Everywhere along the supply chain, wherever there is a physical activity occurring, a financial activity is taking place. As export or import documentation is created, letters of credit or other financial vehicles are also being generated and secured; as shipments leave the factory, brokers and freight forwarders are paid; as goods pass through Customs and across borders, duties and taxes are collected; and as shipments arrive to final destinations, business partners are compensated.

For a while now, supply chain executives have been anticipating means of coordinating these two information flows in order to more fully integrate supply chain processes and enhance visibility. In 2003, industry analyst firm Aberdeen Group foretold the emergence of business applications and networks to support the complete order-to-cash life cycle for cross-border business transactions, including order, logistics management, and financial settlement activities. "The convergence will create closed-loop decision processes between the global physical and financial supply chains," the report predicts. "This will help companies do contingency planning and dynamically adjust their global procure-to-pay and order-to-cash processes to meet working capital and cash flow objectives and mitigate business risk."

As those same supply chain executives well appreciate, optimistic predictions aren't the same thing as tangible results (especially when it comes to high tech solutions). The Aberdeen report stated that the marriage of the physical and financial supply chain was finally occurring. A recent development in the convergence of trade finance and supply chain management, the acquisition of Vastera by JPMorgan Chase Treasury Services, amplifies that progress.

Merger in the making

As the world's largest provider of cash management services, JPMorgan Chase Treasury Services processes as much as $2.3 trillion in U.S. dollar wire transfers on any given day on behalf of more than 50,000 clients. With a presence in 35 countries, the division operates the most extensive correspondent banking network in the industry. JPMorgan Chase offers a broad range of trade finance solutions, including letters of credit, cash management and bank-to-bank reimbursement.

When the company decided to expand its logistics and supply chain capabilities, it looked for capabilities that would address the needs and opportunities of its customers and target clients, as well as complement the bank's strategy of enhancing and expanding its Treasury Services business.

Vastera of Dulles, Virginia specialized in global trade management solutions since 1991 and is widely recognized by leading analysts like Aberdeen Group, ARC Advisory Group and AMR Research as the largest shareholder of the global trade solutions market. As important to JPMorgan Chase was the fact that Vastera already had mastered core capabilities that were important to the bank, including managing information, transaction processing, and compliance management associated with international trade.

In terms of 'value added,' Vastera was differentiated from its competition by its veteran team of industry and government trade experts; its unique three-pronged approach to delivering solutions to clients via either consulting services, technology, or managed services; its strong in-country presence, with trade experts located in 15 of the world's top trading countries; and its impressive blue chip client list, including Black & Decker, Dell, Ford, Lucent, Nike and Nortel Networks.

"JPMorgan Chase sought to continue to build Trade capabilities," observes Paul Simpson, Emerging Payments and Global Trade Services Business Executive for the Treasury Services unit of JPMorgan Chase. "With Vastera, we saw an opportunity to integrate our clients' financial and physical supply chain activity."

"Vastera offers physical supply chain services that complement what JPMorgan Chase offers on the financial side, while relying on similar core competencies, such as technology, superior service and substantial trade expertise," added Simpson.

In June 2003, JPMorgan Chase and Vastera entered into a joint marketing agreement in which the companies would deliver comprehensive global trade management solutions covering physical and financial supply chain management.

Two years later, JPMorgan Chase Bank acquired Vastera in a $129 million deal, which combined Vastera with the Logistics and Trade Services businesses of JPMorgan Chase's Treasury Services unit, effectively "raising the bar" in global supply chain integration by linking finance with trade management.

The value proposition

Now known as JPMorgan Chase Vastera, the company's value proposition is providing importers and exporters with a "one-stop shop" that addresses the increasing challenges and risks associated with moving goods across international borders. Such risks include delayed shipments due to incomplete export/import information and documentation. It also includes fines or loss of trade privileges due to lack of compliance with trade regulations; and cash flow issues due to weakness in the supply chain (the Bureau of Industry & Security reports that civil fines for export violations in 2004 rose a whopping 51 percent over 2003 to $6.2 million).

A typical airfreight shipment takes eight to twelve days. During this time, the cargo is en route only 5 percent of the time. The rest is spent sitting in warehouses waiting for the required documents and compliance checks. If solutions are available to speed the time spent at gathering the required information, companies can receive shipments and be paid more quickly.

"Our research finds that globalization of supply chains is creating longer and more uncertain cash-to-cash cycle times and greater invoice reconciliation costs," says Beth Enslow, vice president at Aberdeen Group. "CFOs are finding that by creating integrated views of their financial and physical supply chains, they can use their money more optimally while also improving service to the end customer."

