A Supply Chain Finance Primer

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Contents

Introduction

Supply Chain Finance is the optimization of both the availability and cost of capital within a buyer-centric supply chain. The availability and cost of capital is usually optimized through the aggregation, integration, packaging, and utilization of all of the relevant information generated in the supply chain in conjunction with cost analysis, cost management, and various supply chain finance strategies.

A Supply Chain Finance Solution, in comparison, is a combination of trade financing provided by a financial institution, a third-party vendor, or an enterprise itself, and a technology platform that unites the trading partners and the financing partners electronically and provides visibility into the various supply chain events that can serve as financing triggers. (These include the issuance of the purchase order, work in progress payments, Vendor Managed Inventory or VMI, inventory in transit, proof of delivery via Forwarder Cargo Receipt (FCR), and invoice approval by the buyer.)

Supply Chain Finance is not a new concept. "For decades -- maybe centuries, in developed economies -- supply chain finance has existed in various forms. In the past, the most basic legitimate form of supply chain finance on the payables side was called factoring. Factoring is essentially a loan-shark arrangement where a financial institution or third party buys receivables from a supplier at some material -- read: often outrageous -- discount relative to the face value of the obligation." (Jason Busch, Live Dispatch: Ariva and Orbian Partner to Take on the Banks, Spend Matters) However, it's a lot more than just factoring, early payment discounting, or inventory shifting. It's balancing credit, financing options, inventory management, and other supply chain variables to optimize working capital, and much more.

Supply Chain Finance is gaining in importance for a number of reasons. When one combines downward cost pressures with steadily increasing raw material, energy, and labor costs globally, total cost of ownership strategic sourcing is no longer enough. Companies need to wring as much value out of their working capital as they can, especially in a market where many large corporations are moving away from physical assets to mostly working capital. Moreover, in their rush to implement low cost country sourcing programs, many companies have implemented non-optimal global sourcing and outsourcing programs that are plagued with one or more unintended consequences which often remain hidden until the programs, and fundamental strategies, are examined from a Supply Chain Finance perspective. Given that 73% of large corporations are looking to extend payment terms with their suppliers in 2007, preferably without negatively impacting the supply base, Supply Chain Finance is a great place to start. (Statistic from the recent Demica study.)

Supply Chain Finance is effective. According to a Hackett study, 1000 of the largest US Companies were able to free up $72B in 2005 by reducing working capital requirements through "improvements in collecting bills, turning over inventory and stretching out the amount of time they take to pay their own suppliers". Improvements in bill collection, days payable outstanding, and inventory turnover barely scratch the surface of what supply chain finance is or what it can do for an enterprise.

Furthermore, Aberdeen has found that Best-In-Class companies in supply chain finance, who are six times more likely to have gained a competitive advantage, are able to process twice as much volume (measured as annual dollar turnover) and three times as many invoices.

To get the maximum benefit from Supply Chain Finance strategies and solutions, a company will require a significant amount of technological capabilities. It will require e-Procurement and e-Payment software to send purchase orders, track good receipts, receive invoices, and automate the settlement processes to the greatest extent possible. It requires inventory management and tracking solutions to appropriately track and manage inventory throughout the supply chain. It requires collaboration and event tracking software to track supply chain events and permit early detection and resolution of potential problems. It requires cash flow management and modeling tools to make sure the right financial decisions are being made at each stage of the chain. And all of this technology needs to be integrated. For example, information relating to transactions and payments needs to flow from the company's e-Procurement and e-Payment systems automatically into a company's accounts receivable (A/R) and accounts payable (A/P) systems and then, ultimately, into it's cash flow modeling and working capital optimization tools.

Parties Involved

There are four primary types of players in supply chain finance. There is the buyer, the supplier, the technology provider, and the financing institution.

Buyers are the primary drivers of supply chain finance. As the builder of brands, and associated advertising campaigns, they are largely responsible for shaping consumer demand for the products they wish to sell. They're also the first in the chain to feel the pressure to reduce costs in a market where raw material prices keep rising but consumers expect prices to keep falling in the Walmart Rollback era.

