The situation of supply chain financing for business in techcombank and bidv in vietnam from 2014 to 2017,graduation thesis

The purpose of the thesis is to analyze the supply chain financing situation in the two banks, as well as indicate problems in supply chain financing and suggest some possible solutions.

BANKING ACADEMY FACULTY OF FOREIGN LANGUAGE

TABLE OF CONTENTS

ABSTRACT 5

ACKNOWLEDGEMENT 6

DECLARATION 7

LIST OF ABBREVIATIONS 8

LIST OF FIGURES AND TABLES 9

CHAPTER 1: INTRODUCTION 1

I RATIONALE 1

II THE PURPOSE OF THE STUDY 2

III THE SCOPE AND LIMITATION 2

IV RESEARCH METHODOLOGY 2

V THESIS STRUCTURE 2

CHAPTER 2: THEORETICAL BACKGROUND OF THE STUDY 3

I SUPPLY CHAIN 3

1.1 Definition of supply chain 3

1.2 Evolution of supply chain 4

1.3 Factors affecting supply chain efficiency 5

II SUPPLY CHAIN MANAGEMENT 7

2.1 Definition 7

2.2 Purpose and Goals 9

2.3 The role of supply chain management 12

2.4 Main issues in supply chain management 13

III BANKS IN SUPPLY CHAIN FINANCING 15

3.1 Supply Chain Finance 15

3.2 Banks’ supply chain financing products 16

3.2.1 Banks’ financing products for domestic supply chain 16

3.2.2 Banks’ financing products for multinational supply chain 18

3.3 The benefits of banks in supply chain financing 20

3.4 The challenges of banks in supply chain financing 21

3.4.1 Organisational challenges 21

3.4.2 Technological and Digital challenges 22

3.5 The solutions to supply chain financing 23

CHAPTER 3: THE SITUATION OF SUPPLY CHAIN FINANCING FOR BUSINESS IN TECHCOMBANK AND BIDV IN VIETNAM FROM 2014 TO 2017 24

I TECHCOMBANK 25

1.1 About Techcombank 25

1.2 Techcombank's supply chain financing products 26

1.3 The situation of supply chain financing in Techcombank 29

1.3.1 “Masan distributors financing” product by Techcombank 29

1.3.2 The situation of other financing products 37

1.4 Achievements and problems of supply chain financing in Techcombank 38

1.4.1 Achievements 38

1.4.2 Problems 39

II BIDV 40

2.1 About BIDV 40

2.2 BIDV's supply chain financing products 41

2.2.1 Financing various types of business 41

2.2.2 Financing seafood supply chain 42

2.2.3 BIDV factoring service 43

2.3 The situation of supply chain financing in BIDV 44

2.4 Achievements and problems of supply chain financing in BIDV 46

2.4.1 Achievements 46

2.4.2 Problems 46

CHAPTER 4: PROBLEMS AND SOLUTIONS FOR SUPPLY CHAIN FINANCING IN VIETNAMESE BANKS 48

I PROBLEMS FOR SUPPLY CHAIN FINANCING 48

II SOLUTIONS AND RECOMMENDATIONS 50

2.1 Solutions for the access to capital of businesses 50

2.2 Solutions for convincing businesses to use SCF 52

2.3 Solutions for the supply capacity of enterprises 53

CONCLUSION 56 REFERENCES 57

ABSTRACT

Supply chain is becoming one of the most discussed topics in business literature and is considered by many organizations a key strategic element Supply chain is all the activities related to a product life, from raw materials to delivering to the customer Today, markets have become more dynamic with rapid changes in customer requirements, so it is important that companies have

to ensure that materials and information flow smoothly in a supply chain

However, in order to have an effective and efficient supply chain, businesses need to manage their working capital well Therefore, supply chain financing has gained an increasing interest from companies across the country Supply chain financing can be a simple way of improving capital, releasing cash and decreasing supply chain risks

In Vietnam, Techcombank and BIDV are considered two of several leading banks in providing supply chain financing products for businesses The purpose

of the thesis is to analyze the supply chain financing situation in the two banks,

as well as indicate problems in supply chain financing and suggest some possible solutions

One of the supply chain financing products that Techcombank was and is being quite success in is “Masan distributors financing” product Meanwhile, BIDV

is well-known for their car supply chain financing Although the supply chain financing activity in Vietnamese banks have faced some difficulties such as businesses still have problems in borrowing capital from banks or their supply capacity is weak, commercial banks as well as The State Bank of Vietnam are always working on new policies and solutions to improve their products for the best of the customer

ACKNOWLEDGEMENT

It is my great pleasure to thank all the people who made this thesis possible First and foremost, I would like to express my sincere thank to my lecturer, Mrs Nguyen Phuong Lan, for her constant support, insightful guidance and directions during the work process of this thesis With her experience and knowledge, I have learned a lot from the interactions with her

I am also very thankful to my parents for their care, support and trust, without which I could not have completed this thesis

Finally, I would like to thank all of my friends in Banking Academy, especially the three friends who have been working on their graduation thesis with the same lecturer as me, for the friendship, help, support and fun

To all, thank you for being there for me and making this journey a worthwhile and rewarding adventure

DECLARATION

I declare that this thesis is a presentation of my original research work and has not been submitted for any previous degree Whenever contributions of others are involved, every effort is made to indicate this clearly, with due reference to the literature

LIST OF ABBREVIATIONS

CEO Chief Executive Officer

ATM Automatic Teller Machine

FDI Foreign Direct Investment

LIST OF FIGURES AND TABLES

Figures/

Tables

Figure 3 The supply chain process involved Masan distributors 31

Figure 4 The number of distributors used "Masan distributors

Figure 6 Pie chart showing new customer concerns - 2014 35

Figure 7 Pie chart showing current customer concerns - 2014 35

Figure 8 Total income of BIDV from the financing program in the

last 4 months of 2016

45

Figure 9 How much has the Supply Chain Finance solution

decreased working capital?

