supply chain management primer

8/8/2019 Supply Chain Management Primer

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Supply Chain Management Primer

What is Supply Chain Management ?

Even among professionals in the industry, there is still confusion between these

concepts. The Council of Supply Chain Management Professionals (CSCMP), formerlyknown as the Council of Logistics Management (CLM), defines it as the process ofplanning, implementing, and controlling the efficient and effective flow and storage ofgoods, services, and related information from the point of origin to the point ofconsumption for the purpose of conforming to customer

The following lengthy, but not all-encompassing, list of business activities and functionalareas comprise supply chain management operations.

Customer service Demand management (forecasting, pricing, customer segmentation) Procurement (purchasing, supplier selection, supplier base rationalization) Inventory management (raw materials, nished goods, MRO3 items) Warehousing and material handling Production planning and control (aggregate planning, workforce scheduling,

factory operations, etc.) Packaging (industrial and consumer) Transportation management Order management Distribution network design (facility location, distribution strategy, etc.)

Product return management

Supply Chain Management as a Basis of Competitive AdvantageSince supply chain management can help firms become more competitive in theirparticular industry, it becomes relevant to examine how it aects each of the fourcommon bases of competition: cost, quality, flexibility, and response time.

In order to increase net income, a company can either try to earn more revenue (oftenquite a difficult task) or lower its operating costs. Effeective supply chain managementcan reduce a firm's operating expenses by eliminating wasteful redundancies andinefficiencies within the chain. Many of the solutions take advantage of technologicalapplications either to execute historically paper transactions electronically or to providemore accurate information for managers to utilize when making decisions.

E-procurement allows purchasing personnel to execute transactions in afraction of the time and for a fraction of the cost that it took them before. This frees themto concentrate the bulk of their day on building supplier relations and monitoring theperformance of existing suppliers .

One of the most obvious cost reduction opportunities lies in the area of inventorymanagement. Better relations and information-sharing with suppliers and customers


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allows a company to reduce the required levels of inventory that flow through thechannel, thus improving the turnover ratios and decreasing the amount of capital thatmust be invested in risky inventory.

Very few companies are entirely vertically integrated {that is, able to perform every actnecessary from extracting the raw materials that are the inputs for the product to

delivering the finished good to the end user's dock. Companies, therefore, must rely onsuppliers, service providers, and distribution channel partners to perform many of thefunctions required to deliver a quality product that meets the customers' increasinglydemanding needs. Cooperation and collaboration among the members in the chain canhelp to reduce the delays that often result in lower levels of customer satisfaction.

Reliable sourcing and collaborative product development helps the firm to producethe product correctly the rst time so that the level of defects decreases without theaddition of costly thorough inspection procedures.

More and more, customers are increasing their demands of vendors for customizedproducts. In some cases the customer is large enough that these requests must be

honored or else the fate of the company is in danger.

The question arises when a company tries to meet the individual demandsof thousands of customers for customizable products. Firms can utilize productiontechniques like mass customization and postponement to improve their flexibility inresponding to specific customer demands. The added demand visibility that effectivesupply chain management provides enables firms to see this data almost in real timeand react to any changes. The customer receives a higher degree of service without theneed for additional inventory investment within the channel.

Many industries have become increasingly dynamic as new technological advancementshave shortened product life cycles for many products to six months or one year. Firms

must be able to cut their product development time so that they can be first to the marketwith the latest technological innovation. Cross-functional teams are now being used toreduce the time that it takes for new products to be designed. The reduction of inventoryin the pipeline makes a firm more nimble in the market. Since the product life cycle is soshort, companies want to carry lean levels of stock so that they reduce the possibility ofobsolescence when the next innovation hits the market. Without the problem of excessinventory, firms are much more eager to introduce new products that threaten tocannibalize the sales of existing ones.


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2.1 Supply Chain Management as an Advantage in Cost

The most visible benefit of integrated supply chain management is a reduction ofoperating costs. Almost every supply chain integration initiative has cost savings as oneof the primary motivating factors. Any savings that can be extracted from supply chainoperations manifest themselves as direct additions to net income (the proverbial \bottomline"). Many opportunities exist for companies to capture low hanging fruit byimplementing supply chain projects because these opportunities were much moredifficult to recognize and capitalize on without the recent technological progress and thebusiness community's endorsement. Some of the techniques and methodologies includeE-procurement and inventory reduction programs.

The main goal of E-procurement is to reduce the transactional (operational) costsinvolved with classic procurement. By moving paper-based transactions to an electronicform, companies can save the costs of expensive three-copy requisitions and mailingexpenses. An important aspect of E- procurement is empowering the employees tomake certain non-strategic purchases (generally MRO items) right from their desktopwithout getting approval from a supervisor. This saves each person time in their workday

and drastically reduces the time that it takes for a requisition to be filled onceit is initially made. It also reduces the likelihood that employees will become frustratedwith the approval process and just purchase the item at an oce supply store. Thismaverick" purchasing costs the company because the employee is not taking advantageof the firm's negotiated rates with suppliers based on its aggregate purchasing power. E-procurement also reduces manual errors in purchase order processing that ultimatelyprovide greater quality of information and reduce the rework expenses. By reducing thetime and eort that it takes employees to make day-to-day purchases, procurementpersonnel are free to concentrate their eorts on strategic activities like managingsupplier relations, working with engineering in cross-functional teams on productdevelopment, and evaluating supplier performance. These value-added activities help toelevate procurement to a strategic-level activity as a source of competitive advantage

Many firms have been able to realize substantial cost savings by engaging in inventoryreduction programs. Swedish furniture manufacturer Ikea had a major problem inmatching production with demand for its goods. After an unsuccessful adoption of anenterprise resourse planning (ERP) system, the firm implemented a new demand-planning decision support system from Manugistics in 2002 that has since resulted in a20% reduction in inventory levels for the products included in the pilot program

2.2 Supply Chain Management as an Advantage in Quality

The quality of a manufactured good is largely dependent upon the raw materials that areutilized in the production process. When a firm has strategic partnerships with itssuppliers, its product development teams can tap into the vast knowledge that itssuppliers have about the materials and components that will be used to produce the newproduct. Suppliers can help the designers determine which of their offerings wouldproduce the best quality nished product. Sun Microsystems director of corporate supplymanagement cites supplier involvement as crucial in the firm's new product developmentprocess.


