Supply Chain Management Primer: The Financial Supply Chain

The financial aspect of the supply chain is an often-neglected topic when discussing supply chain management. It is left only to the financial department, and everyone else forgets that the whole organization depends on it.

The physical and financial aspects of the supply chain must be integrated to provide a really smooth supply chain management to manufacturers. Managing cash and capital is as important in the equation as managing partner relationships. Thinking of return on investment is important, but so is being careful not to become a cheap (read: low-quality) supply chain. Quality and efficiency must never be compromised.

The smart way to manage the financial supply chain is to get the best quality at the lower possible cost. This requires some specific ability in finance and, most of all, smart thinking and excellent decision making. Then the financial supply chain becomes the spine of a healthy and active organization. It provides the cash needed to ensure everything from keeping lights on in factories and offices and paying employees on time to manufacturing and shipping products smoothly without delays or complications is properly achieved.

How to advance financial SCM
Here are some of the things that must be considered for advancing your organization's financial supply chain management.

The financial department must work closely with the supply chain departments to assist in decision making, budgeting, and capital expenditure planning.

Commodity risk management plays an important role. Globalization brings a rapid expansion in emerging markets. When this is combined with market speculation, it can raise commodity prices, putting individual companies at risk. Manufacturers believe commodity price risk is fundamental to a company's financial performance, but only a few companies manage commodity risk very effectively. Most companies adopt strategies such as procurement contracts and cost reduction to manage their risks. Once again, good communications with the financial department is crucial.

Creating an integrated team combining the expertise and insights of finance and supply chain management is the beginning of dealing effectively with risk management through the application of financial optimization tools and techniques. At this point, supply chain management may want to revisit the organization's enterprise resource planning (ERP) system and evaluate — together with the financial department — the possibility of an update, an upgrade, or choosing an integrated ERP system that is right for the organization. The figure below (from Tutorialspoint) clearly illustrates the difference between a non-integrated ERP system and one in which the financial application works in harmony with the rest.

The financial department may consider the ROI of the investment in an integrated ERP system. However, the solution proves to be cost efficient in the long run. Most importantly, it advances the integration of the financial department with the rest of the organization. All in all, it helps enhance productivity and produce a more efficient and agile supply chain.

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