52

Table 1 Expected revenue of Techcombank from the program 32

Table 2 Result of the "Masan Distributors Financing" program in

One of the most important but very complex issues in supply chain management for businesses is financial management Typically, the product cycle has a direct impact on the capital turnover of a business Businesses have

to deal with problems related to payment term, receivables and payables, assurance of payment, etc This is a complex issue required high professionalism, and it is not only costly to businesses involved in supply chain, but also takes a lot of time to research, develop, and train staff Furthermore, many Vietnamese businesses find it difficult to mobilize enough capital to invest in supply chain Therefore, the need for commercial banks as financial intermediaries to provide capital and manage the cash flow from the beginning to the end of the supply chain becomes urgent and irreplaceable However, the concept of supply chain or supply chain financing is still new in Vietnam There are only several banks in Vietnam that provided supply chain financing products, typically Techcombank and BIDV Therefore, the thesis selects the research topic: The situation of supply chain financing for business

in Techcombank and BIDV in Vietnam from 2014 to 2017

II THE PURPOSE OF THE STUDY

The thesis focuses on products of banks in supply chain financing, supply chain financing situation of Techcombank and BIDV, limitations and solutions for the supply chain financing commercial banks in Vietnam

III THE SCOPE AND LIMITATION

The thesis studies on two of Vietnamese banks that already have some supply chain financing products for businesses: Techcombank and BIDV

IV RESEARCH METHODOLOGY

The thesis uses qualitative and quantitative method, generalize and synthetic method to research

V THESIS STRUCTURE

The thesis is divided into four chapters:

Chapter 1: Introduction

Chapter 2: Theoretical background of the study

Chapter 3: The situation of supply chain financing for business in Techcombank and BIDV in Vietnam from 2014 to 2017

Chapter 4: Problems and solutions for supply chain financing in Vietnamese banks

CHAPTER 2: THEORETICAL BACKGROUND OF THE

STUDY

I SUPPLY CHAIN

1.1 Definition of supply chain

Supply chain is defined as all the activities involved in delivering a product from raw materials to the customer including sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, delivery to the customer, and the information systems necessary to monitor all of these activities Within each organization, a supply chain includes all the functions related to satisfying customer needs These functions include new product development, marketing, manufacturing, distribution, financing, and customer services

Supply chain can be summarized in the process below:

Figure 1: The supply chain model

With this supply chain concept, it is easy to see that the consumer/ customer is the main focus of the chain, since the primary purpose of the existence of any supply chain is to satisfy consumer needs, in the process generating profit for

itself When a business in the supply chain make decision without regard for other businesses in the chain, this will ultimately lead to very high prices for consumer and low customer demand

1.2 Evolution of supply chain

In the early years of the 20th century, the design and development of new product were slow and depend mainly on internal resources, technology and capacity

Sharing technology and expertise through strategic partnerships between buyers and sellers was a rare term in that period Production processes were backed up by inventory to keep machines running smoothly and balance the flow of raw materials, leading to high inventory level

Until the 1960s, large companies around the world aggressively applied mass production technology to reduce cost and improve productivity, but they paid little attention to build relationship with suppliers, improve process design and flexibility, or improve product quality

In the 1970s, Manufacturing Resource Planning (MRP) and MRP II system were developed and the importance of effective resources/ materials management was increasingly recognized The manufacturers started to recognize the impact of high inventory level on production cost and inventory cost Along with the development of information technology, especially computers, which increased the sophistication of inventory control software, they have significantly reduced inventory cost

The 1980s were considered as an important period of supply chain management The term of supply chain management was first widely used in many newspapers and magazines, particularly from 1982 Competition in the global market has become increasingly fierce, putting pressure on manufacturers, forcing them to reduce cost, improve product quality, and customer service Manufacturers made use of Just In Time (JIT) manufacturing and Total Quality Management (TQM) to improve quality, improve production efficiency, and shorten delivery time

In the JIT manufacturing environment, with low inventory level, businesses started to realize potential benefits and importance of the strategic and cooperative relationship among supplier, manufacturer and customer The

concept of collaboration or coalition was more prominent when businesses implement JIT and TQM

Since the 1990s, fierce competition, the increasing of logistics and inventory cost, as well as the globalization of the economy, have brought challenges to improve product quality, productivity and customer service, design and develop new product continuously To address these challenges, manufacturers began to buy products from reputable and certified suppliers Moreover, manufacturing companies called on suppliers to engage in new product design and development as well as contribute to improve service, quality and reduce overall cost On the other hand, they recognized that if they commit to buy from the best suppliers for their business operation, in return they will benefit from increased sales through quality improvement, product distribution and design as well as reduce cost by paying close attention to the process, materials and components used in production