Suppliers need good supply chain finance the most. As the company that manufacturers the goods, they not only feel the current increases in raw material, energy, and labor costs the most, but traditionally hurt the most since they need to bear the brunt of the cost and typically go the longest between the initial outlay for raw materials, overhead, and labor and the day they finally get paid for producing the product.

Technology Providers are the enablers of supply chain finance. They provide the technology that connects all of parties together, and enables the visibility and communication required to support modern supply chain finance strategies.

Financing institutions play the role of lender in supply chain finance and offer various types of financing, including Global Asset Based Lending (GABL), inventory financing, and insurance, and may offer payables discounting and receivables management services.

Benefits

This section discusses the benefits to buyers, suppliers, and both parties.

To Buyers and Suppliers

The great thing about supply chain finance is that, when done right, it benefits parties all along the supply chain. The benefits described in this section, divided into financial, automation, and general categories, apply to buyers and sellers alike.

Financial

Supply Chain Finance brings a host of financial benefits to the supply chain. Most of these cannot be obtained through more traditional methods, or at least not to the same degree that Supply Chain Finance enables them.

Lower End-To-End Costs

The primary benefit is lower end-to-end supply chain costs. By automating most of the transactions, including approvals and payments when multi-way matching between purchase orders, good receipts, invoices, and contracts lead to non-disputed invoices, supply chain finance removes a lot of manual processing, and its associated administrative overhead and transaction costs from the chain for all affected parties. This results in an instant cost reduction.

Unit Cost Reduction

Proper Supply Chain Finance, unlike basic sourcing, inventory shifting, or early discounting, actually takes cost out of the chain instead of just squeezing profit margins or shifting cost from a buyer to a supplier.

Shorter Cash-To-Cash Cycles

By automating transactions and enabling third party financing at various points of the supply chain through additional event-based visibility, cash-to-cash cycles can be converted for buyers and suppliers alike. This can substantially reduce costs of financing and, thus, overhead costs.

Increased Cost Transparency

Effective Supply Chain Finance programs not only point where the costs are, but what they are for. This allows an organization to compare its cost to market averages and increase focus on the areas of the supply chain that are truly ineffective from a cost perspective. No more guessing.

Reduced Cash Flow Uncertainty

With appropriate Supply Chain Finance solutions, buyers know what they owe, to who, when, and for how much as soon as the invoice is created and suppliers know when they are going to be paid, how much, and what opportunities they have for discounted early payments or third party financing and how much it will cost.

Working Capital Optimization

When a holistic Supply Chain Finance program is put in place, and all areas that impact the supply chain appropriately aligned and connected, for the first time an organization, with the proper tools, can truly being to optimize its working capital. No more excessive hoarding of cash or borrowing to hedge against the unknown.

Through the enhanced visibility and collaboration that results from a sound supply chain finance program, as discussed in later sections, treasurers will have direct knowledge of sourcing strategies, payment terms, seasonal variations, and transport methods and this will allow them to plan cash requirements with greater precision and take advantage of more investment opportunities.

Automation

Supply Chain Finance brings a host of automation benefits to the supply chain. Although many of these can be obtained through more traditional supply chain technology solutions such as e-Procurement, e-Payment, and inventory management, the benefits are greatly enhanced when these traditional technology solutions are integrated into a Supply Chain Finance Framework.

Reduced Paper

Automating the processing and payment of purchase orders, goods receipts, and invoices when there are no discrepancies in a multi-way match considerably reduces the amount of paper that must be manually processed.

Minimization of Data Errors

Every time something is manually entered, and re-entered, another opportunity for human error creeps in. Since human error is usually the major cause of discrepancies, that only results in considerable man hours being invested to clear up the confusion, it's easy to see how improved automation can substantially reduce data errors.

Reduced Transaction Processing Time

Automation allows non-disputed transactions to be processed in a seconds, not minutes, hours, or days.

