In the April issue of Business Finance Magazine, Beth Enslow of Aberdeen Group penned a great article on “How to Create a More Competitive End-to-End Supply Chain” using Supply Chain Finance using Supply Chain Finance.

According to the article, by merging physical supply-chain information with financial supply-chain data and flexible funding methods, companies are able to not only automate payables and receivables but also to inject much-needed liquidity at various stages of the supply chain.

This gives the buyer the ability to:

• Optimize Working Capitalthrough inventory reduction and A/P and A/R improvements
• Reduce Product Unit Coststhrough arbitrage opportunities due to a higher cost of capital for many suppliers
• Extra Days Payable Outstandingoften by over 50 days which can improve cash flow by hundreds of millions of dollars or decrease unit costs by five to ten percent

This is enabled by better visibility into order and shipment status and historical performance which allows financial transactions between a supplier and buyer to be assessed, securitized, and sold at a lower credit premium which often allows for an end-to-end reduction in the cost of goods sold. Furthermore, enhanced visibility will give buyers the option to finance at multiple points in the supply chain, including raw material production, intermediate production, point of shipment, customs clearance, and arrival at the vendor-managed inventory hub.

The article also described characteristics of best-in class companies in supply chain finance. These companies are:

• more than three times as likely to use EIPP (electronic payment and presentment) systems as laggard companies
• three times more likely to use an online payment platform with automated-discounting and invoice-reconciliation capabilities
• twice as likely to extend payment terms and take part in an early payment discount program
• more actively involved in using supply-chain financing techniques

In other words, leading companies take advantage of appropriate e-Sourcing and e-Procurement technology to maximize their potential.

Aberdeen recently released a report on “Technology Platforms for Supply Chain Finance” How to Drive Competitive Business Advantage by Increasing Payment and Financing Automation with Business Partners that found that best-in-class companies are six times more likely to have gained significant competitive advantage due to implementing Supply Chain Finance technology. They also processed twice as much volume, measured as annual dollar turnover, than their lower performing peers and three times as many invoices.

Supply Chain Finance (SCF) technology helps automate the process of exchanging payments, related documents, and information between buyers, sellers, financial institutions, and other involved parties. It supports related visibility and workflow for all the parties involved.

The most widespread technologies today that enable some aspects of SCF are document and content management systems (DMS/CMS), accounting systems that enable Accounts Payable (AP) / Accounts Receivable, (AR) Electronic Invoice Presentment & Payment Systems (EIPP) and Procure-to-Pay (P2P) systems, extended Enterprise Resource Planning (ERP), and global trade finance (GTF) platforms. Aberdeen has developed a 4-level pyramid of capabilities that represents the different levels of technology enablement a company can achieve. These are:

1. DMS & EIPP
2. Automated Management of Early Payment Discounts
3. On-Demand Access to 3^rd party supply chain financing
4. End-to-End SCF decision support

The report presents the usual Aberdeen PACE (Pressures-Actions-Capabilities-Enablers) framework and the primary actions and enablers recommended by the report are worth noting.

Actions:

• Automate AP & AR processes
• Automate purchase order management
• Automate charge-back management
• Adapt technology that facilitates access to trade financing

Enablers:

• SCF platform with access to payables financing
• SCF platform with access to receivables financing
• SCF platform with access to inventory financing
• EIPP
• Trade related document preparation & management
• Invoice matching / reconciliation

The study also notes that SCF platforms offer more than just financial benefits. Other benefits include:

• real-time visibility into program activity and status of each customer
• improved business agility
• greater usability and flexibility of the supply chain technology
• increased analytics capability
• improved productivity

The study concluded with some recommendations for action to help both struggling companies and leaders move to the next level of supply chain finance.

For laggards:

• Know what to focus on: identify the most critical financial metrics and focus on these specific metrics in SCF program development (example metrics are supplier performance, Return On Capital Employed (ROCE), Days Payable Outstanding (DPO), and Debt/Equity Ratios)
• Invest in a SCF technology platform that provides strong visibility and automates the key functions for you and your trading partners

For leaders:

• Use SC technology that provides visibility into shipments and inventory
• Improve financial risk management with new SCF platforms that offer enhanced analytics tools for credit scoring, supplier risk assessment, and working capital balance analysis with support for trade discounts and receivables/payables financing options

What does it all mean? When you combine this study with previous studies and blog posts here on Sourcing Innovation, you can deduce that:

• There are significant opportunities to improve supply chain performance through supply chain finance technology.
• Most companies are not capitalizing on these opportunities.
• As of yet there is no good definition for a Supply Chain Finance Technology Platform, and no providers that provide one that even covers all of the capabilities identified in the study. Its arguable whether or not any even come close on their own.
• In order to achieve best in class status, you will likely need to acquire and integrate a number of solutions, and possibly even extend these solutions with custom in-house development.
• Given that most of the best-in-class solutions in EIPP/P2P/eProcurement, Document Management, and analysis are from new, small, progressive companies, you will likely have to integrate the solutions on your own or use a third party integrator.
• You need a good game plan from the start – otherwise, you risk not only acquiring the wrong technology in your quest to become a Level 4 Best-In-Class company, but acquiring technology that does not fit together well. Even though every successful project is one that is approached in stages, it is key to identify not only the technologies you require from the outset, but the platforms you intend to use to insure that they will work together and that they can be integrated in an efficient and cost-effective manner. (Alternatively, adopt a common underlying technology model (XML/SOA/etc) and only select solutions that integrate with the model.)

Last fall I introduced Supply Chain Finance (SCF) to this blog and noted that 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. Then, I started the year off with a review of an article from the Supply Chain Manufacturing Review on Managing the Financial Supply Chain.

