Earlier this month, Jason Busch wrote a blog entry about Hackett, Working Capital, and a Massive, Untapped Opportunity where he commented on a recent Wall Street Journal article that captured the essence of a recent Hackett Group study that noted the 1,000 largest US Companies were able to free up approximately $72 Billion last year 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.
Later in the blog entry he alludes that perhaps the largest, low-risk untapped working capital reduction opportunity is a nascent area that Aberdeen and a handful of vendors refer to as supply chain finance, which helps companies treat their payables as an asset. This reminded me of a recent Research Brief from Aberdeen entitled Get Ahead with Supply Chain Finance: How to Leverage New Solutions for End-to-End Financial Improvement where they noted that enterprise benefits from Supply Chain Finance include lower end-to-end supply chain costs, working capital optimization, and shorter cash-to-cash cycles. The research brief notes the financial productivity of enterprises is being undercut by a widespread lack of global supply chain visibility and automation and that SCF solutions can eliminate paper documentation, minimize data errors, provide faster dispute management and easier detection of duplicate payments, and enable increased transparency of purchase-to-pay and order-to-cash processes which drive additional hard-dollar cost savings on top of the SCF benefits of cash flow and cost of capital improvements.
Furthermore, SCF includes not only the technology to automate settlement processes (e.g. EIPP), but also provides a path for accessing financing services throughout an entire transaction lifecycle, including related raw material, asset, and inventory financing. The financing arrangements can be done using a company’s own cash reserves or via third-party financial institution partners.
In other words, a Supply Chain Finance Solution 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 financial institution electronically and provides the financing triggers based on the occurrence of one or several supply chain events.
Makes sense to me … I’m excited to see new innovative ideas on how to maximize use of your capital in this four party arrangement. I’m going to keep a watchful eye on Aberdeen and Hackett Group research as well as SpendMatters in the coming weeks, because I think there is great value to be had in maximizing use of capital and I’m sure Jason is going to dig until he finds it. In the meantime, I’ll probably offer a few more entries on risk management and visibility, which actually bear many similarities to network risk management and visibility at a sufficiently abstract level, but that’s something for the fringe academics to debate.