It was nice to see the recent article by Henry Ijams of PayStream Advisors, Inc in Supply & Demand Chain Executive on emerging payment and discount paradigms in the supply chain and the benefits of working capital optimization, which include:
- paper reduction
- liquidity injection into the supply chain
- supply chain risk reduction
- purchase-to-pay automation financing
The point of the article is that supply chain finance is finally starting to take hold, which is good, even if most people are still confusing “discounts” with “finance”. Not that discounts are bad because, appropriately used, they’re quite good. Appropriately defined early payment discounts save the buyer money, as they pay a lower price, and save the supplier money, as they don’t have to borrow financing at a higher rate. It’s a win-win.
They key to supply chain finance, as correctly noted in the article, is end-to-end e-Procurement with full automation when there is no discrepancy in the m-way match (between purchase order, goods receipt, invoice, and, if available, contract) and quick discovery and alerts when something doesn’t match (to allow for the error to be corrected and payment approved before the discount window expires).
However, supply chain finance is more than just discounts. It’s better forecasting. Better inventory optimization. Better financing options. A full suite of capital and cash management tools. Collaborative problem solving. And more importantly, it’s not shifting inventory to suppliers or increasing days payable outstanding (DPO). For a detailed discussion of supply chain finance, I would suggest that you check out the wiki-paper. I think it would be worth your time.