This article is a concise form of a Supply Chain Finance Management MBA Project. This article is very useful for the management students. this article includes The Keys to Effective Financial Supply Chain Management and Drivers for Supply Chain Finance. You can download the entire project as well.
The Keys to Effective Financial Supply Chain Management
Financial Supply Chain Management is not an entirely new concept, interest in the discipline has increased dramatically over the past year with the focus shifting from theoretical discussion to the practical implementation of programmes with tangible benefits. Interest has been driven by banks seeking to adapt their transaction banking product offerings to new market conditions, as well as buying corporates looking to squeeze added value from their existing procurement arrangements.
The physical supply chain can be defined as the activities involved in planning and executing the movement of goods and their documentation, while the financial supply chain describes the activities involved in planning and executing payments between trading partners – what could be described as the order-to-cash and the purchase-to-pay cycles for suppliers and buyers respectively. For every physical movement of goods between supplier and buyer, there exists a financial flow travelling in the opposite direction. Financial supply chain management involves taking a holistic approach to these processes in order to achieve a range of benefits that include improved efficiency and visibility across the supply chain and a more favourable working capital position.
A distinction should also be drawn between what can be defined as ‘supply chain services’ and ‘supply chain finance’. The former refers to the realm of providing services in order to increase supply chain efficiency – services that are not necessarily finance related such as the dematerialisation of paper invoices or an increase in straight-through processing (STP). Supply chain finance (SCF), on the other hand, relates more specifically to providing the appropriate financing facilities at the relevant points in the physical supply chain.
From the buyer’s perspective, offering financing in this way represents an opportunity to more effectively manage relationships with suppliers and increase payment terms without damaging goodwill between trading parties. And from the perspective of the supplier, the main benefits relate to improved cash flow as reduced days sales outstanding (DSO) mitigates the need for working capital during the production process.
Drivers for Supply Chain Finance
Corporates are increasingly purchasing their supplies from overseas markets, in order to benefit from lowest cost country sourcing, ie purchasing goods and services at the lowest possible cost. With the globalization of supply chains, large corporates are realizing that they need to be more collaborative and supportive in managing these extended trade relationships. In place of the traditional arm-wrestling relationship between buyer and supplier, where the buyer simply squeezes the most advantageous terms out of his suppliers, collaborative supply chain management is becoming widely accepted as best practice.
Even with the growth in long distance global trade, the traditional trade finance tool, the documentary letter of credit, is on the decline in terms of market share. Notwithstanding the tremendous security and financial flexibility of this trade finance instrument, letters of credit can involve high administrative costs and manual processes. This has been a driver for initiatives at industry level and within individual businesses to simplify trade processing and reduce costs. According to the World Trade Organisation, more than 80% of global trade is now in the form of open account, whereby a supplier simply invoices his customer who then settles the invoice after a period of trade credit. So despite the enormous value of letters of credit in specific circumstances (such as the beginning of a trade relationship with a new supplier or buyer in relatively unknown overseas markets), it seems that the trend towards increased open account trade is set to continue.
In this expanding open account environment, creative banks are finding a useful role for themselves in delivering supply chain finance and other value-added services to help their customers improve their working capital management. These initiatives respond to the challenges being laid down by national and super-regional governments to drive commerce and economic growth. Many EU countries have introduced laws to help promote a culture of prompt payment in order to alleviate the problems of small and medium enterprises (SMEs) suffering from late payment of their invoices. Similarly, banks are responding to encouragement from the European Commission and national governments to develop e-invoicing solutions in order to reduce processing costs and improve the flow of working capital along supply chains, with benefits for buyers and suppliers.