At its center, international trade is basically working capital in motion. Whether you're talking about the physical or financial supply chain, every time a shipment gets handed off, it is setting up an accounts payable and accounts receivable to all the different parties of the transaction.

Integrated information management

What does this combination-and comparable ones in the future-mean for companies involved in world trade?

As companies increasingly source, manufacture and sell goods overseas, many businesses are looking for integrated solutions that address a broad spectrum of capabilities, from cash management and compliance to traditional trade finance and logistics. Exporters and importers need solutions that facilitate transactions, maximize information, and manage risk in ways that help them maximize working capital. With such solutions, exporters get paid quicker, importers better manage their inventory and cash positions, and both parties avoid the fines and border delays associated with non-compliance and mismanaged shipment documentation.

"A year ago, trade compliance was viewed as a tactical, necessary evil," said a director in the finance organization at a billion-dollar industrial manufacturer. "Now we understand that we must operate global business processes and stop thinking of ourselves as a U.S. manufacturer. Now we're seeing compliance as strategic."

Up until now, global businesses have had to rely on disjointed systems and processes to manage their global trade operations. In far too many cases, businesses approach global trade from a silo perspective. Manufacturing, logistics and supply chain departments rely on separate technologies, processes or experts to help them manage the physical movement of cross-border transactions, while treasury and finance organizations use their own unique set of tools to support the financial flow of goods. Yet both business units require much of the same data and information to populate the documents and databases managed within.

"I'm positioning our initiative as a way to automate trade finance, but my real agenda is to provide visibility and process automation across our global supply chain," reports an apparel manufacturer CFO.

With the acquisition of Vastera, JPMorgan Chase now has access to the data and information supporting the movement of goods in the channels of trade. "Given this visibility, we are able to provide enhanced financing tools throughout the supply chain to participants who may or may not be customers of JPMorgan Chase," said Michael Quinn, vice president, product management, Global Trade Services, JPMorgan Chase. "Also, new risk mitigation techniques will evolve as the information from the physical and financial supply chains are integrated. Facilitation of trade can be further automated as reliance on paper will be greatly diminished.

The bottom line: integrated trade solutions

"Synchronizing the flow of goods with the flow of money is the next horizon for efficiency." - Aberdeen Group, April 2005.

By marrying both capabilities, JPMorgan Chase Vastera delivers solutions that simultaneously address both physical and financial events on one supply chain. Adding Vastera to the JPMorgan Chase suite has enabled the company to provide solutions in multiple areas for supply chain and working capital efficiency.

JPMorgan supports the "financial activity" side of the equation by automating the creation of financial trade data associated with key monetary transactions along the global supply chain, whether it's collecting funds from customers, making payments to brokers or transportation companies, or paying duties or taxes to government entities. Vastera's processes and technology supports the "physical activity" portion by automating the creation and management of shipping documentation (and ensuring adherence with associated trade compliance regulations) required to enable physical goods to cross borders and smoothly pass through Customs.

Linking the physical and financial supply chains can create tremendous value for companies in managing their end-to-end trade flows. Increasing regulatory and economic pressures are dictating that companies focus resources on supply chain integration efforts now. While technologies do exist today that maximize the value of each component of each supply chain, only by integrating those components will companies achieve the best returns. Managing the information once you have integrated information flows is the most critical factor for success.

Sidebar: Testing the Market

JPMorgan Chase and Vastera went out and worked with a number of clients to determine the overall look and feel of its offering.

An example of one of those clients is a Fortune 100 supplier of power generation and energy delivery technology that sought to improve payment cycle times (DSO) for export letters of credit and collections. The company produces and distributes parts to support customer installations and ongoing maintenance in more than 120 countries. The company had already deployed Vastera TradeSphere(tm) Exporter software for order screening, export determination and shipment documents, but in full support of settlement and banking channel requirements (i.e. letters of credit terms, drafts, third-party documents, etc.).

Vastera and JPMorgan integrated their document preparation technology to deliver a seamless solution to the client in which one hit of a button would allow them to toggle between the two environments. The solution provided significant process improvement and collaboration on export documentation preparation and related payment processes, giving the customer access to the data in real time, improved management reporting and better performance metrics.

"Through this combination, JPMorgan Chase is the first global financial institution to offer a complete integrated cash, trade and logistics solution across the physical and financial supply chains in a way that maximizes benefits to our clients," said Paul Simpson, Emerging Payments and Global Trade Services Business Executive for the Treasury Services unit of JPMorgan Chase. "Moving forward, this combination gives us scale and capabilities that are unmatched in the market place."