The Global Financial Supply Chain
Back in September, a really good article materialized over on the Supply Chain Management Review site that complements Aberdeen's recent research brief Get Ahead with Supply Chain Finance: How to Leverage New Solutions for End-to-End Financial Improvement that I wrote about in Supply Chain Finance and their recent report New Strategies for Financial Supply Chain Optimization: Rethinking Financial Practices with Your Suppliers to Maximize Bottom Line Performance that is briefly summarized over on Supply & Demand Chain Executive in their post Supply Chain Finance Techniques Seen Yielding Significant Savings.
In Managing the Financial Supply Chain, Supply Chain Management Review starts off by noting that business leaders need to assess the unintended consequences of their global sourcing and outsourcing strategies beyond direct cost and capital savings since there are impacts to the financial side of the business as well. For example, since plants and equipment are often far more expensive to finance in emerging markets, the capital efficiency of the value chain can be decreased with global sourcing and outsourcing and global sourcing/outsourcing can also weaken control which can affect shareholder value, erode competitiveness, and introduce new business risks such as compliance, complex chargeback management processes, and implicit foreign exchange risks.
Even though today's enterprises are enabled to become "core competency centric with global outsourcing allowing corporations to exist as virtual entities whose brand and CRM are the central value add, the longer lead times, multiple party involvement, added duties and taxes, longer delays, disruptions, and security regulations all complicate financial flows and cash management and leveraging global supply chain visibility to control and optimize the financial flows of a business value chain is essential for the long-term viability of companies that have outsourced manufacturing or are sourcing globally.
Furthermore, global outsourcing complicates the value exchange process, increasing the quantity, velocity, and complexity of inter-enterprise financial transactions while decreasing the number of financial transactions handled within the four walls of the enterprise and reducing the visibility into the timing of payments while introducing a higher degree of risk. In addition postponement, merge-in-transit, and VMI supply chain strategies only complicate the process.
In other words, even though global outsourcing is attractive due to the significantly lower labor costs, lower landed costs of nearby raw materials (due to significantly reduced transportation requirements), and the reduction of fixed assets required by the firm for production, the supplier to which the manufacturing is outsourced usually has a higher cost of capital and a higher equipment acquisition cost, thereby negating some of the savings you had hoped to achieve.
Therefore, it is vitally important, particularly from the financial perspective, to analyze all of the costs associated with an outsourcing decision before committing to a contract and to have a well thought out strategy in place to reduce product costs, enhance overall performance, and insulate the business from unexpected exchange rate fluctuations up front.
For example, the article offers three strategies you can use to lower your suppliers financing costs, and thus your overall total cost of ownership. These are:
- early payment programs
- which will allow your supplier to offer you a discount
- inventory ownership solutions
- which could include logistics services as well
- virtual consignment financing with assignment of proceeds
- where you buy the raw materials with your added leverage and sell them to the supplier at cost
The article also offers some good going forward recommendations that you can use to improve your overall financial supply chain.
- adopt a formal supplier-risk assessment process
- to understand the capital costs and foreign exchange risks embedded in the unit costs
- evaluate payment policies and systems
- to mitigate Sarbanes-Oxley risks and assure that what you're paying for is what you've ordered
- develop collaborative financing solutions
- since earlier visibility can be leveraged to create flexibility around early payment options for suppliers
- ensure inventory-reduction programs eliminate inventory across the total supply chain
- since this reduces costs throughout the supply chain for all parties
- integrate information about the physical flow of goods with the financial flow
- since this allows for financial supply chain optimization