A financial supply chain (FSC) is the sequence of business processes and technologies that connect monetary and financial flows with merchandise exchanged between trading partners—the physical supply chain (PSC). FSC processes are triggered by PSC events:
A payment (i.e., FSC process) is initiated once goods are shipped and an invoice is issued.
Financial and physical supply chains are tightly interconnected, but there are significant differences in how they are managed and optimized. Physical supply chains have been always considered generators of costs, so techniques and practices to improve operational
execution and cost efficiencies have been well-developed over time: total quality management, just-in-time inventory management, lean manufacturing, and kaizen are but a few of the management weapons in every supply chain manager’s arsenal. The same cannot
be said for financial supply chains. Until the 2008 financial crisis, financial institutions mainly focused on reducing internal back-office inefficiencies, giving superficial consideration to the financial flows exchanged with corporate users. On their side,
corporate users did not pay overmuch attention because the relatively easy access to finance would offset any necessity for improvement. That left processes very underdeveloped, with poor information sharing between buyers and suppliers, old-fashioned static
payment and discounting terms, and largely manual pricing negotiation.
For example, a parcel (i.e., physical good) shipped via FedEx can be tracked along its entire journey; at any time the sender can decide where and to whom the parcel must be delivered and at what time of day. The address and time of delivery can be changed.
The receiver can be alerted of the incoming delivery via telephone, email, or text message.
For the payment of the good, the story is quite different. There is no way to track how the payment instruction is executed; the date the payment is settled cannot be changed; the payment cannot be routed to another bank account.
While optimization techniques abound for processes, initiatives to support an optimization strategy appear very difficult to implement. Examples of daily processes are the management of receivables and payables as well as the control of inventory values.
These are the main components of working capital, and their optimization strategy coincides with working capital release.
Recently, supply chain finance (SCF) initiatives appeared to be the solution to optimize working capital ratios and, hence, to optimize FSC flows. The EBA
SCF Market Guide defines SCF as, “the use of financial instruments, practices, and technologies to optimize the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners,” but in the course of
time, banks and finance service operators have focused almost exclusively on the “financial instruments” component, reducing SCF to a set of product-centric terms. This approach engenders an internal bank’s product-centric way of thinking. What constitutes
supply chain finance today is purely a set of financial products created by the banks looking for a solution.
Optimizing an FSC requires more than offering a bunch of financial instruments. It requires a more thorough (i.e., smarter) approach that consists of understanding and mapping a company’s information flows, business and operational processes, and data insights.
It also includes analytics of how the company exchanges its monetary flows with business partners when it operates as a buyer (i.e., focusing on payables), operates as a supplier (i.e., focusing on receivables), or looks at its internal operations, thereby
aiming to optimize levels of raw materials inventory, works in process, and flows of finished goods stocks.
Smartly conducting a financial supply chain requires a company to identify practices and tools that streamline its execution, remove inefficiencies and waste, allow better predictability of processes, and improve collaboration and visibility among partners—exactly
the same way as is already happening in physical supply chains.
A smart FSC is a way for a company to make decisions about its monetary and financial flows that directly support or enable the company’s following strategic goals:
- Reduce costs to drive greater operational efficiency
- Release working capital to drive business transformation
- Support business-critical suppliers with affordable finance
- Demonstrate good corporate citizenship and corporate social responsibility
- Enhance supplier relationships through better transparency, on-time payments, and dispute resolution
The articles that will follow this post will articulate how a disciplined use of technology and process analysis allows a combination of financial instruments (i.e., products) to support the implementation of these strategic objectives.
This article was first published in http://www.aitegroup.com/blogs/enrico-camerinelli/introducing-smart-financial-supply-chains#sthash.G5NB7fGg.dpuf