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Quality is currently being interpreted as not only producing a defect-free product but alsodelivering it to meet the customer's requirement as well. Customers are more demandingthan ever before, and just like suppliers, their input is inseparable from the developmentprocess. The customer must set the standards of acceptable performance along with themanufacturer so that every party can agree on what metrics should be measured andwhat constitutes satisfactory performance

When suppliers also understand the customer requirements, they are generally morewilling to work with the manufacturer to satisfy the ultimate customer. Many suppliersrecognize that they lose business as well if the end customer is not satised, so theystrive to meet the quality and delivery requirements of the manufacturer. Relationshipsbetween all of the parties in the channel are absolutely critical to the competitive positionof all of the companies involved in the product's supply chain .2.3 Supply Chain Management as an Advantage in Flexibility

As discussed above, customers are more demanding now than ever before. Companieshave always dropped everything at the requests of large customers. The loss of any ofthese accounts would be devastating to the corporation, so managers always have done

anything they could to satisfy them. The difference now is that many of the smallercustomers as well are demanding some form of customized product whether it be achoice of color or the ability to design the product specifications themselves. Forecastingat the specific stock-keeping unit (SKU) level has always been much more dicult thanconsidering the aggregated product group. Firms cannot afford to tie up capital inenough inventory of each style and color to meet customers' highly variable demands.These manufacturers must develop exible methods of production in order to respond tocustomer desires. One such production method is mass customization, in which themanufacturer assembles a customized product from mass-produced components.

Buyers think that they are getting a customized product, but they are merely purchasinga standard product with a certain added feature. Mass customization requires several

attributes in order to be successful. The products should be modularly designed, thusfacilitating quick, easy assembly. Companies need to have a sophisticated ordermanagement information system that can capture customer profiles, accommodate alarge volume of wide-ranging orders, and retain every minute detail about each order.Real-time inventory levels and lead time information become critical so that theassembly operation can determine if it has enough components in order to meet theproduction schedule .

Supplier relationships again become especially important here regarding current leadtime information. Postponement, also known as delayed differentiation, is the delay ofthe final identity of the product until the last possible moment. This allows for productionof base units to be made according to aggregate forecasts, which are more accurate

than those for a specific SKU. The costs are postponed until the goods are actuallyassembled, and the manufacturing operation is able to reduce the risk of obsolescenceand produce the exact product that a customer demands.

Thus, postponement practices can be used to combat demand uncertainties that areunable to be forecast.

Hewlett-Packard has used mass customization with postponement in its European


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distribution center (DC) to reduce stockouts for its printers. Production facilitiesmanufacture generic printers which are customized for individual international markets atthe DC only after firm orders from customers have been received. This strategy hassimultaneously resulted in higher service levels, inventory reductions, and increasedprfitability. Dell, Gateway, Titleist, John Deere, Black & Decker, and Motorola are moreexamples of companies currently utilizing mass customization techniques.

A related supply chain strategy that some firms have utilized to establish a competitiveadvantage is flexible manufacturing. Many production facilities have dedicatedmanufacturing and assembly operations that can take hours or even days to changeover to the production of another product. Firms that are able to design theirmanufacturing operations so that they can produce multiple products can more-effectively tailor their production runs to actual customer demand.

2.4 Supply Chain Management as an Advantage in Response Time

Flexibility and response time are inseparable in practice. Most companies can do almostanything if they have a year with which to work. Flexibility in the current business sense

is not measured in years but in days and possibly hours. In order to be truly deemedflexible a firm must be able to respond quickly to changes in customer requirements.Inventory must be able to be acquired in a short period of time if the production schedulemust be adjusted to meet unexpected demand.

Speed is crucial in today's business environment. With many product life cycles beingone year or less in length, companies must look for ways to develop their productsquickly and get them to market to meet the customers' current needs before theircompetitors can. Supported by supply chain management's focus on the organization(and the chain) as a whole instead of as functional silos, many companies haveintroduced cross-functional teams into their design process. These teams includerepresentatives from engineering, purchasing, Finance, marketing, operations, and

strategic suppliers and customers. With input from the experts in all of these functionalareas, the team can design a feasible finished product in much less time that before.

This technique almost eliminates the need for engineering redesign when purchasinglooks at the specs and says that it cannot procure the appropriate materials at theprojected cost or when operations explains that the die exchange time would be toolong. With real-time input from all of these entities, engineering can draft a design thatsatises each party without the need for countless drafts.

Response time is especially important in service supply chains, where a service delay orinterruption could cost the customer thousands of dollars per minute

3 Challenges to Supply Chain Integration

The previous section highlighted many advantages of effective supply chainmanagement initiatives. The truth is that while many companies have benefitted fromrecalibrating a portion of their supply chains, very few, if any, supply chains are fullyintegrated throughout the entire channel. Consequently, these firms have failed toexperience all of the benefits of supply chain management.


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Two major challenges to supply chain integration:Global optimalityManaging uncertainty.

Traditional supply chain strategies have sought to improve a specific piece of the supplychain, such as transportation cost reduction or increased capacity utilization, without

regard to its effect on the total system performance.

Effective supply chain managers must balance many competing costs and performancemetrics. Decision makers in a fully-integrated channel must consider global optimality byimproving the performance of the entire supply chain, which can encompass manydisparate firms. Even though the potential benefits are great, many decision makers arereluctant to sacrifice their firm's short-term profit for the long-term benefit of the entirechannel. The metrics that evaluate supply chain decisions must be modified toencompass this broader objective.

Uncertainty affects practically all of the decisions made within the supply chain. Theseare not simply those decisions based on customer demand, but supplier and

intermediary performances are uncertain as well. The effects of uncertainty can bedampened by the availability and exchange of information throughout all levels of thesupply chain. Working more closely with suppliers, customers, and intermediariesenables each entity to understand the others' operations and incentives so that contractsand agreements can be designed and managed to make the entire supply chain operatemore predictably.

