SUPPLY CHAIN FINANCE

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." 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.

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.

15 Key Factors That Impact Distribution Network Effectiveness

Distribution professionals "see" their operations on a daily basis. Competitive pressures, mergers, acquisitions, new product lines and greater customer expectations are just the tip of the change iceberg for the modern logistics leader. On the surface, this continuum of change is just a cost of doing business in the latest "new economy." However, for those intimately involved in a distribution process, how these changes are accommodated can mean the difference between survival, burnout and/or even extinction in today's rapidly changing supply chain. This article focuses on 15 key areas that are the roadmap to an effective, flexible and proactively responsive distribution operation.

1. Centralization vs. Regionalization—In distribution network planning, there is a well-established relationship between the number of distribution points, transportation costs and customer service targets. In a graphical sense, the point at which these three entities merge is the optimum balance of facility and transportation costs to develop a low-cost, high service distribution network. Normally, as distribution networks become more centralized, so do the internal support structures such as facility management, order entry, customer service and data processing. Depending on the degree of centralization achieved in support staffs, it is not uncommon to see cost savings of 50 percent or higher over decentralized networks. However, service levels, limitations on total facility size, risk mitigation and throughput peaks must be factored into the decision matrix.

2. Energy—Any significant shift in the cost of energy—electricity, fuel, etc.—could have an impact on operating costs and, therefore, on distribution. Many distribution projects that are otherwise viable fail once the cost of energy becomes a factor. This is especially true for energy-intensive facilities such as refrigerated warehouses. For this reason, it is crucial to work with all energy providers to determine the load that a prospective operation would put on the local energy system and develop solutions that conserve energy while achieving goals.

3. Flexibility—In today's unpredictable business climate, flexibility is a key to continued success for some and survival for others. When designing a distribution facility, specifying versatile equipment is a critical requirement. The latest technology may look nice at start up, but if it can't keep pace with unpredictable events, it is simply a waste of money. Planning for likely (and unlikely) changes in the distribution profile should drive the warehouse design and equipment specifications. For the majority of distribution operations, flexible equipment is the more practical choice.

4. Global Marketplace—In the ever-changing supply chain, global impact must always be considered. This could be as minor as a domestic customer wanting direct shipments to an international location, or as major as an acquisition by a global company or addition of a key global account. Successful distribution operations are ready for this type of change. Transportation systems should be designed with exports in mind; there should be contingencies for customs documentation and international shipping paperwork. Operations should be designed in a manner that product re-labeling or special packaging for international customers can be accomplished easily. Facilities may need to accommodate inbound or outbound airfreight or ocean freight containers. Customer service functions may need to operate in 24-hour mode to assist customers in all time zones. Preparedness is the critical element in a global marketplace. If you are not a global company today, your success will drive you into that marketplace sooner rather than later.

5. Government Involvement—Just as government involvement has an impact on distribution, distribution leadership has an obligation to be involved and aware of legislation that involves their industry. Many decisions are made daily at a local, state, and federal level that impact distribution operations. Taxes, labor regulations, transportation restrictions and infrastructure decisions are continually up for review and discussion at every level of government. Without proper input, uninformed decisions often have a dramatic effect on the distribution community.

In addition, involvement in professional societies (many of which conduct lobbying activities) is an effective way to track the pulse of legislative movement and also an ideal forum to make your concerns known. For some ambitious souls, a direct role in local or municipal government may be an effective and fulfilling way to make an impact. By being proactive, distribution leaders can ensure that distribution and government entities can collaborate to provide benefit to both sides without unpleasant surprises.

6. Information Systems—In today's e-enabled world, timely and accurate information is a requirement. The days of keypunching in daily distribution activity and nightly updates to host financial systems are becoming a distant memory for successful distribution operations. Today's reality is that distribution execution systems must be:

• Real-time: Customer requirements are moving toward being able to instantly track an order through every step of the fulfillment process to delivery. Optimally, this information is linked to an Internet front-end where a customer can easily log in and see the exact status of their order. Real-time interfaces and host system updates enable this customer-focused initiative.
• Paperless: The reality is that paper equates to errors. Language and educational barriers result in paper pick documents that are often misinterpreted, at best resulting in lost dollars within the distribution operation or, worse still, lost customers due to fulfillment issues that escape even the best inspection processes. The solution is paperless systems requiring operator validation that the right steps were followed and that the correct product was picked and packed.
• Standardized: In the past, many companies developed proprietary, legacy systems to manage their distribution operations. With the high growth associated with a successful distribution operation, many of these companies are finding that the investment to develop and maintain an in-house system no longer is viable. Standardized, industry-tailored software is now the rule rather than the exception. Software companies leverage their client base to continually update their product, adding far more base functionality than inflexible legacy systems.