Faster Dispute Management

Since discrepancies are brought to light faster, as well as their root causes, they can be clarified and resolved much faster using automation-enabled Supply Chain Finance solutions than they could be resolved using purely manual methods.

Increased Inventory Visibility

Automation, and the increased visibility that it offers, allows you to query where your inventory is at any time. It enables an organization to instantly know when it hits a checkpoint, clears customs, and changes ownership.

General

The increased supply chain visibility enabled by good Supply Chain Finance solutions lead to more than just the automation and financial benefits discussed in the previous sections. This section overviews some of the additional benefits Supply Chain Finance solutions enable.

Improved Agility

With an integrated end-to-end Supply Chain Solution, an organization can more quickly respond to demand changes, transportation delays, production short-falls, and unexpected changes in cash-flow.

Increased Analytics Capability

The additional data made available through end-to-end Supply Chain Solutions enables additional analytics. This allows for the continual refinement of demand forecasts, inventory optimization, and working capital plans.

Enhanced Productivity

Supply Chain Finance reduces the amount of time an organization needs to spend on tactical manual processes such as invoice approval, payment, and data collection, and frees up an organization's resources to spend their time on more strategic activities. This allows for a significant leap in productivity.

Improved Customer Service

Less time on manual transaction processing, better demand forecasting, and improved productivity will allow any organization to make great strides in its customer service.

Improved Supply Chain Reliability

Having timely information on a regular basis naturally leads to improved supply chain reliability. An organization knows where it's inventory is, what its suppliers are working on, and if they are currently experiencing problems that could lead to a slow down. It even allows parties to work together to detect, and resolve, potential problems before they appear.

To Buyers

In addition to all of the benefits outlined in the previous section, Supply Chain Finance also brings some specific benefits to buyers that can not be achieved through more traditional supply chain improvement programs.

Off-Balance Sheet Financing

Knowing precisely where inventory is at any given time allows a buyer to securitize it's assets and obtain off-balance sheet financing using a number of different options that might include early receivables programs (where a buyer can ensure early receivable payments to its supplier for as little as 0.5% to 2.0% per annum against non-disputed invoices), toll manufacturing and netting programs (where off-trade positions between Original Equipment Manufacturers (OEMs) and Contract Manufacturers are netted), and inventory financing programs (using consignment). This allows it to obtain additional capital at low cast without negatively impacting its balance sheet.

Increased Supplier Interest

A buyer with a strong supply chain finance program becomes considerably more attractive to a supplier than the average buyer since most suppliers are constantly in a capital crunch in a market where the average buyer is trying to improve their financial position at the supplier's expense by increasing Days-Payable-Outstanding (DPO) terms.

More Days-Payable-Outstanding flexibility

By enabling a multitude of financing options for it and its suppliers, the buyer has a lot more control over its DPO options and the cost associated with each option.

More Control Over The Procure-To-Pay Cycle

An integrated Supply Chain Finance solution gives the buyer more control over the Procure-to-Pay procedure than a traditional e-Procurement, EIPP (Electronic Invoice Presentation & Payment), or P2P (Procure-To-Pay) solution which does not take the broader financial picture into account.

In addition, properly managed supply chain finance will help a company treat its payables as an asset. In some cases, this will mean trading on their credit to reduce the amount of cash they need today to pay their suppliers. In others, it might be using a dynamic bid/ask marketplace that offers early payment discounts down to the specific day that the supplier wants to get paid.

To Suppliers

The great thing about Supply Chain Finance is that, when done properly, it provides as much advantage to the supplier as it does to the buyer, which truly allows costs to be taken out of the chain without unreasonably impacting profit margins or shifting costs to the parties least capable of bearing them.

Below Market Financing Rates

A good SCF solution, by increasing visibility into supply chain events throughout the chain, gives the supplier the ability to leverage the buyer's credit rating against their receivables. This is an enormous benefit to a supplier whose normal cost of short-term financing is 20% to 40% when their buyer has a much lower cost of capital, often under 12%.