Over the past 100 years, supply chain management has evolved from focusing

on simple relationship processes to extremely complex global network management techniques today

However, the “supply chain” concept is still new in Vietnam and this period is just the beginning of the supply chain development

1.3 Factors affecting supply chain efficiency

Some factors that affect the performance of supply chain and work as the obstacles for a smooth supply chain operation

* Lack of capital: Many businesses said that it is very difficult for them to

borrow capital from banks and it takes time to get banks approve to give financial support

* Time-consuming sampling process: sampling process is one of the most

time consuming stage in the total supply chain process The sample approval process involves different time in different stages before and after the production of the goods

* Unavailability of raw materials: After getting the order, suppliers need to

source the raw materials to go for production However, if suppliers cannot meet up the delivery time because they have difficulties in finding the materials, the supply chain process becomes affected for the crisis of utility supply

* Problems with invoice and documents

* Inadequacy of transportation facility: In some areas in Vietnam, the traffic

system fails to meet the demand of transporting goods

* Time involving Quality check/re-check: It is an obvious thing for the buyer

company Concerned person of the buyer company go to the supplier factory to check the quality of their goods In this time production activities get hampered At the time of checking the quality, almost all the productions are remain stopped Because, the quality checking officer goes to almost every worker’s machine and check the products randomly from one machine to another It takes a long time After packing the goods, buyer company runs the quality check again If they find any discrepancy at that time, they give order to open all the packing, get the products out and re-check This is a very time consuming job and sometimes supplier fails to deliver the goods in time

* Insufficient technological infrastructure: There are many suppliers, who

are not conscious about the technological support Their negligence and another is lack of knowledge about technology There are a lot of suppliers who are reluctant to invest money in the technological infrastructure

* Lack of proper technical knowledge: In many factories, operators do not

have any technical knowledge about the machineries; even there is no permanent technical person to fix the machines or equipment If any machine is broken down or any problem is found in any equipment then the supplier needs

to wait for the technical person and to hire from outside Production is stopped for a long time and ultimately delivery deadline is delayed

* Retention of authority: In most of the supplier companies, management

power is centralized to owner of the company Nobody can interfere in any matter or take decision in any situation The concerned person needs to wait for getting any decision from the top level management regarding any issue in his

or her own department Any person does not have the authority in decision making even if it is an urgent matter This process wastes the time in production process and even in the delivery phase as well

In conclusion, a company’s supply chain faces pressure from product

development, planning, marketing and sales, procurement, distribution, and so

on There is pressure to create innovative products and services that are tailored

to customers’ needs and that are scalable so as to drive margins Externally, a company faces pressure from both the supply and demand sides Examples of supply-side pressures are forecasting demand, carrying costs during delays, product testing and quality control, and social responsibility in the form of

green initiatives Alternatively, demandside pressures include seasonality, cyclicality, and price consciousness

II SUPPLY CHAIN MANAGEMENT

2.1 Definition

According to Wikipedia, supply chain management (SCM) “is the management

of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption Supply-chain management has been defined as the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.”

Douglas M Lambert, Martha C Cooper, and Janus D Pagh, "Supply Chain

Management: Implementation Issues and Research Opportunities." The

International Journal of Logistics and Management (1998): “Supply chain

management is the integration of key business processes from end user through original suppliers that provide products, services, and information that add value for customers and other stakeholders.”

According to investopedia.com, SCM “is the active streamlining of a business' supply-side activities to maximize customer value and gain a competitive advantage in the marketplace SCM represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible Supply chains cover everything from production, to product development, to the information systems needed to direct these undertakings.”

The Council of SCM Professionals (CSCMP) has defined SCM as: “SCM encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers In essence, SCM integrates supply and demand management within and across companies” (2007)

In short, SCM is the management of all activities from the initial stage of the procurement of raw materials to the delivery of products to customers

As of July 5, 2016, Walgreens has invested in the technology portion of its supply chain It implemented a forward-looking SCM that synthesizes relevant data and uses analytics to forecast customer purchase behavior, and then works its way backward up the supply chain to meet that expected demand For example, the company can anticipate flu patterns, which allow it to accurately forecast needed inventory for over-the-counter flu remedies, creating an efficient supply chain with little waste Using this SCM, the company can reduce excess inventory and all of the inventories' associated costs, such as the cost of warehousing and transportation (investopedia.com)

Many people mistake that SCM and logistics management are similar

However the difference between those is that "Logistics typically refers to activities that occur within the boundaries of a single organization and Supply Chain refers to networks of companies that work together and coordinate their actions to deliver a product to market Also, traditional logistics focuses its attention on activities such as procurement, distribution, maintenance, and inventory management SCM acknowledges all of traditional logistics and also includes activities such as marketing, new product development, finance, and customer service" - from Essential of Supply Chain Management by Michael Hugos

2.2 Purpose and Goals

All organizations need strong supply chain capabilities to profitably compete in the marketplace Their key goals for supply chain management should be to achieve efficient fulfillment of demand, drive outstanding customer value, enhance organizational responsiveness, build network resiliency, and facilitate financial success

