniently available.  

TXF: So is supply chain finance still a useful term to describe the industry? Or could it be something else like ‘supplier support programme’? Do you think that causes any issues?

DS: My experience is that the word ‘finance’ in the description is sometimes a negative. Because in my experience so far, the majority of supply chain managers will sometimes shy away from that word ‘finance’ because they’re not sure whether or not they’re getting out of their comfort zone. In terms of speaking to the supplier about terms and conditions or other areas of procurement that have nothing to do with the flow of funds, it can be challenging to communicate effectively.

With that being said, if we move away from terms and conditions of payment and methods of payment and the efficiency of payment to a supplier, the hallmark of a good supply chain finance programme is flexibility on the part of the supplier to receive funds. If you move to a larger vision of a holistic place to support your supply chain, the physical movement of goods needs to be augmented with the flow of funds. The sharing of accurate data as well as the flow of money, this is where, I believe, future value lies. So it does go beyond finance, it goes to good data sharing, it also goes to those services that support the physical flow of goods around the world. Maybe supply chain finance doesn’t end up being the best name for the future. Maybe it is more of a suite of supplier support. Maybe it’s a suite of products that ends up being something similar to a banquet laid out in front of suppliers where they’re able to actually go and choose the items that will fill their needs. So that’s what I see as the future and supply chain finance might be one of the major items on that banquet table.  

TXF: Would you say the banks are in step with your own views on what constitutes supply chain finance and how it is communicated both to the corporate buyer and to the supplier?

DS: It really does depend. Which bank are we speaking about? I think that there are leaders and there are even thought leaders in the banking world today. And that’s good. I also think that there are some that are more internally-focused in their thinking around how supply chain finance should be used. I do believe in something I heard just earlier today, that when you take a look at the actual percentage of trade that is affected by supply chain financing structures today, it’s small, you know it’s probably sub two percent of total trade buying.

So, to continue with the food vernacular, the pie is big enough for everyone to eat. I would simply be worried about banks or institutions who have a singular or myopic view of how they’re going to benefit from being in the supply chain finance market, because that’s a very short-term outlook. To be able to support and enhance the buyer relationship with their suppliers, that’s a better outlook and the way that I think banks need to look at this service. Is there intelligence that they can bring about suppliers that maybe the buyer doesn’t understand or know? Is there market or social intelligence about the condition of certain suppliers? If the buyer is savvy enough to understand where there is potential risk in the relationship, is that bank willing to take that information and start to investigate to support what might be a concern on the part of the buyer? There’s as much value, I believe, in that intelligence and data gathering of how the suppliers are doing as there is in gaining another five basis points on financing.

Supply chains in general will grow larger and more complex as they encompass more countries.  So I think banks need to take a more holistic view of the relationship and try to use whatever investigative and data gathering powers they have to support that relationship. I think the corporate side will be very, very happy to have that additional information available to them, and I think there’s value there. So, it’s a long answer to your question but I think the banks in general are comfortable with the supply chain finance option and offering.  It’s been around now for some time. The technology side is no longer a differentiator when you talk about just the use of technology platforms, so the banks have to focus more on supporting the existing relationships and enhancing the intelligence that buyers have about their suppliers.

TXF: Going onto to the technology side, in what ways do you expect fintech to interact with the supply chain finance space? And are you monitoring developments in this area?

DS: Personally, yes I am.  I have a few spiders out there looking for certain keywords and feed news about fintechs on an ongoing basis. I just want to understand whether or not there might be a disruptive technology that is not, you know, two to three years in the future, but months in the future. But that being said, what do I think is going to be the impact? Well I think the main theme of what I’ve been saying is the international nature of the large supply chains. You know, is there a way for those now discreet separate services that can be contracted to support the efficient flow of goods across borders to be offered efficiently through one space? This is where the future lies and if there’s a technology that’s able to corral all of those things together to provide that banquet table of services and structures to support the efficient movement of goods across borders, I think there is real power there. And how many important/powerful supply chain finance offerings are going to be out there? I can’t say. It might be a handful or less. Or it might be that some of the major banks end up doing enough acquisition and controlling over time, that it might be only two or three. I don’t have a crystal ball that says exactly what that’s going to be, but I see that happening most likely.

And I think there’s going to be the opportunity for some great returns on some fintech organisations who are able to immediately close deals, have the terms and conditions in such a way that it’s well known and understood, pre-audited, in other words fully audited and signed off, so that from a compliance and auditing perspective the buying organisation does not have to be concerned. And you know that is a wonderful place for a fintech to focus on. Can they bring the structures of international trade to such a place that there’s no concern on the legal and compliance side, that It’s fully auditable, non-hackable, and that’s proven over time?  There is some gold out there for someone able to pull that all together.

TXF: Where will this product be in 10 years’ time? Who will provide it? How much and how will it be used?

DS: My quick reaction answer is that we will have a few large providers of this service where the majority of the market is concentrated in a few large institutions that can pull this together. But I would predict that that’s not going to be the case in 10 years. Why? I think the complexity of the international supply chain is such that there is still going to be a fragmented market. I still believe that banks with a local presence will be preferred over some large provider elsewhere, especially when you talk about smaller suppliers and smaller countries. Can I see consolidation on the banking side? For this I can. I think that will happen, but I also see more and more local players trying to provide this service in their local market as well.

On the technology side? You know, I hope the vision of being able to put all those support services on one banquet table for international trade companies like Siemens to effectively pull pieces up and to support the physical flow of goods across borders seamlessly and with already proven structures, that is I think a vision that can happen and I can see certain commodities and maybe even certain sub-assemblies in certain industries getting to that point where the complexity that exists today is no longer going to be complex in the future. And the vision of being able to follow a product from its raw material place, say buying in Australia through to a final production and distribution at a customer site, maybe in Los Angeles, California, will have an absolute trail day to day, hour to hour of how that thing, whatever it is, was moved from a raw material state to a final delivered state and be able to also follow the flow of funds from order through final payment from the customer. That is where we’re going and some fintechs are going to be focused on that I’m sure.

I think we will be able to see that in 10 years, probably not across all the different categories, but certainly in some markets, that’ll be there and hopefully Siemens can be one of the organisations that’s benefitting from that type of advancement.

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