Reduced Cash Flow Uncertainty

If a supplier does not know that a payment will be late(r than expected) until the payment fails to materialize on the expected date, the supplier could end up scrambling for cash and be forced to accept very costly short-term capital financing (in the 20% to 40% range). This will ultimately drive up the cost of the products they make by a significant amount. A good SCF solution allows the supplier to see posted payables, with the payment date, as soon as they are posted.

On-Demand Access to Funding and Financing

A good Supply Chain Finance Solution will include an on-demand software-as-a-service payment or intermediation platform that will connect all parties, buyers, suppliers, and lenders, together in a manner that will allow suppliers to instantly take available of the low(er)-cost lending options available to them (as enabled or co-negotiated by the buyer) at any time.

More Days-Sales-Outstanding Flexibility

The supplier now has much greater control over it's Days-Sales-Outstanding as it can choose to convert receivables from the time the invoice is approved until the maturity date into cash using early payment discounts from the buyer or through low-cost sales of such receivables to third party lenders.

Strategies for Success

This section overviews a number of supply chain finance strategies that anyone can use to improve the cost of the capital used by their business. It also points out some additional strategies for success that are specific to buyers and sellers as a lead in to the following sections that outline a methodology that buyers and sellers can use to establish and take full advantage of supply chain finance programs.

When you consider that global sourcing and outsourcing considerably complicates the value exchange process, Supply Chain Finance quickly rises in importance. As such, its important to have solid strategies from day one, lest you select the wrong ones and instead of seeding success find failure down the road instead.

Balance Open Accounts and Letters of Credit

It's important to understand an organization's cost of capital versus the supplier's cost of capital. Open account terms, for example, may bear lower fees than a letter-of-credit based transaction, but they can also restrict a seller's access to working capital financing and increase its costs of working capital. The additional cost borne by the supplier for accepting extended payment terms, for example, could be finding their way back into the cost of goods. Treasurers and procurement staff should determine which party has the lower financing costs and greater access to capital, and payment terms should take this discrepancy into account. Furthermore, today's technology is steadily blurring the lines between 'pure' letters of credits (LCs) and open account transactions. As the platforms become more sophisticated, automated, and flexible, users will be able to pick and choose the best features from the two payment methods, specific to the situation at hand.

Letters of Credit (LCs) are a traditional risk mitigation tool for suppliers, but they come with costs. Some of those costs are financial, such as higher financing charges for the buyer. Other costs are operational and may not show up on typical financial reports. For example, returns for credit are usually impossible when using LCs. There is also the considerable cost and complexity of processing change orders through a LC system in parallel to the procurement system.

However, open accounts have their costs too. Although much less expensive for the buyer, they can be much more costly for the supplier who may not be able to leverage them when short term financing is required. However, a buying company must carefully consider whether they want to help finance a supplier. This is particularly true when the buying company is only a small fraction of a supplier's total sales. How does the buyer know the costs of using LCs will be reflected in the price that particular buyer pays?

More, And Better, Financing Options

Identify and enable financing for you and your suppliers at multiple points in the supply chain, including raw material production, intermediate production, point of shipment, customs clearance, and arrival at a Vendor-Manged Inventory (VMI) hub. This will allow you, as a buyer, to select the right financing vehicle at the right time to minimize your cost of capital.

More specifically, you should have three or more of the following available to you: low-cost line of credit from a bank from which you have an established relationship, third party financing opportunities at various points in the supply chain where inventory could shift ownership, factoring, trade receivables securitization, and, providing it is not more disadvantageous to the supplier than other financing options, early payment discounts.

Also look for off-balance sheet supply chain finance, which is often cheaper than junior debt. This can position the buyer as a partner and low-cost customer to a supplier who can get paid faster through this arrangement. A number of different options for off-balance sheet programs exist in the marketplace, including early receivables programs where a buyer can ensure early receivable payments to the supplier for as little as 0.5% to 2.0% per annum against non-disputed invoices, toll manufacturing and netting programs where off-trade positions between Original Equipment Manufacturers (OEMs) and Contract Manufacturers are netted, and inventory financing programs using consignment.

