2020 Global SRM Research Report - SM at speed

EXECUTIVE INTERVIEW: IAN SAYERS, INTERNATIONAL TRADE CENTRE

order from a reputable buyer under the scheme and the underpinning international guarantee.

factoring or leasing arrangements can free up cash, but curtail a business’s capacity to expand, take on more credit covenants or collateral requirements with new lenders. One way that many international buyers in low-interest-rate jurisdictions help is through supplier financing and ‘open- account’ contracting arrangements. However, many then demand deep discounts in return. In some commodity sectors, these discounts equate to the total profit. Suppliers feel locked in by these arrangements and deprived of flexibility to improve their business. What prevents these SME exporters getting lower cost financing? Short-term financing providers are held back by supply chain and payment risk. SRM advisory is now at the top of everyone’s agenda, as is assessment of traceability, relations with financing providers and buyers’ banks. All supply chain parties, including international buyers, can play a role in upgrading and pre-qualifying suppliers, reducing financing risks and thus, increasing the profitability of transactions and economic growth.

Adviser on access to financing for sustainability at the ITC, the UN agency responsible for sustainable trade and enterprise development. He says successful SMEs in poorer countries demonstrate four key traits that improve their agility: > Quick and highly collaborative decision-making that brings together financing, business owners, sales, marketing and procurement operators without regard to hierarchy; > Rapid adoption of local technologies that work in low bandwidth areas to build bridges and dialogue with suppliers and trading partners; > Rigorous analysis of even the smallest item that could stop business combined with respect and genuine empathy for key suppliers of essential parts, HR and services;

We ask him how the ITC is supporting these organisations, the challenges they face, and what higher income countries could learn. How have these businesses been hit by Covid and how did the ITC help? We have seen disasters turned into success. For example, textile and garment manufacturers from an ITC project in North Africa found their export shipments cancelled due to ‘force majeure’ by leading European buyers. ITC’s network helped find alternative buyers in Asia who, in turn, helped find suppliers of PPE materials so the exporters could substitute items for their local health sector. ITC facilitated connections, assisted with access to financing, and provided technical inputs on operational changes and compliance for new product lines. In another example ITC worked closely with SME exporters to switch from supplying European buyers with spices to comply with a different product/packaging mix and standards for Asian markets. These are not isolated cases. We’ve been impressed by the speed of decision- making and execution resulting from the same basic business foundations that we now call SRM. Consider how well your business could tolerate an overnight cancellation by a supplier. What can you change about your supplier relationship so both parties benefit?

Bringing businesses together

Is there a connection between sustainability, resilience and financing costs?

Most certainly. Beyond saving the environment, ample research evidence shows that certified sustainable businesses have better business management, resilience and reliability as suppliers. Enterprises with sustainability and fair labour credentials generally have lower default rates (around 0.38% 2 ) than others (around 1.4%) according to a July report by the ICC. However, the cost to SMEs of obtaining and maintaining certification audits is disproportionate to profits. ITC and industry stakeholders are developing trade financing incentives to accelerate sustainability practices and clean trade. The scope is broad, including renewable energy for production, reduction in packaging pollution or expansion of organic certification of supply chain farmers. I’d welcome contact from buyers and banks interested in joining us to pilot these arrangements this year.

It’s time to learn from suppliers in less prosperous countries, where strong relationships have always been the key to business survival, agility and success, says Ian Sayers

> Full engagement of financing functions – accountants, legal and financing providers.

“For these entrepreneurs there’s nothing else to do to make things work than what we call ‘SRM’,” says Sayers. “Many of these enterprises will be your suppliers or the suppliers of your suppliers. The work we do is hugely important to ensure they comply with industry or international standards, are financially viable and contribute to a sustainable economy. We act as a sort of ‘relationship manager’ between financing providers, businesses and buyers, a process we call ‘intermediation’.”

T he Covid-19 crisis has highlighted why strong supplier-buyer relationships are essential. The verdict on agility and profitability is unequivocal: Good collaborations win hands-down 1 – particularly when rapid change is required. The thousands of SME exporters and importers that comprise the International Trade Centre’s (ITC) beneficiaries know all too well the importance of supplier relations. They are entrepreneurs and small to medium-sized companies in developing nations whose survival and success depends on strong links with their suppliers and support services. Their only certainties are crises and change, yet six months into the pandemic, financing default rates were still <2%, and trade into new markets is rising steadily. Most have lived SRM since founding their businesses. “They know they would not have progressed without strong engagements with their suppliers,” says Ian Sayers, Senior

How does the ITC help?

How can larger organisations help these SMEs help them?

Donor-funded field projects help the ITC to build the capacity of local business development services to help SME exporters upgrade their performance and review their entire supply chains for vulnerability, sustainability, fair employment practices and cash-flow efficiency. We’re also working with development financing institutions (DFIs), the International Chamber of Commerce (ICC) and local financing providers to provide a first-loss fund, improve the availability of short-term financing and reduce its cost for SMEs. When these schemes are in place, a buyers’ bank will be able to extend its own risk- sharing guarantee to the exporters’ bank – usually for up to 80% of transaction costs. This will enable an exporters’ local bank to advance payments to exporters at <10% cost based on the security of a purchase

Find out the challenges they face and how you can help overcome them. Arms- length supplier relations will be the death of your business, or at least prevent agile responses. It’s sink or swim together. Business is changing fast. It is time to rethink your entire business model and supply chain relations.

Arms-length supplier relations will be the death of your business.

What do exporting SMEs need most?

According to a 2020 ITC survey, 74% of our beneficiaries prioritise access to affordable short-term financing and business development advisory services. This includes market and financing information, technical know- how transfer and capacity building. The term ‘cash is king’ has never been more relevant. These exporters typically face prohibitive local interest rates on short-term loans and factoring of 20% to 34%. Average exporter margins are typically 10% or less so bank financing with costly letters of credit is often a last resort. Instruments, like letters of credit,

Image credit: ITC, Geneva Stock photo 2020

1 ITC enterprise profiling surveys in East Africa, South and Central Asia, The Pacific and West Africa May to August 2020, McKinsey & Company, the need for speed in the post- COVID-19 era 9 September 2020 2 According to the World Bank and Asian Development Bank surveys of 2019 and 2020.

10 STATE OF FLUX

2020 GLOBAL SRM RESEARCH REPORT