4 Summary

Supply chain management provides enormous opportunities for all companies toimprove their competitiveness. No matter how many strides a rm may have made in the

last two decades, many more opportunities still exist because no one has yet gured outhow to manage the entire supply chain completely. Even small companies with arelatively simple operation can find ways to improve their market position with supplychain techniques. The main thing to remember in any supply chain initiative is theimportance of strategic relationships and partnerships with suppliers and customers.

None of these techniques will work without support from all of the players in thechain. The information needed to utilize the systems will not be available without thecooperation of suppliers and customers. The biggest challenge facing executives andmanagers is the difficulty in getting all of the parties in the chain to make decisionsbased on what is best for everyone involved rather than on what is best for eachindividual organization. This shift in mentality is critical as competition ceases to bebetween businesses but moves toward being between supply chains.


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Supply Chain FinanceSupply Chain FinanceSupply Chain FinanceSupply Chain Finance

IntroductionIntroductionIntroductionIntroductionSupply Chain Finance is the optimization of both the availability and cost ofcapital within a buyer-centric supply chain. The availability and cost of capital isusually optimized through the aggregation, integration, packaging, and utilizationof all of the relevant information generated in the supply chain in conjunction withcost analysis, cost management, and various supply chain finance strategies.

A Supply Chain Finance Solution, in comparison, is a combination of tradefinancing provided by a financial institution, a third-party vendor, or an enterpriseitself, and a technology platform that unites the trading partners and the financingpartners electronically and provides visibility into the various supply chain eventsthat can serve as financing triggers. (These include the issuance of the purchaseorder, work in progress payments, Vendor Managed Inventory or VMI, inventoryin transit, proof of delivery via Forwarder Cargo Receipt (FCR), and invoiceapproval by the buyer.)

Supply Chain Finance is not a new concept. "For decades -- maybe centuries, indeveloped economies -- supply chain finance has existed in various forms. In the

past, the most basic legitimate form of supply chain finance on the payables sidewas called factoring. Factoring is essentially a loan-shark arrangement where afinancial institution or third party buys receivables from a supplier at somematerial -- read: often outrageous -- discount relative to the face value of the

obligation." (Jason Busch, Live Dispatch: Ariva and Orbian Partner to Take onthe Banks, Spend Matters)

However, it's a lot more than just factoring, early payment discounting, orinventory shifting. It's balancing credit, financing options, inventory management,and other supply chain variables to optimize working capital, and much more.Supply Chain Finance is gaining in importance for a number of reasons. Whenone combines downward cost pressures with steadily increasing raw material,energy, and labor costs globally, total cost of ownership strategic sourcing is nolonger enough. Companies need to wring as much value out of their workingcapital as they can, especially in a market where many large corporations are

moving away from physical assets to mostly working capital. Moreover, in theirrush to implement low cost country sourcing programs, many companies haveimplemented non-optimal global sourcing and outsourcing programs that areplagued with one or more unintended consequences which often remain hiddenuntil the programs, and fundamental strategies, are examined from a SupplyChain Finance perspective. Given that 73% of large corporations are looking toextend payment terms with their suppliers in 2007, preferably without negatively


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impacting the supply base, Supply Chain Finance is a great place to start.(Statistic from the recent Demica study.)

Supply Chain Finance is effective. According to a Hackett study, 1000 of thelargest US Companies were able to free up $72B in 2005 by reducing working

capital requirements through "improvements in collecting bills, turning overinventory and stretching out the amount of time they take to pay their ownsuppliers". Improvements in bill collection, days payable outstanding, andinventory turnover barely scratch the surface of what supply chain finance is orwhat it can do for an enterprise.

Furthermore, Aberdeen has found that Best-In-Class companies in supply chainfinance, who are six times more likely to have gained a competitive advantage,are able to process twice as much volume (measured as annual dollar turnover)and three times as many invoices.

To get the maximum benefit from Supply Chain Finance strategies and solutions,a company will require a significant amount of technological capabilities. It willrequire e-Procurement and e-Payment software to send purchase orders, trackgood receipts, receive invoices, and automate the settlement processes to thegreatest extent possible. It requires inventory management and tracking solutionsto appropriately track and manage inventory throughout the supply chain. Itrequires collaboration and event tracking software to track supply chain eventsand permit early detection and resolution of potential problems. It requires cashflow management and modeling tools to make sure the right financial decisionsare being made at each stage of the chain. And all of this technology needs to beintegrated. For example, information relating to transactions and payments needsto flow from the company's e-Procurement and e-Payment systems automaticallyinto a company's accounts receivable (A/R) and accounts payable (A/P) systemsand then, ultimately, into it's cash flow modeling and working capital optimizationtools.

Parties InvolvedParties InvolvedParties InvolvedParties Involved

There are four primary types of players in supply chain finance. There is thebuyer, the supplier, the technology provider, and the financing institution.Buyers are the primary drivers of supply chain finance. As the builder of brands,

and associated advertising campaigns, they are largely responsible for shapingconsumer demand for the products they wish to sell. They're also the first in thechain to feel the pressure to reduce costs in a market where raw material priceskeep rising but consumers expect prices to keep falling in the Walmart Rollbackera.

Suppliers need good supply chain finance the most. As the company thatmanufacturers the goods, they not only feel the current increases in raw material,


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energy, and labor costs the most, but traditionally hurt the most since they needto bear the brunt of the cost and typically go the longest between the initial outlayfor raw materials, overhead, and labor and the day they finally get paid forproducing the product.

Technology Providers are the enablers of supply chain finance. They provide thetechnology that connects all of parties together, and enables the visibility andcommunication required to support modern supply chain finance strategies.Financing institutions play the role of lender in supply chain finance and offervarious types of financing, including Global Asset Based Lending (GABL),inventory financing, and insurance, and may offer payables discounting andreceivables management services.

BenefitsBenefitsBenefitsBenefits

This section discusses the benefits to buyers, suppliers, and both parties.To Buyers and Suppliers

The great thing about supply chain finance is that, when done right, it benefits parties all

along the supply chain. The benefits described in this section, divided into financial,automation, and general categories, apply to buyers and sellers alike.