Improve Forecast Accuracy

One of the best ways to take cost out of the supply chain is to take unnecessary inventory out of the chain, as this just leads to additional storage, overhead, and financing costs and losses when it has to be cleared at considerable markdowns.

Inventory Optimization

Optimize inventory management across the supply chain. This involves reducing total supply chain costs and lead times, not just inventory shifting onto a supplier. Also, when considering whether or not to (temporarily) transfer control to a third party during shipment (possibly using consignment), make sure to include the additional customs fees, excise fees, and taxes that could result. Look for free trade zones, secure trade zones, and free trade agreements that could reduce not only these fees, but fees in general if goods are simply being shipped through a country to their final destination.

When attempting to optimize inventory, consider segmenting customer channels and products which can allow for more accurate forecasting and faster response times, leading to a higher return on assets and reduced stock-outs in response to demand changes.

Lower Your Supplier's Cost

A recent Aberdeen benchmark report found that 39% of suppliers indicated that their top issue is their ability to access financing at acceptable terms. The more it costs a supplier to make a product, the more it will cost a buyer to buy it. Therefore, any strategies that reduce a supplier's cost of production or operation should be strongly considered and employed. After all, when faced with increased risk, suppliers are more likely to shorten payment terms, raise prices, or limit product availability, all of which ultimately drives up product, and supply chain, cost. Some specific programs that may be beneficial are:

  • Early Payment Programs
    To make a product, a supplier needs to acquire raw materials, pay its employees, and maintain it's plant and equipment. This adds up. If there is a significant time lag between when the supplier needs to acquire the raw material and when a buyer finally pays for a finished product, the supplier will have to draw financing, which can be costly if they are a small or mid-sized supplier without a lot of leverage and access to cheap capital. Thus, paying early will reduce the supplier's cost of capital, the markup they need to charge to make a profit, and, ultimately, the buyer's price.
  • Inventory Ownership Solutions
    Consider engaging a third party who will buy, and take ownership of, the product from the supplier as soon as it is finished and then sell it to you on a Just-In-Time (JIT) basis. Although the third party would charge a mark-up for their services, if the cost is considerably less than the combined inventory and financing cost to the supplier, the supplier would be able to lower their price considerably, which would still result in a lower price to the buyer even after the third-party mark-up costs. (On average, an inventory management company is likely to have more space, financing leverage, and inventory management expertise and, thus, a significantly lower storage cost than a supplier.)
  • Virtual Consignment Financing
    If a buyer is considerably larger than a supplier, and especially if the buyer needs a considerable amount of a certain raw-material across its supply base, the buyer could consider using its added leverage to buy the raw materials itself and then sell them back to the supplier at its cost. If the buyer's annual needs were, say, five or ten times that of the supplier, one could see the potential for significant volume-based discounts. Also, when this strategy is combined with early payment (i.e. instead of selling the product to the supplier, the buyer simply trades it to the supplier and deducts the raw material cost from the cost of the finished good at purchase time), this can often enable a supplier to significantly reduce unit costs.

Innovative, Collaborative, MindSet

Supply Chain finance requires the collaboration of multiple parties to succeed. Furthermore, it requires an innovative mindset as many of the best solutions will be relatively non-traditional solutions compared to the non-collaborative silo solutions traditionally employed by many business units. Practitioners must be prepared to embrace new ways of doing business in order to achieve the full value that is there for the taking. It takes more than just "thinking outside the box". It takes a commitment, and a drive, to continually innovate the business to the next level.

Align Purchasing, Engineering, and Finance

Purchasing, which includes logistics for the purpose of this wiki, is responsible for many of the payables that end up in accounts payable. Engineering, responsible for New Product Design (NPD), is responsible for much of the product cost, baking in up to 80% of the costs in the design phase. Finance is responsible for making the payments generated by Purchasing and generating the reports necessary to comply with federal regulations, such as Sarbanes-Oxley. Thus, in order to reduce operating costs and optimize working capital, all units need to work in unison.