Goal 1: Achieve Efficient Fulfillment

On the most basic level, the purpose of supply chain management is to make inventory readily available in customer facing positions to fulfill demand The fresh produce business adage “you cannot sell from an empty wagon” highlights this fundamental purpose of supply chain management

Organizations must pursue the goal of matching supply with demand in a timely fashion through the most efficient use of cross-chain resources Supply chain partners must work together to maximize resource productivity, develop standardized processes, eliminate duplicate efforts, and minimize inventory levels Such steps will help the organization reduce waste, drive out costs, and achieve efficiencies in the supply chain

Reduction of supply chain expenses is a popular goal, particularly during times

of economic uncertainty when companies desire to conserve capital Efficiency initiatives can focus on any aspect of supply chain operations, though transportation and inventory are frequent cost control targets

Goal 2: Drive Customer Value

Cost efficient fulfillment and inexpensive products are important, but supply chain managers must also focus on value creation for their customers Customers are the lifeblood of the organization and create the need for a supply chain Hence, a fundamental objective in supply chain management must be to consistently meet or exceed customer requirements

The goal of driving customer value begins with a market-driven customer service strategy that is based on clearly understood customer requirements Supply chain strategies, design, and capabilities should emanate from these requirements (Sweeney, 2011) The result will be higher-quality service, reduced variability, and fewer exceptions to address

Highly consistent, just-in-time delivery is critical to the restaurants and food service companies supplied by McCain Foods, the world’s largest manufacturer

of French fries Rather than focus on low–cost rail transportation, McCain works closely with a long–haul truckload carrier to provide exceptional on-time delivery performance for these time–sensitive supply chains They preload trailers, secure additional capacity, and expedite deliveries as needed to ensure that French fries are always on the menu (Partridge, 2010)

It is important to note that Goal 1 and Goal 2 are not mutually exclusive To succeed, organizations must establish supply chains that balance efficiency with effectiveness to optimize overall performance

Goal 3: Enhance Organizational Responsiveness

Another important rationale for supply chain management capabilities is responsiveness to change The current business environment is one of rapid change with multiple forces shaping how businesses operate and survive Supply chain management can help organizations adapt to the challenges of globalization, economic upheaval, expanding consumer expectations, and related issues (Coyle et al., 2013)

The unprecedented expansion of global trade increases the intensity of competition from new market entrants For example, Panasonic, Samsung, and Sharp must battle for retail shelf space and sales with Vizio, Hisense, and other television manufacturers Also, the cost of global trade is on the rise As offshore labor costs increase, global sourcing does not guarantee lower overall cost of goods In both situations, supply chain management expertise and network flexibility are needed to analyze and respond to these issues At the same time, globalization can present expansion opportunities Organizations with flexible supply chain networks that can adapt to the requirements of new markets will be well positioned to grow

Economic crises such as the recent global recession have a tremendous negative impact on consumer demand and production Weaker organizations that fail to anticipate the changes, adjust capacity, and reduce inventory levels

in their supply chains will not survive To weather these economic downturns with minimal damage, organizations should build adaptive operating models buoyed by flexible supply chain capacity and a variable cost structure Also, the use of standardized processes and systems will help the organization rapidly scale or shutter operations based on short-notice demand changes (Cudahy, George, Godfrey, & Rollman, 2012)

With information at their fingertips, today’s consumers are empowered to make strong demands on the supply chain They can review product options,

compare prices, and check availability in real-time using mobile devices This leads to increased expectations for greater product variety, customized goods, off-season availability of inventory, and rapid fulfillment at a cost comparable

to in-store offerings To satisfy these consumer expectations, retailers must be able to leverage inventory as a shared resource and use distributed order management technology to fill orders from the optimal node in the supply chain Such responsive omnichannel supply chain capabilities separate the retail winners from the losers (Baird & Kilcourse, 2011)

In addition, shrinking product life cycles, the emergence of new technologies to facilitate supply chain transformation, and increases in government regulation

of supply chain processes like transportation are compelling reasons to remain nimble A flexible and responsive supply chain will adapt to these changes with negligible disruption

Goal 4: Build Network Resiliency

Beyond the business challenges that emerge over time, organizations may also encounter sudden and severe supply chain disruptions These atypical events—natural disasters, cataclysmic weather, labor strikes, supplier failures, and so on—negatively affect the flow of goods and make the organization vulnerable

to financial, reputational, and relational damages One study estimates that supply chain glitches are associated with an abnormal decrease in shareholder value of more than 10 percent (Hendricks & Singhal, 2003)

Given the cost of disruptions, it is imperative for organizations to manage these supply chain risks Common predisruption steps include risk identification, risk assessment, and risk reduction To reduce vulnerability to disruption risks, Sheffi (2005) recommends that organizations collaborate on security and safety issues, build redundancies into their supply chains, and invest in people through cross-training

In addition to preventative risk management steps, it is imperative to establish disruption management capabilities Organizations must develop the capabilities to recognize disruptions, overcome them, and redesign processes to reduce future risk (Blackhurst, Craighead, Elkins, & Handfield, 2005) For known risks, it is important to design resilient supply chains that are flexible enough to bounce back quickly from major incidents (Sheffi, 2005) For risks that are unlikely to occur but are potentially catastrophic, supply chain managers must engage in contingency planning and test the plans