Financial

Supply Chain Finance brings a host of financial benefits to the supply chain. Most ofthese cannot be obtained through more traditional methods, or at least not to the same

degree that Supply Chain Finance enables them.

Lower End-To-End CostsThe primary benefit is lower end-to-end supply chain costs. By automating most of the

transactions, including approvals and payments when multi-way matching between

purchase orders, good receipts, invoices, and contracts lead to non-disputed invoices,supply chain finance removes a lot of manual processing, and its associated

administrative overhead and transaction costs from the chain for all affected parties. This

results in an instant cost reduction.

Unit Cost Reduction

Proper Supply Chain Finance, unlike basic sourcing, inventory shifting, or early

discounting, actually takes cost out of the chain instead of just squeezing profit margins

or shifting cost from a buyer to a supplier.

Shorter Cash-To-Cash Cycles


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By automating transactions and enabling third party financing at various points of the

supply chain through additional event-based visibility, cash-to-cash cycles can be

converted for buyers and suppliers alike. This can substantially reduce costs of financingand, thus, overhead costs.

Increased Cost Transparency

Effective Supply Chain Finance programs not only point where the costs are, but what

they are for. This allows an organization to compare its cost to market averages and

increase focus on the areas of the supply chain that are truly ineffective from a costperspective. No more guessing.

Reduced Cash Flow Uncertainty

With appropriate Supply Chain Finance solutions, buyers know what they owe, to who,

when, and for how much as soon as the invoice is created and suppliers know when they

are going to be paid, how much, and what opportunities they have for discounted earlypayments or third party financing and how much it will cost.

Working Capital Optimization

When a holistic Supply Chain Finance program is put in place, and all areas that impact

the supply chain appropriately aligned and connected, for the first time an organization,with the proper tools, can truly being to optimize its working capital. No more excessive

hoarding of cash or borrowing to hedge against the unknown.

Through the enhanced visibility and collaboration that results from a sound supply chainfinance program, as discussed in later sections, treasurers will have direct knowledge of

sourcing strategies, payment terms, seasonal variations, and transport methods and this

will allow them to plan cash requirements with greater precision and take advantage ofmore investment opportunities.

Automation

Supply Chain Finance brings a host of automation benefits to the supply chain. Although

many of these can be obtained through more traditional supply chain technology

solutions such as e-Procurement, e-Payment, and inventory management, the benefits aregreatly enhanced when these traditional technology solutions are integrated into a Supply

Chain Finance Framework.

Reduced Paper

Automating the processing and payment of purchase orders, goods receipts, and invoices

when there are no discrepancies in a multi-way match considerably reduces the amountof paper that must be manually processed.

Minimization of Data Errors


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Every time something is manually entered, and re-entered, another opportunity for human

error creeps in. Since human error is usually the major cause of discrepancies, that only

results in considerable man hours being invested to clear up the confusion, it's easy to seehow improved automation can substantially reduce data errors.

Reduced Transaction Processing Time

Automation allows non-disputed transactions to be processed in a seconds, not minutes,

hours, or days.

Faster Dispute Management

Since discrepancies are brought to light faster, as well as their root causes, they can beclarified and resolved much faster using automation-enabled Supply Chain Finance

solutions than they could be resolved using purely manual methods.

Increased Inventory Visibility

Automation, and the increased visibility that it offers, allows you to query where yourinventory is at any time. It enables an organization to instantly know when it hits a

checkpoint, clears customs, and changes ownership.

General

The increased supply chain visibility enabled by good Supply Chain Finance solutions

lead to more than just the automation and financial benefits discussed in the previoussections. This section overviews some of the additional benefits Supply Chain Finance

solutions enable.

Improved Agility

With an integrated end-to-end Supply Chain Solution, an organization can more quickly

respond to demand changes, transportation delays, production short-falls, and unexpectedchanges in cash-flow.

Increased Analytics Capability

The additional data made available through end-to-end Supply Chain Solutions enables

additional analytics. This allows for the continual refinement of demand forecasts,inventory optimization, and working capital plans.

Enhanced Productivity

Supply Chain Finance reduces the amount of time an organization needs to spend on

tactical manual processes such as invoice approval, payment, and data collection, and


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frees up an organization's resources to spend their time on more strategic activities. This

allows for a significant leap in productivity.

Improved Customer Service

Less time on manual transaction processing, better demand forecasting, and improvedproductivity will allow any organization to make great strides in its customer service.

Improved Supply Chain Reliability

Having timely information on a regular basis naturally leads to improved supply chain

reliability. An organization knows where it's inventory is, what its suppliers are working

on, and if they are currently experiencing problems that could lead to a slow down. Iteven allows parties to work together to detect, and resolve, potential problems before

they appear.

To Buyers

In addition to all of the benefits outlined in the previous section, Supply Chain Financealso brings some specific benefits to buyers that can not be achieved through more

traditional supply chain improvement programs.

Off-Balance Sheet Financing

Knowing precisely where inventory is at any given time allows a buyer to securitize it's

assets and obtain off-balance sheet financing using a number of different options thatmight include early receivables programs (where a buyer can ensure early receivable

payments to its supplier for as little as 0.5% to 2.0% per annum against non-disputed

invoices), toll manufacturing and netting programs (where off-trade positions betweenOriginal Equipment Manufacturers (OEMs) and Contract Manufacturers are netted), and

inventory financing programs (using consignment). This allows it to obtain additional

capital at low cast without negatively impacting its balance sheet.

Increased Supplier Interest

A buyer with a strong supply chain finance program becomes considerably moreattractive to a supplier than the average buyer since most suppliers are constantly in a

capital crunch in a market where the average buyer is trying to improve their financial

position at the supplier's expense by increasing Days-Payable-Outstanding (DPO) terms.More Days-Payable-Outstanding flexibility

By enabling a multitude of financing options for it and its suppliers, the buyer has a lot

more control over its DPO options and the cost associated with each option.

More Control Over The Procure-To-Pay Cycle


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An integrated Supply Chain Finance solution gives the buyer more control over the

Procure-to-Pay procedure than a traditional e-Procurement, EIPP (Electronic Invoice

Presentation & Payment), or P2P (Procure-To-Pay) solution which does not take thebroader financial picture into account.

