Sophisticated electronics organizations have been optimizing the supply chain for years. Now, as they reach the highest levels of refinement, these same organizations are looking at the final frontier: supply chain finance.
We can identify five phases of supply chain optimization. The first phase is all about optimizing the logistics of increasingly complex and global supply chains. The second phase focused on improving the quality of products and services, and the third phase on innovation. Sustainability has started a fourth phase as companies try to reduce their social and environmental footprint. Following these developments, companies now determine what role they can or should play in financing the supply chain. As a result, a fifth phase of financial optimization has started that will transform the supply chain in the coming years.
Globalization has raised the issue of global sourcing in every industry but at a different speed. Global activities are of all times but the pace of globalization has increased since the 1960s when large, industrial companies conquered the world.
As a result of increased international trade and strong competition in global markets, these companies all take a close look at their value chain. Global sourcing is an integral part of their strategy: Where do we execute which activities considering cost and quality differences around the world? As supply chains become more global and complex the need for supply chain management intensifies.
The financial crisis has started a new phase of supply chain optimization. Despite these developments, they have not yet determined what role they can or should play in financing the supply chain. However, as the physical supply chain grows in sophistication and global reach, there are emerging demands on the financial supply chain.
Since the outbreak of the financial crisis in 2008 this topic is more relevant than ever. Pressures on working capital and long-term finance, as well as the need to reduce risk, all led to a take-up of supply chain finance initiatives. Currently these initiatives focus on working capital solutions such as supply chain finance. Current supply chain finance solutions focus on reducing working capital costs in the supply chain.
From a financial perspective, working capital finance is the oil that makes trade in supply chains possible. The flow of goods and services is reflected in the accounts payables (AP) and accounts receivables (AR) from buyers and suppliers. In it a lot of liquidity is trapped. In a world of suppressed liquidity, companies have been eating into their own cash reserves and take a close look at their working capital needs. Buyers want to pay later, while (international) suppliers want to collect earlier putting supply chains under pressure.
The strongest companies in the supply chain win this battle but it leads to a suboptimal solution from a supply chain perspective. This cannot go on forever and alternative lines of finance are required to fund working capital needs.
For example, supply chain finance has the potential to mitigate these tensions in such a way that both the buyer and supplier benefit. These schemes use the collateral of outstanding debt from large buyer organizations to offer cash flow advantages to suppliers in that companies supply chain. In doing so, it frees up trapped liquidity for both buyers and suppliers.
The supplier gains from lower financing costs based on the creditworthiness of the buyer. The buyer gains from an extension in his Days Payables Outstanding (DPO) and possibly even a decrease in operational risk through better financial health of their strategic partners. As a result working capital is optimized in the supply chain leading to overall lower financing costs.
Benefits on both sides of the trade equation
There are few financial structures that can truly be said to create a win/win for both parties, but supply chain finance is undoubtedly advantageous for both buyers and sellers. For example, buyers find that:
- Their financial supply chain becomes more resilient as key suppliers have greater financial certainty and are therefore in a better position to fulfill orders on time, reducing risk in the buyer's financial supply chain.
- The cost of processing is reduced as the numbers of supplier queries, in-house payments processing and payment fees are reduced.
- Relationships with suppliers are improved, with the potential for achieving better commercial terms without negatively impacting on suppliers.
- A supply chain finance program does not compromise a company's ability to source other forms of financing, and does not impact on its credit rating.
For the supplier, the benefits are comparable:
- Cash flow is predictable, as invoices are settled on time by the buyer's bank. Working capital requirements are therefore reduced and cash flow becomes less constrained. Suppliers may also be able to offer more competitive terms as the cost of late payment does not need to be factored into invoices.
- There is the option to seek early payment as a means of financing. This financing is effectively pre-approved and is not subject to the supplier's financial standing. For companies that could not otherwise source financing, or where the cost would be prohibitive, this can be a major benefit. For those with alternative means of financing, credit lines are released for other purposes.
- Reconciliation, account posting, and management reporting is enhanced as remittance information is provided in a format that can be integrated with internal systems.
Let us know what the benefits you've found in focusing on the financial supply chain.