Goal 5: Facilitate Financial Success

One of the most important roles of supply chain management is to contribute to the financial success of the organization Traditional initiatives focus on cost efficiency—streamline stock levels to reduce inventory carrying cost, automate fulfillment operations to minimize labor expense, consolidate orders to cut freight spend, and so on In contrast, leading organizations use the supply chain

to enhance differentiation, increase sales, and penetrate new markets Their goal is to drive competitive advantage and shareholder value (Anderson, Copacino, Lee, & Starr, 2003)

A dual focus on cost control and revenue generation helps executives recognize the organizational value of supply chain management As they place more strategic emphasis on supply chain management, capabilities must morph from

a series of day-to-day functions to a strategic process with supply chain managers who skillfully manage cross-functional and cross-company complexity They must understand the connections and interdependencies across the organization and conquer the challenges of managing supplier and customer interfaces (Dittmann, 2012)

2.3 The role of supply chain management

According to economic experts, in the integration phase, effective supply chain management plays an important role for businesses to increase their profit and market share In the 1980s, businesses figured out that new production strategies and technologies enabled them to reduce cost and compete better in different markets Strategies such as timely production, lean manufacturing, total quality management, and others had become popular, and many resources had been invested to implement these strategies However, in the past few years, many companies have cut production cost as much as possible, and in order to achieve profit and market share targets, many of these companies realized that effective supply chain management is the next step they need to take

90% of CEOs in the world give the first priority to supply chain management

as market competition is rising, market prices and commodity supply prices are tightening The supply chain that has a great impact will dominate the market and customers’ confidence, create shareholder value and expand the business

In addition, in today's business environment, supply chain is one of the deciding factors affecting competitiveness of a business to its competitors

Thanks to an effective and efficient supply chain, large international corporations such as Dell and Wal-Mart have made up 4-6% of profit, higher than that of their rivals A study also found out that some of the world leading companies, such as Apple, Coca-Cola, and Samsung took full advantage of their supply chain to thrive in the competitive environment, making the corporate value increase by 40% higher than that of their competitors In addition, it has been proved that effective supply chain management can bring:

• Reduction in supply chain cost from 25-50%

• Inventory decreases from 25-60%

• Accuracy in production forecasts increases from 25-80%

• Increase customer orders to 30-50%

• Increase after-tax profit by 20%

Effective supply chain management is a very important key to the success of the company as well as to the satisfaction of its customers Improving supply chain management efficiency can reduce production cost and increase profit without compromising on product quality For example, if you find a cheaper supplier, raw materials cost will be cheaper If you can forecast a sufficient amount of Coca-Cola cans produced to serve Tet holiday, you will avoid inventory problem (leading to high cost) or running out of products to sell (leading to low profit) In short, effective supply chain management creates a competitive edge for a company in terms of price and cost to compete with competitors and survive in the marketplace

2.4 Main issues in supply chain management

* Distribution network configuration

When inspecting some manufacturing plants, business managers found some current warehouses have inappropriate geographical position or do not meet the necessary conditions Therefore, they want to reorganize or redesign the distribution network This could be due to changes in demand or the termination of warehouse rent contract Moreover, the changes in demand can lead to changes in production level, selection of new suppliers and new product movement across the distribution network The managers should consider carefully where the warehouse is located, decide the quantity of each product at each factory, and set the flow among units, from factories to warehouses and

from warehouses to retailers, in a way that minimizes the total costs of production, inventory and transportation, but still satisfies the level of service required This is a complicated issue that requires advanced technology and innovative approach to deal with

* Inventory management

Let’s analyze the case where a retailer considers the inventory level of a particular product As customer demand changes over time, the retailer can use past data to forecast customer demand The objective of the retailer is to determine the reorder point and order level to minimize ordering and inventory costs But why should retailers always keep inventory? Is this due to uncertainty about customer demand, or supply process, or any other reason? If

it is uncertainty about customer demand, what should they do about this? Retailers should order more, less or exactly the quantity of product forecasted?

* Supply contracts

In traditional supply chain strategies, each business in the chain only focuses

on making their own profit; therefore they barely concern about the impact of their decision on other supply chain partners The relationship between the supplier and the buyer is created through a supply contract that specifies prices, quantity discount, delivery time, and product quality The question is that is there any supply contract that can be used to replace the traditional supply chain strategy with another strategy that optimizes the supply chain efficiency

of the whole system? In particular, what is the impact of quantity discount and profit sharing agreement on supply chain performance? Is there a pricing strategy that suppliers can use to encourage customers to buy more products while still increasing their profit?