Create a Cross-Functional Team

Aligning purchasing, engineering, and finance is a great start - but it's not enough. To truly succeed, each of these units will need to work together on a daily basis. This will require a cross-functional team whose driving goal is to optimize costs across the supply chain while not only preserving, but increasing value to all parties. This will include increasing quality, reliability of delivery, and reducing risk as well.

Employ Capital and Cash Management Tools

Be sure to make heavy use of automation. Manually-intensive financial transaction and trade document processing leads to long processing times, poor visibility, and high transaction costs. Well designed e-Procurement and e-Payment systems can perform 2-way and 3-way matching and automate routine transactions within pre-defined contracts and tolerances.

Also, be sure to take currency issues into account. Transaction fees, volatility of dollar-based invoices versus a domestic currency, and fluctuating exchange rates can complicate otherwise well thought-out plans.

Strategies for Failure

As with any other endeavor, if done improperly, or non-commitally, it is possible to fail - and in the case of supply chain finance, fail spectacularly, especially if an organization uses one of these unfortunately all-too-common examples of supply chain finance.

Shifting Inventory to Suppliers

With increasing costs across the board and little or no room to increase prices, companies are scrambling for new ways to increase profits. This has resulted in many companies scrambling to find new ways to reduce inventory and reduce one of the biggest costs on their balance sheets - inventory carrying charges. Unfortunately, many of these companies have chosen the unenlightened solution of simply delaying purchases until the last minute, which forces their suppliers, who are often ill-equipped to do so, to hold the inventory instead. Considering that most suppliers have to wait an unduly long time between their initial cost outlay to make a product and the eventual payment for that product in an environment where many buyers are now demanding payment terms that include 60, 90, or even 120 Days-Payable-Outstanding (DPO) and that most do not have large storage facilities or inventory management expertise, this drives up their costs from all angles. Their financing charges go through the roof as they have to take out more high-cost short-term financing, often at rates of 20% to 40% per annum (which are especially common in developing economies), their costs of operation go through the roof as they have to either acquire additional assets or pay a third party to manage the inventory, and their opportunity costs rise as they are prevented from ramping up production, due to lack of funds and storage, on New Product Development that could ultimately prove more profitable to them, and the buyer.

Increasing Days Payable Outstanding

One of the the primary actions that buyers who are new to supply chain finance take is to extend payment terms for their suppliers, which often have constricted access to short-term financing with a significantly higher cost of capital. This cost-shifting to suppliers might result in better Days-Payable-Outstanding (DPO) statistics to the buyer in the short term, but ultimately results in a less financially stable, and thus higher-risk supply base, and, eventually, an overall higher cost of goods sold versus competitors who have mastered sound SCF practices.

Strapped for cash, and lacking adequate access to affordable capital, these suppliers may be forced to delay raw material ordering, squeeze work-in-process inventories, or skimp on plant maintenance or quality processes. Each of these options negatively impacts the buyer's return on investment and could lead to significant supply shortages, especially if demand spikes.

Mistaking Early Payment Discounts and Factoring for Financing Options

Early payment discount programs, regular or automated, do not address the root causes of financial flow inefficiency and can in fact exacerbate the underlying drivers. Instead of shifting inventory to a supplier, you're essentially shifting costs and this often results in cost increases, rather than cost reductions, across the supply chain.

Buyer SCF Program Implementation

This section overviews some steps a buyer could take in defining and implementing a Supply Chain Finance program.

Align Purchasing, Engineering, and Finance

Consistent with the strategies for success, the first thing a buyer should do is be sure to align the various business units within its organization around the common goal of improving operations across the supply chain within and beyond the four walls of the company.

Create a Cross-Functional Team

Once the different business units are aligned along the common goal of improving supply across the supply chain, the next thing to do is to form a cross functional team that will lead, monitor, maintain, and improve the initiatives on a going-forward basis.

Adopt a Formal (Supplier) Risk Assessment Process

It's important to understand the capital costs and foreign exchange risks embedded in every purchase from your perspective and from your supplier's perspective. As a buyer, be sure to assess key pressure points for your suppliers that are important for their business continuity. Negotiating ten million dollars worth of savings will not do your organization much good if the supplier goes bankrupt three months into the contract.