In addition, properly managed supply chain finance will help a company treat its payablesas an asset. In some cases, this will mean trading on their credit to reduce the amount of

cash they need today to pay their suppliers. In others, it might be using a dynamic bid/ask

marketplace that offers early payment discounts down to the specific day that the supplier

wants to get paid.

To Suppliers

The great thing about Supply Chain Finance is that, when done properly, it provides as

much advantage to the supplier as it does to the buyer, which truly allows costs to be

taken out of the chain without unreasonably impacting profit margins or shifting costs to

the parties least capable of bearing them.

Below Market Financing Rates

A good SCF solution, by increasing visibility into supply chain events throughout the

chain, gives the supplier the ability to leverage the buyer's credit rating against their

receivables. This is an enormous benefit to a supplier whose normal cost of short-termfinancing is 20% to 40% when their buyer has a much lower cost of capital, often under

12%.

Reduced Cash Flow Uncertainty

If a supplier does not know that a payment will be late(r than expected) until the paymentfails to materialize on the expected date, the supplier could end up scrambling for cash

and be forced to accept very costly short-term capital financing (in the 20% to 40%

range). This will ultimately drive up the cost of the products they make by a significant

amount. A good SCF solution allows the supplier to see posted payables, with thepayment date, as soon as they are posted.

On-Demand Access to Funding and Financing

A good Supply Chain Finance Solution will include an on-demand software-as-a-service

payment or intermediation platform that will connect all parties, buyers, suppliers, andlenders, together in a manner that will allow suppliers to instantly take available of the

low(er)-cost lending options available to them (as enabled or co-negotiated by the buyer)

at any time.

More Days-Sales-Outstanding Flexibility


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The supplier now has much greater control over it's Days-Sales-Outstanding as it can

choose to convert receivables from the time the invoice is approved until the maturity

date into cash using early payment discounts from the buyer or through low-cost sales ofsuch receivables to third party lenders.

Strategies for Success

This section overviews a number of supply chain finance strategies that anyone can use to

improve the cost of the capital used by their business. It also points out some additional

strategies for success that are specific to buyers and sellers as a lead in to the followingsections that outline a methodology that buyers and sellers can use to establish and take

full advantage of supply chain finance programs.

When you consider that global sourcing and outsourcing considerably complicates the

value exchange process, Supply Chain Finance quickly rises in importance. As such, its

important to have solid strategies from day one, lest you select the wrong ones and

instead of seeding success find failure down the road instead.

Balance Open Accounts and Letters of Credit

It's important to understand an organization's cost of capital versus the supplier's cost of

capital. Open account terms, for example, may bear lower fees than a letter-of-credit

based transaction, but they can also restrict a seller's access to working capital financingand increase its costs of working capital. The additional cost borne by the supplier for

accepting extended payment terms, for example, could be finding their way back into the

cost of goods. Treasurers and procurement staff should determine which party has thelower financing costs and greater access to capital, and payment terms should take this

discrepancy into account. Furthermore, today's technology is steadily blurring the lines

between 'pure' letters of credits (LCs) and open account transactions. As the platformsbecome more sophisticated, automated, and flexible, users will be able to pick and choose

the best features from the two payment methods, specific to the situation at hand.

Letters of Credit (LCs) are a traditional risk mitigation tool for suppliers, but they come

with costs. Some of those costs are financial, such as higher financing charges for thebuyer. Other costs are operational and may not show up on typical financial reports. For

example, returns for credit are usually impossible when using LCs. There is also the

considerable cost and complexity of processing change orders through a LC system inparallel to the procurement system.

However, open accounts have their costs too. Although much less expensive for thebuyer, they can be much more costly for the supplier who may not be able to leverage

them when short term financing is required. However, a buying company must carefully

consider whether they want to help finance a supplier. This is particularly true when the

buying company is only a small fraction of a supplier's total sales. How does the buyerknow the costs of using LCs will be reflected in the price that particular buyer pays?

More, And Better, Financing Options


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Identify and enable financing for you and your suppliers at multiple points in the supply

chain, including raw material production, intermediate production, point of shipment,

customs clearance, and arrival at a Vendor-Manged Inventory (VMI) hub. This will allowyou, as a buyer, to select the right financing vehicle at the right time to minimize your

cost of capital.

More specifically, you should have three or more of the following available to you: low-

cost line of credit from a bank from which you have an established relationship, third

party financing opportunities at various points in the supply chain where inventory could

shift ownership, factoring, trade receivables securitization, and, providing it is not moredisadvantageous to the supplier than other financing options, early payment discounts.

Also look for off-balance sheet supply chain finance, which is often cheaper than junior

debt. This can position the buyer as a partner and low-cost customer to a supplier whocan get paid faster through this arrangement. A number of different options for off-

balance sheet programs exist in the marketplace, including early receivables programs

where a buyer can ensure early receivable payments to the supplier for as little as 0.5% to

2.0% per annum against non-disputed invoices, toll manufacturing and netting programswhere off-trade positions between Original Equipment Manufacturers (OEMs) and

Contract Manufacturers are netted, and inventory financing programs using consignment.Improve Forecast Accuracy

One of the best ways to take cost out of the supply chain is to take unnecessary inventory

out of the chain, as this just leads to additional storage, overhead, and financing costs andlosses when it has to be cleared at considerable markdowns.

Inventory Optimization

Optimize inventory management across the supply chain. This involves reducing total

supply chain costs and lead times, not just inventory shifting onto a supplier. Also, when

considering whether or not to (temporarily) transfer control to a third party duringshipment (possibly using consignment), make sure to include the additional customs fees,

excise fees, and taxes that could result. Look for free trade zones, secure trade zones, and

free trade agreements that could reduce not only these fees, but fees in general if goods

are simply being shipped through a country to their final destination.When attempting to optimize inventory, consider segmenting customer channels and

products which can allow for more accurate forecasting and faster response times,

leading to a higher return on assets and reduced stock-outs in response to demandchanges.