* Distribution strategies

Wal-Mart's success story (the largest grocery retailler in the United States) has proved the importance of a specific distribution strategy known as “saturation”

strategyy About 85 percent of all the merchandise sold by Wal-Mart was

shipped through its distribution system to its stores Wal-Mart used

“saturation” strategy for store expansion The standard was to be able to drive

from a distribution center to a store within a day A distribution center was

strategically placed so that it could eventually serve 150-200 Wal-Mart stores

within a day Stores were built as far away as possible but still within a day’s

drive of the distribution center; the area then was filled back (or saturated back)

to the distribution center Each distribution center operated 24 hours a day using laser-guided conveyer belts and cross-docking techniques that received

goods on one side while simultaneously filling orders on the other The company owned a fleet of more than 3,000 trucks and 12,000 trailers (Most competitors outsourced trucking.) Wal-Mart had implemented a satellite network system that allowed information to be shared between the company’s wide network of stores, distribution centers, and suppliers The system consolidated orders for goods, enabling the company to buy full truckload

quantities without incurring the inventory costs Wal-Mart is committed to

improving operations, lowering costs and improving customer service But the key to retailer Wal-Mart’s success is its ability to drive costs out of its supply

chain and manage it efficiently

So how this strategy should be applied in practice? Which strategy should business use: cross-shifting strategy, classic distribution strategy where inventory is kept in warehouses, or directly transport strategy in which the commodity is directly delivered from suppliers to stores?

* Information technology

Information technology is an important tool in effective supply chain management The key issue in supply chain management is not data collection, but what information can be used for supply chain management and what information can be ignored? How should information be analyzed and used?

* Customer value

Customer value is a way to value a company's contribution to its customers, based on products and services Obviously, effective and efficiency supply chain management is critical if businesses want to satisfy customer needs and create value But what determines customer value in many different industries? How is customer value measured? How is information technology used to increase customer value in the supply chain? How does supply chain management contribute to customer value?

III BANKS IN SUPPLY CHAIN FINANCING

3.1 Supply Chain Finance

Supply chain finance (Supply chain financing - SCF) is a set of based business and financing processes that link the various parties in a transaction – the buyer, seller and financing institution – to lower financing costs and improved business efficiency Supply chain finance provides short-

technology-term credit that optimizes working capital for both the buyer and the seller Supply chain finance generally involves the use of a technology platform in order to automate transactions and track the invoice approval and settlement process from initiation to completion The growing popularity of SCF has been largely driven by the increasing globalization and complexity of the supply chain, especially in industries such as automotive, manufacturing and the retail sector.

Figure 2: Supply chain financing process

3.2 Banks’ supply chain financing products

3.2.1 Banks’ financing products for domestic supply chain

Checking the use of working capital in the supply chain is one of the most important factors for the efficient operation of the chain Whether the supply chain is simple or complex, working capital is important on each stage of the chain Each business in the chain must balance its assets and liabilities to have necessary working capital for running the business

Supply chain management as well as using working capital effectively in the supply chain provides many opportunities for banks and other financial institutions to provide financial solutions to businesses

Supply chain finance activity of banks generally aims at solving some or all of the issues related to inventory financing, customer receivable, and supporting suppliers with financial problems Inventory credits that may be offered by banks include inputs/ materials, manufacturing and selling products In each period banks will provide working capital

The role of banks in supply chain management is reflected primarily in the following supply chain financing products:

Inventory financing is a type of loan with collateral or a short-term working

capital loan secured by purchased inventory When inventory becomes commodity, the loan will be settled off gradually and (when meeting all the conditions) new inventory will be purchased for new loan, and the cycle will be repeated Interest rate on inventory financing is often higher than accounts receivable financing because in accounts receivable financing, commodity have been sold Inventory financing allows companies to supply for large buyers to

be able to borrow with collateral as inventory that buyers require these companies to keep in their warehouses This can improve cash cycles for buyers while reduce the amount of capital provided to suppliers

Accounts receivable financing or factoring is a transaction in which a

business sells its invoices, or receivables, to a third-party financial company known as a “factor” The factor then collects payment on those invoices from the business’s customers The main reason that companies choose to factor is that they want to receive cash quickly on their receivables, rather than waiting the 30 to 60 days it often takes a customer to pay Factoring allows companies

to quickly build up their cash flow, which makes it easier for them to pay employees, handle customer orders and add more business

Unlike traditional factoring, where a supplier wants to finance his

receivables, reverse factoring is a financing solution initiated by the ordering

party in order to help his suppliers to finance their receivables more easily and

at a lower interest rate than what they would normally be offered

Insurance products provided by banks to neutralize commercial risk through

commodity insurance, credit insurance and transaction dispute insurance

Trade financing is a product of international trade, used in export and import

Trade financing includes activities such as lending, issuing letter of credit, bill

of lading, export credits, commercial credit insurance, factoring and forfeiting

Purchase order financing is a funding option for businesses that need cash to

fill single or multiple customer orders In many businesses cash flow problems

exist There will be times where there is simply not enough money available to cover the costs of doing business As a result, there may be an order from a client that isn’t able to be fulfilled due to a lack of cash A company may not be able to afford the supplies necessary to meet the client’s particular needs Having to turn the order down would obviously mean loss of revenue and perhaps even a tarnished reputation

Purchase order financing involves one company paying the supplier of another company, for goods that have been ordered to fulfill a job for a customer This

is an advance and may not be for the entire amount of the supplies, but it will cover a large portion of it In some cases, companies can qualify for 100% financing The purchase order finance company will then collect the invoice from the end customer The purchase order finance company makes their money by charging the company in need of funds various fees These fees are taken out of the collected invoice The remaining amount is returned to the company A second option is for the purchase order financing company to open

up a line of credit with the supplier The line of credit will be opened in their name and backed by them This allows businesses with poor credit or few assets to get the supplies that they need