Holistically Evaluate Payment Policies and Systems

In addition to the impact on your company, make sure to assess the impact of your payment policies on your borrowing base, credit, existing banking relationships, and suppliers and whether or not they buffer your organization from credit rating changes. Also be sure that they mitigate any potential risks from accounting and reporting acts such as Sarbanes-Oxley.

Identify IT Deficiencies and Integration Challenges

According to a recent Aberdeen brief (Get Ahead with Supply Chain finance), an astounding 90% of enterprises reported that their global supply chain technology is inadequate to provide the corporate finance function with the timely information it requires. It's vital to identify your needs up front to make sure the right technology is selected and the integration requirements addressed before implementation, and integration, begins.

Set Up an Automated Payment Process

Whether you use or extend your current e-Procurement, EIPP (Electronic Invoice Presentation & Payment), or P2P (Procure-to-Pay) system or bring in a new e-Payment system for the purpose, it is important to set-up, by way of business defined rules, an automated payment process that will perform automatic multi-way matching between purchase orders (cut off of contracts where they exist and current catalog quoted prices where they do not), goods receipts, and invoices and automatic scheduling of payments (using contracted terms or standard terms where contracts do not exist) where there are no discrepancies that would be cause for a dispute. This will seriously reduce the amount of manual processing required and allow the organization to set up an early payment discount program.

Integrate Financial And Physical Supply Chain Processes

In order to truly optimize your supply chain, your costs of operation, and your working capital, physical and financial supply chain processes have to be synched.

Identify Collaborative Solutions To Inventory, Cost, and Risk Management

Traditionally supply chain operating managers hedge by holding more inventory, but this simply results in higher working capital. Insure that the inventory-reduction programs truly eliminate inventory across the supply chain. Simply shifting responsibility does not reduce costs and, if shifted to the wrong party, can significantly increase costs across the supply chain.

Determine the Breadth of Changes to Internal Processes, Roles, and Responsibilities that Will Be Required

The recent study The Growing Role of Supply Chain Finance in a Changing World by Demica found that the largest hurdle for a buyer in the identification and adoption of a supply chain finance program is "the perceived need to change internal processes". Although this need is likely real, it's more than a necessary-evil. There's always room for improvement, and making process changes that will improve not only your productivity but operational costs is always a good thing, as long as they are well planned and the necessary change management identified up front.

Implement Collaborative Processes Across the Supply Chain

This will enable early visibility into supply chain events that can be leveraged to create flexibility around third party financing and early payment options for your suppliers when needed. Enhanced visibility gives a buyer the ability to finance at multiple points in the supply chain, including raw material production, intermediate production, initial shipment, inventory holding, customs clearance, and arrival at a local vendor-managed (or third party) inventory hub.

Actively Monitor New SCF Offerings for Additional Advantages

Supply Chain Finance is a relatively new pursuit and not a lot of vendors have solutions that are specifically targeted at Supply Chain Finance yet. Furthermore, most of the solutions are new and not very extensive. Thus, as time goes on, the footprint and capability of these solutions will expand. Therefore, it is important to regularly evaluate new technologies as they become available on the marketplace to see if they are able to provide the organization with new capabilities or benefits that could result in a lower cost of ownership or help the organization remove additional costs from the supply chain.

Supplier SCF Program Success

Align Sales, Engineering, and Finance

Consistent with the strategies for success, the first thing a supplier should do is be sure to align the various business units within its organization around the common goal of improving operations and working with its buyers to do just that.

Create a Cross-Functional Team

Once the different business units are aligned along the common goal of improving production and supply chain operations, the next thing to do is to form a cross functional team that will lead, monitor, maintain, and improve the initiatives on a going-forward basis.

Adopt a Formal Risk Assessment Process

It's important to understand the operational and production risks inherent in every contract and production run as a supplier. Be sure to understand the costs associated with each production run from a raw material, labor, operational, and financing perspective and the financial risks these costs carry if payment is not received in a certain time frame. Also understand any risks to production from a potential raw material or energy shortage or price hike.

