- Balancing Supply & Demand
- Managing Supply Chain
UCR: Cutting Edge Supply Chain Finance
Union Copper Rod (UCR) exports much of its output overland to customers in Saudi Arabia, incurring significant logistics costs in the process. The company was keen to improve its Days Payable Outstanding (DPO) in relation to these costs, while at the same time supporting its key logistics suppliers. Sunil Veetil, Regional Head of Global Trade and Receivables Finance, Middle East, North Africa and Turkey at HSBC, explains how the company managed to achieve this by becoming the first company in MENAT to adopt HSBC's highly-automated Supply Chain Finance platform.
UCR is a leading copper rod producer based in Abu Dhabi, with the largest copper rod production capacity in the Middle East. The company is part of the larger Ittihad International Investment group, which consists of a range of businesses in paper, cement and steel forming, plus others.
UCR, as well as its sister companies, makes extensive use of local logistics and shipping pallet suppliers in order to service its customers in the region. These suppliers are relatively small companies, but generate a substantial volume of invoices, as they typically bill on a per shipment basis, and the total value of their invoices is considerable. Apart from the administrative cost of processing paper invoices from these suppliers, their relatively small size and limited access to bank finance also meant that they were not in a position to extend longer payment terms to UCR. The company was therefore looking for a solution that would reduce its accounts payable workload/costs, extend its credit terms and increase the 'stickiness' of its supply chain relationship with its logistics providers.
While supply chain financing (SCF) appeared the obvious solution, the majority of such solutions available were not highly automated and/or incurred a significant implementation overhead for both buyer and suppliers. However, in July 2018, UCR was briefed on HSBC's Supply Chain Finance platform. While this is regarded as market leading in a global context, it had not previously been deployed in MENAT. UCR was attracted by the high levels of automation and visibility the platform offered, as well as the ease of onboarding suppliers. Furthermore, because the solution is a highly-secure and browser based one that uses the Kyriba cloud infrastructure, the implementation workload for both buyers and suppliers is minimal. Therefore, in August 2018, UCR decided to adopt the HSBC solution, with it then initially being deployed in September with three of its most important logistics and pallet suppliers.
As this would be the first time the HSBC Supply Chain Finance Platform had been deployed in MENAT, considerable internal collaboration at the bank was needed in order to ensure a smooth implementation. New local dedicated legal documentation denominated as an AED facility needed to be produced and approved, plus extensive teamwork across credit, structured finance, corporate customer service, operations and client implementation was also required. Nevertheless, the implementation ran smoothly and on schedule, and after around 2 months the first live transaction was processed at the end of September 2018.
Both UCR and its suppliers have already seen considerable benefits from the switch to HSBC's SCF platform. Suppliers submit their invoices electronically to UCR's in house accounts payable system for initial approval. Once that is done, UCR accounts payable staff only need to complete three data fields in a CSV file before dragging and dropping the files into the cloud based platform. In order to ensure appropriate segregation of duties, two security tokens are required within the cloud based platform: one for the member of staff uploading the file and one for another member of accounts payable to give final approval for invoice payment. Once this is done, the transaction is automatically routed to HSBC for immediate payment.
Therefore, suppliers - who do not have to bank with HSBC to participate in the scheme - receive payment for their invoices on the day following invoice presentment. As UCR has approved the invoices for payment and undertaken to reimburse HSBC at the end of the desired credit term, the bank's credit risk is on the buyer, not the supplier. UCR's status as 'anchor credit' means that the funding cost charged to suppliers by HSBC for immediate payment is a small fraction of the amount it would cost them to obtain funding (if it were available) to cover the credit period otherwise.
Suppliers therefore benefit from a major improvement in their working capital positions at very low cost. However, they also gain from an extremely streamlined workflow for invoice presentment and tracking. The transparency of the HSBC platform means that they can simply log in to the system to check the status of their invoices, with no longer any need to call UCR to enquire about progress. They also enjoy considerable flexibility, as they are not obliged to submit all their invoices for financing.
At the same time, UCR has been able to extend its payment terms and improve its DPO without adversely affecting supplier relationships. In fact the opposite applies, because suppliers now enjoy a substantial cash flow benefit, which encourages loyalty in a competitive market, as well as opening the door for UCR to negotiate commercial enhancements. UCR also benefits from a high level of automation in its accounts payable, with no further manual processing of paper invoices or handling of supplier telephone enquiries about invoice payment status.
Conclusion and the future
UCR has been pleased with the progress of the new SCF workflow.
We have seen a significant reduction in our accounts payable workload, while also achieving an improvement in our DPO, plus the enhancement of our supplier relationships|
We are very pleased to have been the first company in MENAT to adopt this highly-automated HSBC SCF solution.
In due course, UCR intends to roll out the SCF option to some of its other suppliers. In the longer term, there is also the possibility that other companies in the Ittihad International Investment group, many of which have similar supplier demographics to UCR, may also choose to adopt it.