3.2.2 Banks’ financing products for multinational supply chain

A supply chain can be a national or multinational supply chain, depending on whether there is any foreign participation the chain Although banks play the same role as financial intermediaries in both types of supply chain, for multinational supply chain, the importance of banks are more superior than for national supply chain

In multinational supply chain, letter of credit and documents are traditional commercial financing tools used by the seller to neutralize the buyer's risk and receive credit However, their importance has been decreasing by about 5% annually in recent years because they are complex, time consuming and expensive

To solve this problem, buyers and sellers can choose another method which is faster, simpler and cheaper: Open account Open account occurs when a seller ships the goods and all the necessary shipping and commercial documents directly to a buyer who agrees to pay a seller’s invoice at a future date This method is typically used between established and trusted traders

Businesses are facing the increasing need in expanding the supply chain According to research by Aberdeen Group in 2006, 90% of businesses claimed

that their global supply chain technology is "not sufficient to provide timely information for financial functions in the business" As a result, banks have found new ways to increase convenience, transparency, efficiency, savings, liquidity and predictability for their customers in the supply chain

Some supply chain financing products provided by banks for multinational supply chain management:

Nowadays, multinational corporations more concern about supply chain issues than domestic ones Through multinational supply chain, the flow from raw materials to products is expanded and richer Thus, financing this supply chain

is more important and indispensable than national supply chain And banks are better choices than other financial institutions because of their size, prestige and various financing products

Bank-assisted Open Account or "Approval-to-pay" is a product that

eliminates risk premium that customers need to pay when using letter of credit, yet offers similar benefits as letter of credit The payment certificate is based on

a sales contract and is issued in the same way as letter of credit, with payment terms that match the buyer's conditions without the bank's certificate The payment certificate provides a solid framework for open account service such

as documents checking, monitoring and checking of trade contract and invoice, payment to seller or sponsor to buyer

Export/ Seller Finance is a good product to solve the payment delay problem,

especially with international transactions The payment process normally puts a financial burden on the seller They must prepare and deliver goods, then wait a long time to be paid However, the role of Export Finance is diverse The bank may provide a mix of products depending on its risk profile and the type of programs it supports

Export Finance is carried on to provide financing at various points in the payment process The export’s bank may finance before, during or after delivery depending on the situation

Financing before delivery means that banks finance for production process or purchasing of goods Traditionally, the seller must issue letter of credit to assure the payment of goods However, the sales contract accepts the payment

on this form of financing

Financing during delivery means that banks finance from the presentation of letter of credit and documents to the time the payment is completed

Financing after delivery is that if letter of credit or documents refer to payment term in Banker's Acceptance (BA), Deferred Payment (D/P), the bank can continue to grant credit terms until maturity date of these tools

Import Finance - Direct export financing for seller: The buyer’s bank can

grant direct credit to the seller with export financing packages, during or after delivery Many banks that do not have branches in the seller’s country do not like direct export financing However, banks that have branches in the seller's country may finance through sales contract and invoice linked with Open Account instruments supported by banks and import letter of credit

Buyer-Backed Seller Export Finance is one of the innovative solutions

offered by banks and is a win-win situation for buyers, sellers and banks themselves The program allows buyers to ask their bank to pay the bills on maturity date with terms of payment renewals Then the bank will pay the seller by purchasing an invoice with conditions based on the buyer's credit rating - a huge savings for the seller Then the buyer will negotiate for a more profitable price in the contract This type of program provides the buyer with longer payment term and lower price, the seller gets a cheaper, more reliable and timely credit, and the bank earns new profit from the loan and operating fees

3.3 The benefits of banks in supply chain financing

For banks, several benefits exist by creating SCF finance service An increasing amount of trade is conducted over open account, which means that banks have lost visibility of the information flow related to trades This visibility can be recaptured with a holistic SCF service offering approach and also provides possibilities to finance a larger deal of the customers’ transactions by the creation of new financing solutions Additionally, a holistic approach enables banks to differentiate on competence rather than product pricing Furthermore, it facilitates for banks to build closer customer relationships by achieving better knowledge and understanding of their clients’ businesses and financial ambitions

Banks participate in the supply chain as financial suppliers, means that they are indirect participants in the chain Therefore, the benefits of banks depend primarily on the benefits of direct participants such as suppliers, final suppliers, customers, end customers Supply chain financing by banks creates unique solutions for buyers, sellers and banks - all of which are beneficial (each of the

supply chain’s link has one buyer and one seller) While buyers are able to buy goods at low prices, improve cash flow clarity and ensure a credible supply, sellers can take advantage of buyers' trust to reduce capital used to produce goods, financial expenses and can easily predict cash flow Meanwhile, commercial banks, as intermediaries, solve financial management issues with their customers, leading to improving profitability and tightening relationships with their customers

In conclusion, from supply chain financing activities, banks will be able to make profit, create strong partnerships with enterprises as well as contribute to the economic growth of the country

3.4 The challenges of banks in supply chain financing

3.4.1 Organisational challenges

Many drivers exist to offer solutions rather than separate products The reason that products in many cases are packaged and distributed in silos is due to banks’ internal organisations Economy of scale benefits lead to banks organising themselves in product silos to produce products efficiently The logic of this organisation was extended to the way products were sold, often with separate sales forces Subsequently, the clients today encounter a wide variety of touch points from their bank and have often adapted their own organisation managing financial processes accordingly