7. Modularity—As companies in the distribution space come and go, their business will typically move to a new distributor or distributors. The ability to quickly take on significant business volumes dictates that modularity is a necessity for a thriving distribution organization. Modularity must be evident in:

• Assets: Distribution assets must be modular, providing the ability to easily expand facilities, capacities and equipment to meet increasing demands and diverse products. Many companies design this into a facility, while others are constantly tracking alternate local space that could be closed on quickly.
• Work assignments: The workforce must be able to handle new work assignments and transfer knowledge to new employees effectively. This is a key to a successful start-up of a new operation or an addition to an existing operation.
• Labor management systems: These systems must be able to handle the addition of new operations quickly and economically so that performance can be measured and costs kept under control.

8. Off-Highway Vehicles—In the United States, issues regarding the environment and air quality continue to be under scrutiny. The push for more stringent air-quality regulations will impact the warehouse. Electric vehicles will take over as the preferred models in the warehouse, displacing non-electric vehicles in the process. As this evolution occurs, manufacturers of electric rolling stock will respond with higher power, higher efficiency vehicles to facilitate this process.

9. Pace—Anyone with access to an e-tailer web site can now order product, specify their service requirements, pay for their order on-line, and track the order right to their doorstep. For distributors, this means that the pace of distribution must increase significantly to account for the reduced lead times, shorter product lives, increased inventory turnover and greater customer expectations that is considered standard in the modern business-to-business and business-to-consumer marketplace. If a customer places an order today with next-day delivery, a company that picks and ships the order the next day won't be competitive for long. The entire supply chain needs to keep pace, from vendor compliance to information and execution systems in order to support the new economy that the Internet has enabled.

10. People—Success demands a team-based, participatory organizational culture and a total dedication to customer satisfaction. There are many ways to achieve this, ranging from simple solutions such as employee celebration days, employee suggestion programs, and other simple programs to more structured approaches such as revised organizational designs, compensation/incentive/bonus plans, and other processes that directly tie the distribution associates on the floor to satisfied customers.

11. Price—While service and quality are key factors in selecting a distribution partner, for many companies, decisions still comes down to price. Successful past relationships are no longer a good indicator of the future. Modern free enterprise demands efficient, effective and low-cost distribution. Competition is fierce and many low-cost providers will not be here tomorrow as they undercut the market to get short-term volumes at an operating loss. The goal of a successful distribution operation should be to operate within their core values at the lowest cost possible. The path to competitive pricing is to operate efficiently and flexibly at low cost—to offer low prices any other way is inviting failure.

12. Accountability—A successful distribution operation must have accountability. Accountability is made possible by effective leadership, clear communications and efficient systems and equipment to enable productive operations and a fulfilling work environment. Accountability requires that leadership make difficult decisions while maintaining the commitment of the organization. Accountability requires establishing standards, identifying improvement opportunities and measuring performance. Also required is some form of a reward process that answers the inevitable question, "What's in this for me?" Care must be taken that any rewards are tied to something that can be quantified as a true benefit to the organization; rewards without a basis will result in lack of credibility and a process that will ultimately fail.

13. Reverse Logistics—How to handle the products that are coming back into the operation as well as any returnable packaging that must be accounted for on a regular basis is a challenge. The decision on whether to accept the product, whether a refused shipment, an authorized customer return, or an unexpected return must be planned for and communicated with the distribution operation as well as the receiving and handling process for the product or chaos will likely ensue.

14. Third Party Logistics (3PL)—A growing number of companies are turning to 3PL organizations to handle the customer fulfillment portion of their supply chain. Companies that are accustomed to true partnering with customers and suppliers have less trouble migrating to the 3PL world and achieving the potential cost savings. The key steps are to conduct a comprehensive search for the right 3PL vendor, thoroughly review cost proposals and contracts to ensure there is financial benefit, and work with the 3PL to make their operation is a seamless extension of your company. This may involve shared management, integrated execution systems and a unified appearance to partners and customers.

15. Variety—Special packaging, unitizing, pricing, labeling, kitting and delivery requirements are becoming the norm and must be addressed in any distribution plan. These tasks should be designed into the operation, not "tacked on" as a reactive afterthought. Many companies invest large amounts of capital setting up specialized packing or value-added services (VAS) lines with the mandate to gain competitive advantages and in hindsight gain little except increased costs and headaches. A few key questions need to be answered when setting up these operations:

• What is the benefit of the process?
• How will we recoup our investment?
• Can we charge the customer for these services?
• Is it better to outsource this operation?

A simple review process can often provide justification to move forward and establish key design parameters to ensure that any "extra" requirements are integrated into the operation responsibly. Properly planned, these services can be a profit center, providing differentiation in a competitive marketplace while boosting the bottom line at the same time.

Defination of Supply Chain Management

Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology.