Convergence of Physical and Financial Supply Chains: Part One

With global trade and extended multi-tier supply chains, it is imperative that the physical, financial, and information supply chains becoming more well-integrated.

Convergence

_{Figure 1 – Silo’d Global Trade Management}

In the world of global trade, the physical, financial, and information flows and networks are becoming increasingly intertwined. Traditionally, these disciplines have not understood each other’s realms to any significant depth. When supply chains were shorter and more domestic, and more work was done inside the enterprise, companies could get away with limited integration between finance and supply chain. (See Figure 1 — Silo’d Global Trade Management)

Now that supply chains are global, lead times elongated, and supply chain costs up, these functions can no longer exist independently. Financial-Supply Chain convergence requires that supply chain personnel and financial personnel start working more closely. Supply chain and finance functions impact each other profoundly, and have to learn to speak each other’s language. Progressive CFOs should care deeply about supply chain strategy, practices, and execution — such as build-to-order, Just-in-Time, lean initiatives, inventory velocity, and negotiations with suppliers (terms) — because these all have a tremendous impact on cash-to-cash cycle time and working capital. And it’s not just the CFO, but the trade finance banker as well, as banks are getting deeper into supply chain related services and innovative financing arrangements.A case in point, J.P. Morgan Treasury Services recently announced they are hiring 100 supply chain professionals to expand their Global Trade practice.

_{Figure 2 – Integrated Global Trade Management}

Similarly, the VP of Supply Chain needs to learn about working capital management and the impact that their actions have on cash management. Payment and financing processes should be more tightly integrated with inventory, logistics, and procurement processes. (See Figure 2 — Integrated Global Trade Management)

Without this level of integration, processes are sub-optimized, capital is more expensive, and supply chains are slower. Companies managed to get by this way in the old domestic/vertical scenario, but not in the new globalized world.

Receivables Financing and Beyond

Often people think of supply chain finance as leveraging the supplier’s receivables to provide financing. Receivables financing does have a role to play. Each player in the supply chain, from the retailer all the way back to the raw materials supplier, would like to shorten their cash-to-cash cycle time. Some companies, like Dell, have a negative cash-to-cash cycle time, collecting payment from their customers long before they have to pay their suppliers. However, without some type of third party financing, it’s a zero-sum game. Longer payment terms are a win for the buyer, but a loss for the supplier; and the most powerful player usually wins at the expense of others.¹ This is where receivables financing can make a difference. Different forms of receivables financing, such as invoice factoring, have been around for a very long time. More recently, we’ve seen internet-based trading of receivables and other innovations from companies like The Receivables Exchange, Orbian, TradeCard, and others.

Beyond receivables financing, there are many other points earlier in the P.O.-to-settlement cycle where suppliers can benefit from financing. Besides loans to the supplier, financing companies may also choose to outright buy the inventory (at a discount) for a period of time, such as while the inventory is in-transit or from the time it arrives at a VMI hub until it is pulled. In these cases, the financer usually requires some time-bounded firm guarantee of consumption and payment by the buyer.

_{Figure 3 — Types of Supply Chain Financing and Various “Trigger Events”}

One goal of supply chain finance innovations is to gain better leverage of the buyer’s creditworthiness in the earlier stages of the cycle in order to:

Provide access to a lower cost of capital for the supplier
Create liquidity and reduce lead times in the supply chain (e.g. increase velocity by allowing earlier purchase of raw materials by supplier)

Technologies and new types of services can help achieve these in part by providing:

Better visibility into the supplier’s actual performance over time and their current viability, to give lenders higher confidence in the supplier’s ability to perform to the terms of the contract
Authenticated (digitally signed) electronic documentation of events that can be used to trigger payments or transfer of title.

In Part Two of this article, we discuss evolving financial models, in particular the widespread shift from Letter of Credit to Open Account.

Part Three explores some of the implications for technology, network-based platforms, and the opportunities created.

1. Suppliers may offer discounts for early payment, but those arrangements have their own sets of issues.

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