From the banks’ perspective, this has lead to inefficient resource allocation in the front line and generated challenges related to spur cross-selling of products and creating solutions – thus hampering the main drivers of profitability in times where products becomes increasingly commoditised A solution to the cross-selling challenge can be to consolidate sales forces that solve the same customer need In the case of transaction banking, all products solve the core customer need to pay and get paid in time, as a payment is a payment, regardless of financing and risk mitigation measures required to handle the transaction or transaction bulk

A consolidated sales force, in combination with a solution approach focusing

on core customer needs, might lead to a greater focus on providing SCF service solutions to the customers rather than a number of separate products However, challenges related to enhance the cross-product competence of the individual sales representatives needs to be managed Moreover, appropriate key performance indicators across the organisation need to be set to support a

holistic approach Once these challenges have been managed, there are many benefits to reap For example, the re-organisation of product specific sales forces into customer segments corporate, financial institutions and banks, have enhanced the customer and internal dialogue, as well as provided enhanced conditions for creating new SCF service offerings

3.4.2 Technological and Digital challenges

A customer-centric financial supply chain approach gives rise to several challenges for a bank’s digital channels The legacy focus on cost-efficiency for producing products efficiently in the back end has in many cases led to products being distributed in product silos to the customer This has lead to the client needing several different channels and log-ins to make business with their bank(s) However, financial supply chain offerings do not gain leverage until products supporting different parts of the supply chain can be linked to each other for distribution and information services purposes

The journey of enabling linking products to each other and distribute products based on the core customer need might be cumbersome to undertake if the bank organisation is based on product silos In many banks, this is due to the challenges with efficiently gaining funding and commitment to successfully sustain the journey of consolidating products and channels across organisational lines

Many banks have focused on consolidating products and services in one front However, the system silos in the back-end are often still apparent within the digital channels One solution to enable linking products is to build an additional application above the current applications, with a modular structure This might enable banks to link products to each other and base navigation in the digital channels on customer needs, as well as continuously create new solutions based on existing products and product components Important to note from an organisational perspective is that beginning with the front end is key, as it drives the journey of consolidating middleware and systems in the back end, which enables banks to unleash new report and product development capabilities

Technology is not a restricting factor for banks to create a complete financial supply chain services The challenge is rather to take advantage of current systems, while simultaneously create the organisational capabilities necessary

to match technological possibilities with business opportunities

3.5 The solutions to supply chain financing

There are fundamental conflicts in the supply chain The supplier wants to convert his inventory to cash as early as possible while the buyer wants to optimize that cash by stretching the payment terms The way to alleviate that conflict is by effectively offering solutions that align to both of their goals For example, Bank offers a comprehensive array of collections capabilities in export trade receivables and can sometimes discount those receivables when working on a larger scale

When correctly structured and implemented, solutions for supply chain financing should provide a ‘win-win’ solution for all three parties - buyers, suppliers and banks There are benefits of having a banking partner with local and global knowledge of cash and trade It is also important to retain an advisor that can ensure compliance and regulatory adherence as well as the operational infrastructure and product capability that is going to have financial impact Lastly, it is necessary that the bank is able to mobilize its balance sheet and be prepared to manage risk (David Conroy, Americas Head of Trade Finance and Cash Management Corporates, Global Transaction Banking, Deutsche Bank)

CHAPTER 3: THE SITUATION OF SUPPLY CHAIN FINANCING FOR BUSINESS IN TECHCOMBANK AND

BIDV IN VIETNAM FROM 2014 TO 2017

When mentioning about supply chain management determining the success of a brand, we cannot ignore two well-known brands - Wal-Mart and Kmart When Wal-Mart was established in 1962, Kmart already had 63 stores In 2002, Kmart went bankrupt, Wal-Mart became the largest retailer in the world Speaking of Kmart's failure, General Director Chuck Conaway admitted: "I think supply chain is the Kmart's Achilles’s heel" Dr Nguyen Thi Hong Minh, General Director of Vietnam Distribution System Development and Investment Corporation (VDA), said that if supply chain management is good, low cost will lead to low product prices, creating a strong competitive position The cost

of supply in the US in 2005 was $ 1.183 billion, accounted for 9.5% of GDP, Japan was 11% of GDP, and China was 21.6% of GDP According to unofficial statistics in Vietnam, the cost of supply ranges from 19% to 25% of GDP, therefore the price of products to customers is still very high A company that has a complete supply chain is 12 times more profitable than the one with an incomplete supply chain

In line with the globalization trend, with many foreign companies interest in investing in Vietnam and Vietnam step by step joins global supply chains, supply chain management is becoming more and more important However, supply chain management is still a new category in Vietnam, although each stage of this has been going on for a long time

It is predicted that trade between countries will grow by 33% within 10 years from now, which means that supply chain financing to promote global trade will increase sharply In Vietnam, there are several domestic banks, such as Techcombank and BIDV, that have already applied supply chain financing models and products This is a positive sign showing that Vietnam is step by step approaching and integrating into the global economy