Lower Your Supplier's Cost

A recent Aberdeenbenchmark report found that 39% of suppliers indicated that their top

issue is their ability to access financing at acceptable terms. The more it costs a supplier

to make a product, the more it will cost a buyer to buy it. Therefore, any strategies thatreduce a supplier's cost of production or operation should be strongly considered and

employed. After all, when faced with increased risk, suppliers are more likely to shorten


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payment terms, raise prices, or limit product availability, all of which ultimately drives up

product, and supply chain, cost. Some specific programs that may be beneficial are:

Early Payment Programs

To make a product, a supplier needs to acquire raw materials, pay its employees, andmaintain it's plant and equipment. This adds up. If there is a significant time lag between

when the supplier needs to acquire the raw material and when a buyer finally pays for a

finished product, the supplier will have to draw financing, which can be costly if they are

a small or mid-sized supplier without a lot of leverage and access to cheap capital. Thus,paying early will reduce the supplier's cost of capital, the markup they need to charge to

make a profit, and, ultimately, the buyer's price.

Inventory Ownership Solutions

Consider engaging a third party who will buy, and take ownership of, the product from

the supplier as soon as it is finished and then sell it to you on a Just-In-Time (JIT) basis.Although the third party would charge a mark-up for their services, if the cost is

considerably less than the combined inventory and financing cost to the supplier, thesupplier would be able to lower their price considerably, which would still result in a

lower price to the buyer even after the third-party mark-up costs. (On average, an

inventory management company is likely to have more space, financing leverage, and

inventory management expertise and, thus, a significantly lower storage cost than asupplier.)

Virtual Consignment Financing

If a buyer is considerably larger than a supplier, and especially if the buyer needs a

considerable amount of a certain raw-material across its supply base, the buyer couldconsider using its added leverage to buy the raw materials itself and then sell them back

to the supplier at its cost. If the buyer's annual needs were, say, five or ten times that of

the supplier, one could see the potential for significant volume-based discounts. Also,

when this strategy is combined with early payment (i.e. instead of selling the product tothe supplier, the buyer simply trades it to the supplier and deducts the raw material cost

from the cost of the finished good at purchase time), this can often enable a supplier to

significantly reduce unit costs.

Innovative, Collaborative, MindSet

Supply Chain finance requires the collaboration of multiple parties to succeed.

Furthermore, it requires an innovative mindset as many of the best solutions will be

relatively non-traditional solutions compared to the non-collaborative silo solutions

traditionally employed by many business units. Practitioners must be prepared to embracenew ways of doing business in order to achieve the full value that is there for the taking.

It takes more than just "thinking outside the box". It takes a commitment, and a drive, to

continually innovate the business to the next level.


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Align Purchasing, Engineering, and Finance

Purchasing, which includes logistics for the purpose of this wiki, is responsible for manyof the payables that end up in accounts payable. Engineering, responsible for New

Product Design (NPD), is responsible for much of the product cost, baking in up to 80%

of the costs in the design phase. Finance is responsible for making the paymentsgenerated by Purchasing and generating the reports necessary to comply with federal

regulations, such as Sarbanes-Oxley. Thus, in order to reduce operating costs and

optimize working capital, all units need to work in unison.

Create a Cross-Functional Team

Aligning purchasing, engineering, and finance is a great start - but it's not enough. Totruly succeed, each of these units will need to work together on a daily basis. This will

require a cross-functional team whose driving goal is to optimize costs across the supply

chain while not only preserving, but increasing value to all parties. This will include

increasing quality, reliability of delivery, and reducing risk as well.

Employ Capital and Cash Management Tools

Be sure to make heavy use of automation. Manually-intensive financial transaction and

trade document processing leads to long processing times, poor visibility, and high

transaction costs. Well designed e-Procurement and e-Payment systems can perform 2-way and 3-way matching and automate routine transactions within pre-defined contracts

and tolerances.

Also, be sure to take currency issues into account. Transaction fees, volatility of dollar-

based invoices versus a domestic currency, and fluctuating exchange rates can complicate

otherwise well thought-out plans.

Strategies for Failure

As with any other endeavor, if done improperly, or non-commitally, it is possible to fail -and in the case of supply chain finance, fail spectacularly, especially if an organization

uses one of these unfortunately all-too-common examples of supply chain finance.

Shifting Inventory to Suppliers

With increasing costs across the board and little or no room to increase prices, companiesare scrambling for new ways to increase profits. This has resulted in many companies

scrambling to find new ways to reduce inventory and reduce one of the biggest costs on

their balance sheets - inventory carrying charges. Unfortunately, many of these

companies have chosen the unenlightened solution of simply delaying purchases until thelast minute, which forces their suppliers, who are often ill-equipped to do so, to hold the

inventory instead. Considering that most suppliers have to wait an unduly long time

between their initial cost outlay to make a product and the eventual payment for that


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product in an environment where many buyers are now demanding payment terms that

include 60, 90, or even 120 Days-Payable-Outstanding (DPO) and that most do not have

large storage facilities or inventory management expertise, this drives up their costs fromall angles. Their financing charges go through the roof as they have to take out more

high-cost short-term financing, often at rates of 20% to 40% per annum (which are

especially common in developing economies), their costs of operation go through theroof as they have to either acquire additional assets or pay a third party to manage the

inventory, and their opportunity costs rise as they are prevented from ramping up

production, due to lack of funds and storage, on New Product Development that could

ultimately prove more profitable to them, and the buyer.

Increasing Days Payable Outstanding

One of the the primary actions that buyers who are new to supply chain finance take is to

extend payment terms for their suppliers, which often have constricted access to short-

term financing with a significantly higher cost of capital. This cost-shifting to suppliers

might result in better Days-Payable-Outstanding (DPO) statistics to the buyer in the shortterm, but ultimately results in a less financially stable, and thus higher-risk supply base,

and, eventually, an overall higher cost of goods sold versus competitors who havemastered sound SCF practices.

Strapped for cash, and lacking adequate access to affordable capital, these suppliers may

be forced to delay raw material ordering, squeeze work-in-process inventories, or skimpon plant maintenance or quality processes. Each of these options negatively impacts the

buyer's return on investment and could lead to significant supply shortages, especially if

demand spikes.