Communicate Risks to Production and Inventory Caused By Cash Flow Barriers

Once you understand the risks you face, be sure to clearly communicate these risks to buyers, and focus on the risks that the buyer's policies impact in particular, which include the financial risks to your operations and their production runs that are caused by either their inability or unwillingness to pay within a certain period of time.

Routinely Evaluate Your Various Financing Options

If the buyer is concerned about the health of their supply chain, they should be willing to work with their suppliers to jointly set up financing options that will include their existing banking relationships as well as yours, third party financing providers, and early payment discounts if they have a relatively good cash situation. As a supplier, you should evaluate each of these options on a regular basis to make sure you always get the best deal when you secure financing either for the short term or the long term.

Identify IT Deficiencies and Integration Challenges

According to a recent Aberdeen brief (Get Ahead with Supply Chain finance), an astounding 90% of enterprises reported that their global supply chain technology is inadequate to provide the corporate finance function with the timely information it requires. It's vital to identify your needs up front to make sure the right technology is selected and the integration requirements addressed before implementation, and integration, begins.

Automate the Invoice Process Whether you use or extend your current e-Procurement, EIPP (Electronic Invoice Presentation & Payment), or CRM (Customer Relationship Management) system, it is important to set-up a system that automatically invoices the customer against defined contract terms when a shipment is initiated. This will reduce the amount of manual processing that is required and reduce the overhead associated with each shipment as well as the payment timeframe, especially since this will remove manual error, the largest cause of invoice discrepancies and payment disputes that only serve to lengthen the time between shipment and payment.

Integrate Financial and Physical Supply Chain Processes

In order to truly optimize your supply chain, your costs of operation, and your working capital, physical and financial supply chain processes have to be synched. Furthermore, it is this integration that allows for the injection of liquidity at various stages of the supply chain.

Participate in Collaborative Solutions to Inventory, Cost, & Risk Management

The Demica study The Growing Role of Supply Chain Finance in a Changing World that found that largest hurdle for buyers is "the perceived need to change internal processes" also found that the largest hurdle for suppliers was that they found the programs to be "invasive to their finance departments". Although these programs will require you as a supplier to be more open about your costs, this can be to your advantage if your buyers are willing to work with you to reduce your costs.

Determine the Breadth of Changes to Internal Processes, Roles, and Responsibilities that Will Be Required

One of the largest hurdles in the identification and adoption of a supply chain finance program for most companies is the the perceived need to change internal processes and the amount of work that will ensue. Although this need is likely real, it's more than a necessary-evil. There's always room for improvement, and making process changes that will improve not only your productivity but operational costs is always a good thing, as long as they are well planned and the necessary change management identified up front.

Increase Supply Chain Event Visibility

Enchanced visibility into order and shipment status and historical performance allows financial transactions to be assessed, securitized, and (often) sold at a lower credit premium. Furthermore, effective supply chain finance essentially provides a "virtual cash float" by way of the receivables trading opportunity that begins with the purchase order approval and continues until payment maturity. At any point during this process, there exists the potential for the recievables to be securitized, financed, and even sold.

Consider Long Term Leasing Programs

Instead of buying your equipment, consider long-term leasing instead. This can not only reduce payments up-front, but reduce your overall costs of ownership if you find that you have to update or replace it on a regular basis.

Regularly Conduct a Cost-Benefit Analysis of Upcoming SCF Solutions

Supply Chain Finance is a relatively new pursuit and not a lot of vendors have solutions that are specifically targeted at Supply Chain Finance yet. Furthermore, most of the solutions are new and not very extensive. Thus, as time goes on, the footprint and capability of these solutions will expand. Therefore, it is important to regularly evaluate new technologies as they become available on the marketplace to see if they are able to provide the organization with new capabilities or benefits that could result in a lower cost of ownership or help the organization remove additional costs from the supply chain.

Authors

Michael Lamoureux, PhD of Sourcing Innovation

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