Increase Competitiveness using Supply Chain Finance
In the April issue of Business Finance Magazine, Beth Enslow of Aberdeen Group penned a great article on How to Create a More Competitive End-to-End Supply Chain using Supply Chain Finance.
According to the article, by merging physical supply-chain information with financial supply-chain data and flexible funding methods, companies are able to not only automate payables and receivables but also to inject much-needed liquidity at various stages of the supply chain.
This gives the buyer the ability to:
- Optimize Working Capital
through inventory reduction and A/P and A/R improvements - Reduce Product Unit Costs
through arbitrage opportunities due to a higher cost of capital for many suppliers - Extra Days Payable Outstanding
often by over 50 days which can improve cash flow by hundreds of millions of dollars or decrease unit costs by five to ten percent
This is enabled by better visibility into order and shipment status and historical performance which allows financial transactions between a supplier and buyer to be assessed, securitized, and sold at a lower credit premium which often allows for an end-to-end reduction in the cost of goods sold. Furthermore, enhanced visibility will give buyers the option to finance at multiple points in the supply chain, including raw material production, intermediate production, point of shipment, customs clearance, and arrival at the vendor-managed inventory hub.
The article also described characteristics of best-in class companies in supply chain finance. These companies are:
- more than three times as likely to use EIPP (electronic payment and presentment) systems as laggard companies
- three times more likely to use an online payment platform with automated-discounting and invoice-reconciliation capabilities
- twice as likely to extend payment terms and take part in an early payment discount program
- more actively involved in using supply-chain financing techniques
In other words, leading companies take advantage of appropriate e-Sourcing and e-Procurement technology to maximize their potential.
I generally agree except for the idea of helping to finance suppliers. If your sights are set on sourcing the world's best suppliers, those suppliers will be able to fund themselves.
Providing funding is appropriate for a joint venture, but not for a supplier who might need to be replaced if it doesn't maintain "global best" status.
Sometimes this request for funding takes the form or a request to use letters of credit so the supplier can get lower interest rates. We (HP) had the same answer. We didn't fund suppliers. We didn't use letters of credit either.
Why wouldn't weak suppliers that sell to strong buyers need financing? That's the aim of Supply Chain Finance.