Mistaking Early Payment Discounts and Factoring for Financing Options

Early payment discount programs, regular or automated, do not address the root causes of

financial flow inefficiency and can in fact exacerbate the underlying drivers. Instead of

shifting inventory to a supplier, you're essentially shifting costs and this often results in

cost increases, rather than cost reductions, across the supply chain.

Buyer SCF Program Implementation

This section overviews some steps a buyer could take in defining and implementing a

Supply Chain Finance program.

Align Purchasing, Engineering, and Finance

Consistent with the strategies for success, the first thing a buyer should do is be sure to

align the various business units within its organization around the common goal ofimproving operations across the supply chain within and beyond the four walls of the

company.


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Once the different business units are aligned along the common goal of improving supplyacross the supply chain, the next thing to do is to form a cross functional team that will

lead, monitor, maintain, and improve the initiatives on a going-forward basis.

Adopt a Formal (Supplier) Risk Assessment Process

It's important to understand the capital costs and foreign exchange risks embedded in

every purchase from your perspective and from your supplier's perspective. As a buyer,be sure to assess key pressure points for your suppliers that are important for their

business continuity. Negotiating ten million dollars worth of savings will not do your

organization much good if the supplier goes bankrupt three months into the contract.

Holistically Evaluate Payment Policies and Systems

In addition to the impact on your company, make sure to assess the impact of yourpayment policies on your borrowing base, credit, existing banking relationships, and

suppliers and whether or not they buffer your organization from credit rating changes.Also be sure that they mitigate any potential risks from accounting and reporting acts

such as Sarbanes-Oxley.

Identify IT Deficiencies and Integration Challenges

According to a recent Aberdeen brief (Get Ahead with Supply Chain finance), an

astounding 90% of enterprises reported that their global supply chain technology isinadequate to provide the corporate finance function with the timely information it

requires. It's vital to identify your needs up front to make sure the right technology is

selected and the integration requirements addressed before implementation, andintegration, begins.

Set Up an Automated Payment Process

Whether you use or extend your current e-Procurement, EIPP (Electronic Invoice

Presentation & Payment), or P2P (Procure-to-Pay) system or bring in a new e-Payment

system for the purpose, it is important to set-up, by way of business defined rules, anautomated payment process that will perform automatic multi-way matching between

purchase orders (cut off of contracts where they exist and current catalog quoted prices

where they do not), goods receipts, and invoices and automatic scheduling of payments(using contracted terms or standard terms where contracts do not exist) where there are

no discrepancies that would be cause for a dispute. This will seriously reduce the amount

of manual processing required and allow the organization to set up an early payment

discount program.

Integrate Financial And Physical Supply Chain Processes


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In order to truly optimize your supply chain, your costs of operation, and your working

capital, physical and financial supply chain processes have to be synched.

Identify Collaborative Solutions To Inventory, Cost, and Risk Management

Traditionally supply chain operating managers hedge by holding more inventory, but thissimply results in higher working capital. Insure that the inventory-reduction programs

truly eliminate inventory across the supply chain. Simply shifting responsibility does not

reduce costs and, if shifted to the wrong party, can significantly increase costs across the

supply chain.

Determine the Breadth of Changes to Internal Processes, Roles, and Responsibilities

that Will Be Required

The recent study The Growing Role of Supply Chain Finance in a Changing World by

Demica found that the largest hurdle for a buyer in the identification and adoption of a

supply chain finance program is "the perceived need to change internal processes".Although this need is likely real, it's more than a necessary-evil. There's always room for

improvement, and making process changes that will improve not only your productivitybut operational costs is always a good thing, as long as they are well planned and the

necessary change management identified up front.

Implement Collaborative Processes Across the Supply Chain

This will enable early visibility into supply chain events that can be leveraged to create

flexibility around third party financing and early payment options for your supplierswhen needed. Enhanced visibility gives a buyer the ability to finance at multiple points in

the supply chain, including raw material production, intermediate production, initial

shipment, inventory holding, customs clearance, and arrival at a local vendor-managed(or third party) inventory hub.

Actively Monitor New SCF Offerings for Additional Advantages

Supply Chain Finance is a relatively new pursuit and not a lot of vendors have solutions

that are specifically targeted at Supply Chain Finance yet. Furthermore, most of the

solutions are new and not very extensive. Thus, as time goes on, the footprint andcapability of these solutions will expand. Therefore, it is important to regularly evaluate

new technologies as they become available on the marketplace to see if they are able to

provide the organization with new capabilities or benefits that could result in a lower costof ownership or help the organization remove additional costs from the supply chain.

Supplier SCF Program Success

Align Sales, Engineering, and Finance


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Consistent with the strategies for success, the first thing a supplier should do is be sure to

align the various business units within its organization around the common goal of

improving operations and working with its buyers to do just that.


Once the different business units are aligned along the common goal of improving

production and supply chain operations, the next thing to do is to form a cross functional

team that will lead, monitor, maintain, and improve the initiatives on a going-forward

basis.

Adopt a Formal Risk Assessment Process

It's important to understand the operational and production risks inherent in every

contract and production run as a supplier. Be sure to understand the costs associated with

each production run from a raw material, labor, operational, and financing perspective

and the financial risks these costs carry if payment is not received in a certain time frame.Also understand any risks to production from a potential raw material or energy shortage

or price hike.

Communicate Risks to Production and Inventory Caused By Cash Flow Barriers

Once you understand the risks you face, be sure to clearly communicate these risks tobuyers, and focus on the risks that the buyer's policies impact in particular, which include

the financial risks to your operations and their production runs that are caused by either

their inability or unwillingness to pay within a certain period of time.

Routinely Evaluate Your Various Financing Options

If the buyer is concerned about the health of their supply chain, they should be willing to

work with their suppliers to jointly set up financing options that will include their existing

banking relationships as well as yours, third party financing providers, and early payment

discounts if they have a relatively good cash situation. As a supplier, you should evaluateeach of these options on a regular basis to make sure you always get the best deal when

you secure financing either for the short term or the long term.

