Put a Little Finance into Your Supply Chain
January 30, 2008
For every financial transaction in the global supply chain, the upstream supplier must receive payment on time to keep the whole system functioning optimally so products flow on time to the buyer. Here are some ways to integrate finance within the supply chain.
"Financial-supply chain convergence requires that supply chain personnel and financial personnel start working more closely," according to ChainLink Research, Inc. "The CFO needs to learn what an advanced shipment notice (ASN) is. The vice president of Supply Chain needs to learn about working capital management."
To minimize the period between shipment and payment from customers, Aberdeen Group recommends companies consider the following four technology "enablers":
- An automated platform to manage accounts receivable transactions;
- An automated platform to manage accounts payable transactions;
- A working capital/cash management tool; and
- An electronic invoice presentment and payment (EIPP) system.
Aberdeen offers these performances comparing "best-in-class" with "laggards" to:
- 15 versus 100 days for the average cash conversion cycle;
- 62 versus 38 days on average for payables outstanding (DPOs); and
- 45 versus 63 days on average for sales outstanding (DSOs).
By using advanced supply chain financing techniques -- not necessarily correlated with technology but well-integrated into supply chain interactions -- certain buyer-side and supplier-side benefits can result.
For buyers, there can be lower unit costs of procured goods and fewer supply disruptions from a less risky supplier base. For suppliers, production costs and DSOs may be lower and business continuity improved.
The technology enablers are not the "end all, be all" to optimizing supply chain finance, of course. "These benefits can only be fully realized when there is tight integration between the financial and physical supply chains, enabled by a networked application platform," stresses ChainLink.
Another facet to advanced supply chain management involves visibility. "This visibility comes in part from electronic documentation of physical movement (such as cargo receipts and Bill of Lading) to track each stage carrier took possession at factory, loaded at vessel, offloaded, arrived at destination distribution center," says ChainLink.
If your company's products have high value, active radio frequency identification (RFID) might help with this role. If the products have medium value, possibly passive RFID would be more suitable. For low-value items, bar codes may work well enough if the data is integrated with the supply chain management network.
Three years ago, World Trade Magazine (WTM) advised "the market is moving away from documentary based trade (Letters of Credit etc.), making way for open account opportunities in supply chain finance structure. The time for your company to make the transition is now."
At the time, some financial institutions already knew about supply chain financial needs. "Some banks are using buyer master purchase orders for working capital facilities for key suppliers," says WTM. A few large banks with buyer support programs and master purchase order contracts with medium to large tier-one and -two suppliers have performed well over many years.
With a post-shipment finance model, a bank provides the overseas supplier early payments as financing from the buyer-accepted invoices. The buyer interfaces with accounts payable or creditor ledgers to the bank's working capital platform, which makes available to their suppliers approved payables that are both date- and value-certain, explained WTM.
Six years ago, CitiBank in Singapore predicted that "in the long run, traditional paper-based trade documentation will go the way of the dinosaur." It seems that banks and manufacturers not investing in robust financial platforms, secure telecommunications and training workers might follow that dinosaur.
More businesses may want to consider putting finance into their supply chain more aggressively to lower costs through advanced Supply Chain Finance (SCF). The Aberdeen study showed that about 15 percent of 135 corporations surveyed are actively using SCF techniques to lower end-to-end supply chain costs. The rest:
- 18 percent have firm plans in place to enhance SCF practices;
- 40 percent are investigating options; and
- 26 percent have not acted.
Banks with multinational branches today are better able to help manufacturers streamline their global supply chains. And as with lean processes, integrating finance intimately with physical supply chain management offers a way to eliminate waste.
Convergence of Physical and Financial Global Supply Chains by Bill McBeath ChainLink Research, Inc., October 2007
The 2008 State of the Market in Supply Chain Finance by Viktoriya Sadlovska Aberdeen Group, December 2007
Emerging Trends in Supply Chain Finance, August 2005 by David Gustin World Trade Magazine, Aug. 1, 2005
Supply Chain Financing and Beyond
by Philippe Jaccard
CitiGroup, May 2002