The article noted that today’s supply chains complicate financial flows and cash management and leverage global supply chain visibility to control and optimize the financial flows of a business value chain which is essential for the long-term viability of companies that have outsourced manufacturing or are sourcing globally. It also noted that global outsourcing complicates the value exchange process, increasing the quantity, velocity, and complexity of inter-enterprise financial transactions while decreasing the number of financial transactions handled within the four walls of the enterprise and reducing the visibility into the timing of payments while introducing a higher degree of risk.

As a result, the article concluded that it is vitally important, particularly from the financial perspective, to analyze all of the costs associated with an outsourcing decision before committing to a contract and that you should consider strategies to lower your suppliers’ financing costs, and thus your overall total cost of ownership. These strategies include:

• early payment programs
• inventory ownership solutions
• virtual consignment financing with assignment of proceeds

But strategies are not the only thing you can use to tackle your supply chain finance woes. These days, technology also exists to support you in your decision making process. For example, as announced mid-march in Supply and Demand Executive, PrimeRevenue has just released a new version of its SCF Platform, which offers new functionality related to payment offset information flows critical to retail, diversified manufacturing, high-tech and automotive markets.

PrimeRevenue offers an online payables visibility solution that allows a buying organization to upload electronic output from its Accounts Payable (AP) system with approved payables data and a supplier to log in and view the amount and payment maturity date for each of the approved receivables. The Supplier can then sell the receivables early at a discount and receive cash for any, or all, of these receivables at any point in time (up to the maturity date). The solution allows payment cycles to be reduced to as little as 48 hours in an automated, secure service that runs over a virtual private network (VPN). Essentially, it’s a simple type of Electronic Invoice Presentment and Payment (EIPP) system, but one that allows the supplier to choose when they get paid, and one that achieves the early payment programs option for a supply chain finance solution. (Other companies in the EIPP space include Avolent acquired by Genpact, Thermo Fisher Acquirex, Bottomline Technologies, Harbor Payments, and Osiris Innovations Group.) It’s not the most sophisticated solution that one could devise, but this type of solution could be a great start for companies without any supply chain finance solution. I’m sure we’ll be hearing more about PrimeRevenue and other companies in the EIPP space as the year progresses, especially since a Demica study just found that 73% of large corporates are looking to extend payment terms with their suppliers in 2007.

Back in September, a really good article materialized over on the Supply Chain Management Review site that complements Aberdeen’s recent research brief “Get Ahead with Supply Chain Finance: How to Leverage New Solutions for End-to-End Financial Improvement” that I wrote about in Supply Chain Finance and their recent report “New Strategies for Financial Supply Chain Optimization: Rethinking Financial Practices with Your Suppliers to Maximize Bottom Line Performance” that is briefly summarized over on Supply & Demand Chain Executive in their post “Supply Chain Finance Techniques Seen Yielding Significant Savings”.

“Managing the Financial Supply Chain”In , Supply Chain Management Review starts off by noting that business leaders need to assess the unintended consequences of their global sourcing and outsourcing strategies beyond direct cost and capital savings since there are impacts to the financial side of the business as well. For example, since plants and equipment are often far more expensive to finance in emerging markets, the capital efficiency of the value chain can be decreased with global sourcing and outsourcing and global sourcing/outsourcing can also weaken control which can affect shareholder value, erode competitiveness, and introduce new business risks such as compliance, complex chargeback management processes, and implicit foreign exchange risks.

Even though today’s enterprises are enabled to become “core competency centric with global outsourcing allowing corporations to exist as virtual entities whose brand and CRM are the central value add, the longer lead times, multiple party involvement, added duties and taxes, longer delays, disruptions, and security regulations all complicate financial flows and cash management and leveraging global supply chain visibility to control and optimize the financial flows of a business value chain is essential for the long-term viability of companies that have outsourced manufacturing or are sourcing globally.

Furthermore, global outsourcing complicates the value exchange process, increasing the quantity, velocity, and complexity of inter-enterprise financial transactions while decreasing the number of financial transactions handled within the four walls of the enterprise and reducing the visibility into the timing of payments while introducing a higher degree of risk. In addition postponement, merge-in-transit, and VMI supply chain strategies only complicate the process.

In other words, even though global outsourcing is attractive due to the significantly lower labor costs, lower landed costs of nearby raw materials (due to significantly reduced transportation requirements), and the reduction of fixed assets required by the firm for production, the supplier to which the manufacturing is outsourced usually has a higher cost of capital and a higher equipment acquisition cost, thereby negating some of the savings you had hoped to achieve.

Therefore, it is vitally important, particularly from the financial perspective, to analyze all of the costs associated with an outsourcing decision before committing to a contract and to have a well thought out strategy in place to reduce product costs, enhance overall performance, and insulate the business from unexpected exchange rate fluctuations up front.

For example, the article offers three strategies you can use to lower your suppliers financing costs, and thus your overall total cost of ownership. These are:

early payment programs

which will allow your supplier to offer you a discount

inventory ownership solutions

which could include logistics services as well

virtual consignment financing with assignment of proceeds

where you buy the raw materials with your added leverage and sell them to the supplier at cost

The article also offers some good going forward recommendations that you can use to improve your overall financial supply chain.

adopt a formal supplier-risk assessment process

to understand the capital costs and foreign exchange risks embedded in the unit costs

evaluate payment policies and systems

to mitigate Sarbanes-Oxley risks and assure that what you’re paying for is what you’ve ordered

develop collaborative financing solutions

since earlier visibility can be leveraged to create flexibility around early payment options for suppliers

ensure inventory-reduction programs eliminate inventory across the total supply chain

since this reduces costs throughout the supply chain for all parties

integrate information about the physical flow of goods with the financial flow

since this allows for financial supply chain optimization