Identify IT Deficiencies and Integration Challenges

According to a recent Aberdeen brief (Get Ahead with Supply Chain finance), anastounding 90% of enterprises reported that their global supply chain technology is

inadequate to provide the corporate finance function with the timely information it

requires. It's vital to identify your needs up front to make sure the right technology is

selected and the integration requirements addressed before implementation, andintegration, begins.


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Automate the Invoice Process Whether you use or extend your current e-Procurement,

EIPP (Electronic Invoice Presentation & Payment), or CRM (Customer Relationship

Management) system, it is important to set-up a system that automatically invoices thecustomer against defined contract terms when a shipment is initiated. This will reduce the

amount of manual processing that is required and reduce the overhead associated with

each shipment as well as the payment timeframe, especially since this will removemanual error, the largest cause of invoice discrepancies and payment disputes that only

serve to lengthen the time between shipment and payment.

Integrate Financial and Physical Supply Chain Processes

In order to truly optimize your supply chain, your costs of operation, and your working

capital, physical and financial supply chain processes have to be synched. Furthermore, itis this integration that allows for the injection of liquidity at various stages of the supply

chain.

Participate in Collaborative Solutions to Inventory, Cost, & Risk Management

The Demica study The Growing Role of Supply Chain Finance in a Changing World thatfound that largest hurdle for buyers is "the perceived need to change internal processes"

also found that the largest hurdle for suppliers was that they found the programs to be"invasive to their finance departments". Although these programs will require you as a

supplier to be more open about your costs, this can be to your advantage if your buyersare willing to work with you to reduce your costs.

Determine the Breadth of Changes to Internal Processes, Roles, and Responsibilities

that Will Be Required

One of the largest hurdles in the identification and adoption of a supply chain financeprogram for most companies is the the perceived need to change internal processes and

the amount of work that will ensue. Although this need is likely real, it's more than a

necessary-evil. There's always room for improvement, and making process changes that

will improve not only your productivity but operational costs is always a good thing, aslong as they are well planned and the necessary change management identified up front.

Increase Supply Chain Event Visibility

Enchanced visibility into order and shipment status and historical performance allows

financial transactions to be assessed, securitized, and (often) sold at a lower creditpremium. Furthermore, effective supply chain finance essentially provides a "virtual cash

float" by way of the receivables trading opportunity that begins with the purchase order

approval and continues until payment maturity. At any point during this process, there

exists the potential for the recievables to be securitized, financed, and even sold.

Consider Long Term Leasing Programs


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Instead of buying your equipment, consider long-term leasing instead. This can not only

reduce payments up-front, but reduce your overall costs of ownership if you find that you

have to update or replace it on a regular basis.

Regularly Conduct a Cost-Benefit Analysis of Upcoming SCF Solutions

Supply Chain Finance is a relatively new pursuit and not a lot of vendors have solutions

that are specifically targeted at Supply Chain Finance yet. Furthermore, most of the

solutions are new and not very extensive. Thus, as time goes on, the footprint and

capability of these solutions will expand. Therefore, it is important to regularly evaluatenew technologies as they become available on the marketplace to see if they are able to

provide the organization with new capabilities or benefits that could result in a lower cost

of ownership or help the organization remove additional costs from the supply chain.

Authors

Michael Lamoureux, PhD ofSourcing Innovation

ReferencesAmex Does EIPP

Jason Busch, Spend Matters

Ariba + Orbian = ?

Michael Lamoureux, Sourcing InnovationBeyond Finance: The Treasurer and Supply Chain Management

Jonathan Heuser, Manufacturer

A Blurry PictureJustin Pugsley, GTR

CFOs and the Supply Chain

CFO Research Services & UPS ConsultingEmerging Trends in Supply Chain Finance

David Gustin, World Trade Magazine

Financing the Chain

Kate O'Sullivan, CFO MagazineGet Ahead with Supply Chain Finance

Viktoriya Sadlovska & Beth Enslow, Aberdeen

The Global Financial Supply ChainMichael Lamoureux, Sourcing Innovation

Global Supply Chain Finance

WikipediaThe growing role of Supply Chain Finance in a changing world

Demica

Hackett, Working Capital, and a Massive, Untapped Opportunity

Jason Busch, Spend MattersThe Importance of Supply Chain Finance Technology

Michael Lamoureux, Sourcing Innovation


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Increase Competitiveness Using Supply Chain Finance


LIVE Dispatch: Ariba and Orbian Partner to Take on the BanksJason Busch, Spend Matters

Lower Chains, Lower Costs

Richard Gamble, Treasury & RiskManaging Risk, Improving Efficiency, Delivering Value

Daniel Cotti, Trade Finance

New Paradigm Supply Chain Finance Offerings Compel CFO and Treasury Interest in

the Supply ChainBeth Enslow & Lalig Musserian, Aberdeen

New Strategies for Financial Supply Chain Optimization

Viktoriya Sadlovska & Beth Enslow, AberdeenThe New Trade Finance

Neil Shister, World Trade Magazine

The New UCP 600: Rules to Better Facilitate International Trade

Key BankNew Ways to Enhance Customer Relationships

Kitt Carswell, CGINon-Investment Grade

Prime Revenue

Quantifying the Supply Chain Finance Opportunity

Viktoriya Sadlovska, AberdeenSCF Capital Delivers New Industry Procurement Utility Approach to Supply Chain

Finance

Beth Enslow, AberdeenSourcing from Low-Cost Countries? Supply Chain Financing and Technology

Innovations May Help Extend LCCS Benefits

Viktoriya Sadlovska, AberdeenSupply Chain Finance


Supply Chain Finance, a game changer in Corporate Funding

John Sculley, The Financial Services ClubSupply Chain Finance Benchmark Report

Viktoriya Sadlovska & Beth Enslow, Aberdeen

Technology Platforms for Supply Chain FinanceViktoriya Sadlovska, Aberdeen

Working Capital Optimization (I)

Viktoriya Sadlovska & Nari Viswanathan, AberdeenWorking Capital Optimization (II)

Viktoriya Sadlovska & Nari Viswanathan, Aberdeen

supply chain management primer

Documents