Defining Supply Chain Finance

Innovations in supply chain technology and financing are used as a competitive advantage by leading organizations today. As a result, the battleground for companies in the electronics industry is their financial supply chain.

In a recent report published by the Aberdeen Group, 69% of companies surveyed are investigating ways of using supply chain finance techniques to lower their end-to-end costs. Supply chain finance is becoming increasingly relevant for the electronics industry outlining the main reasons leading corporations are implementing this solution.

Innovation in the electronics industry
If there is one industry that is changing the world we live in faster than any other, it is electronics. From mobile devices to Internet, from telecommunications to computers, the sector is advancing by huge leaps. One of the largest goods producing sectors in the world, the electronics industry is characterized by a high rate in innovation. It is common to describe these advances with Moore’s law, a term based on the statement by Gordon E. Moore, co-founder and Chairman Emeritus of Intel Corporation: over the history of computing hardware, the number of transistors on integrated circuits doubles approximately every two years.

Similar to the electronics industry, the financial sector — especially trade finance — is on a steep innovation curve as it re-invents solutions to take full advantage of new software technology and financial mechanics, whether for manufacturers or for suppliers to increase the efficiency and liquidity in financial supply chains.

While constantly changing market forces have transformed the industry into the most competitive sector in today's economy, it faces various challenges ranging from short product lifecycles to global multi-sourced supply chains and to rising pressure to create shareholder value. As companies in the electronics industry have increased their scope of sourcing from suppliers overseas their supply chains became geographically more extensive and dynamic than in any other goods-producing sector.

Global sourcing is common with a single product containing work carried out by hundreds of suppliers from multiple countries. In addition, with the move from trading based on letter of credit to open account, the need to reduce the risk of supply chain disruptions and improve the working capital has increased considerably.

Disruptions in global supply chains
Working capital is the oil that makes trade in supply chains possible. When liquidity was cheap and abundant, many companies in the electronics industry became lazy with large amounts of working capital trapped on their balance sheet. However, the situation has changed and, as capital becomes more scarce and expensive companies are looking at their cash-to-cash cycle and for ways to extend their Days Payable Outstanding (DPO).

No company remains untouched. Many corporations have developed complex supply chains over the past few years. With globalization, the ability to maintain the health of their financial supply chains and reduce the risk of disruption is becoming increasingly important. Natural disasters, such as the flooding in Thailand, which posed a particular problem for the hard disk manufacturers have shown how fragile supply chains remain. While physical supply chains are inherently exposed to risks beyond our control, there are successful solutions, which allow corporations to reduce the risk of disruption on the financial side. Such solutions, including supply chain finance improve the company's working capital and reduce the risk of financial disruptions.

Risk management has become particularly important during the financial crisis. Key suppliers were facing difficulties due to lack of liquidity, which in turn had a very negative impact on the electronics manufacturers. The downturn made companies focus on new ways to generate cash. Purchasing organizations were commonly seeking longer payment terms with their suppliers. However, on the other side the suppliers need cash even more than their customers.

The recent financial crisis has accelerated the development of supply chain finance solutions. Numerous companies worldwide have recognized the potential of supply chain finance to help unlock liquidity and improve the health of their financial supply chain. As markets start to ease again, the value of supply chain finance remains undiminished, becoming even greater as conservative credit models and stringent banking regulations makes access to credit more difficult, while optimizing liquidity will remain key to funding future growth.

So, how does supply chain finance work? In a traditional factoring arrangement, it is typical for the supplier to approach the financial institution, even if their credit rating affects the cost of the funding. But with supply chain finance, it is the buying organization that makes the approach. In a nutshell, supply chain finance allows the buying organization to increase its payment terms and at the same allowing its supplier to sell the invoices for upfront cash at a discount to a financial institution.

Unlike factoring, the financing cost or discount in supply chain finance is purely based on the credit rating of the buyer. Therefore, the supplier can benefit from having access to a source of cash flow based on very attractive financing rates. The net result can be a true cost saving in the overall supply chain because the integral cost of funding is reduced.

Once a supply chain finance program is set up, the process consists of a few simple steps. After an invoice is received and approved by the buying organization, it becomes visible in a web-based platform such as OpenSCi operated by PrimeRevenue. The suppliers can than request early payment, either automatically or on an individual invoice basis. A financial institution connected to finance program proceeds with the payment and at invoice due date, the buyer pays the funder.

Today many leading organizations in the electronics industry such as Philips, Dell, Flextronics, and Rexel have implemented such supply chain finance programs. In most cases, their supply chain finance programs were truly game changers and transformed the way of doing business in the supply chain. With more and more successful implementation other companies in the electronic industry now have the opportunity to turn its own supply chain as a competitive advantage.

1 comment on “Defining Supply Chain Finance

  1. Williamson
    March 13, 2014

    Interesting details emerging from the survey. Advanced technologies can help organizations and the industry at large ensure quality products throughout their supply chains, new developments such as this will ease the pressure on the retailer. I work for McGladrey and there's a very informative whitepaper on our website that readers of this article will be interested in. @ Count, manage and move: Warehouse inventory control strategies

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