Automation of the Financial Supply Chain
Companies are under pressure to achieve top-line growth in a deflationary world. This is particularly true for industries such as clothing, footwear and retail where goods prices have reduced significantly over the past few years. Industry leaders such as Wal-Mart and Dell are winning by working together with their suppliers to synchronize cross-enterprise processes. In this scenario, information and cash are both commodities that need to be carefully managed in trade transactions. How can companies manage their cash better through more efficient supply chains while reducing the cost of goods?
A supply chain actually consists of: the physical supply chain manages the movement of materials and goods from outside the factory, through the factory floor and the manufacturing process, and then, finally, to the consumer’s hands. The financial supply chain is the movement of money that flows in the opposite direction. As each entity in the chain receives goods, they are compensated with money that moves the other way to who distributed or produced the goods.
If you consider one definition of a chain – ‘a series of things depending on each other as if linked together’-it is information that links the physical and financial supply chains together. Without knowing where your goods are, besides actually walking out to see them in the warehouse or on the dock, it is information transmitted to you that helps you to know what is going on. In the same vein, it’s the information on what was shipped, what quantities, types, colours, and when it was shipped, and to what location that creates the payment obligation for a buyer to pay the manufacturer for his goods.
If a company wants to be competitive in its supply chain, the key is how it manages the information that will launch it ahead of its competitors. With access to the internet as ubiquitous as it is now, moving information is not only quick, but much cheaper than it used to be, allowing companies to ask for more detailed information at more points in a typical manufacturing and shipping cycle.
Although uncommon before the Internet boom, availability of the Internet has introduced software companies that do not require installation of software but use the Internet to host all their services. The Application Service Provider (ASP) model was a relatively new concept five years ago, but with the growth of online users and the increase of speed of data on the Internet, it’s become a common term now. These companies provide services that can be accessed wherever someone can log onto the Internet – at home, at an Internet cafe when traveling, or on your laptop with a WIFI connection at the airport.
In the past there were concerns about security of information and access without physical software or at least a card reader installed in every user’s computer. However, portable card readers, multiple firewalls, and general understanding of the security issues have alleviated people’s concerns about the safety of their data sufficiently in order to allow these online systems to expand.
The information that is needed to make decisions on a global import transaction is important enough that a whole genre of software companies have blossomed – global trade management software. Some may focus more on physical supply chain information (e.g. tracking where the goods are), some on making sure customs documentation is correct, others on processing payments, and a smaller group manages the decision making process and gathers the information to make that specific payment at a certain time.
In the old days, having too much paper on your desk was a sign of not being organized. Nowadays, no one can see how many emails you haven’t answered, but the easier availability of information is not always a good thing. It’s not just access to information that helps you stay ahead of the competition, it’s having the information at the right time, in the right form that you need – and distilled to the point where you can make decisions, not be drowned in too much data.
This is where the use of new technologies is useful, not just in getting data to you quickly from all parts of the world real-time, but also helping you analyze the data into a type of ‘dashboard’ on your PC so a CFO or treasury professional knows what they need to know to manage their cash flow. Of course they can drill down to find out the details of a specific payment, but most of the time you just want to know who are you paying and how much.
With this type of distilled information or a dashboard on your payment/receivable needs, companies can start to compete on their financial supply chains as well as they have been competing on their physical supply chains. It is important that this dashboard links not only the information from internal divisions, but also from your partners in the trade cycle, so as a buyer, you can see when goods will be shipped and when you will need to make payments.
As a manufacturer, after you ship, knowing when you have to pay out or are going to get paid is often as important as receiving the actual funds. If one has the knowledge to the exact day when payments need to go out or funds will be arriving, then cash management and lending can be at its most efficient.
From a buyer’s standpoint, why do multiple FX transactions over a few weeks when you can know exactly what day you will need the currency and then consolidate that FX transaction to get better rates from your banks?
From a seller’s perspective, why borrow money from the bank on the 24th to pay your payroll on the 25th if you know that the funds from your buyer will arrive and be available in your account on the 25th through your dashboard? This not only reduces unnecessary borrowing, but also allows you to use your credit line for more important projects, not just keeping a lot of it open ‘just in case’.
As managing larger amounts of information become easier through automated systems, there is real potential to reduce your cost of goods (COGs) through better management of all your processes.
One example is reducing import duties paid. For anyone that is importing, it is a fact of life that there are import duties that increase the landed cost of any item. It is also true that for most imports, they are made of components that, depending on the industry, could potentially be dutiable at different rates. Previously, tracking the individual components in an item was impossible to manage in a global import business, as the savings would not be worth the trouble of trying to break down the components of every item in a paper-based world. It is hard enough tracking that you have ordered 10,000 dozen jackets, but to track that they have linings or other parts, each with different duties, would not be worth the trouble. However with systems that can track the physical components of every item that you ship, there is a good chance that import duties could be reduced based on breaking down an item into different duty categories. This type of duty reduction goes directly to your bottom line, which could significantly reduce your landed cost of goods.
This would only work in a system where you could electronically track the components going into all your goods and then manage their percentages per unit, then have that information to present to import and export customs electronically. All your purchase orders and fulfillment documents (e.g. packing lists and invoices) will have to be on the same electronic system. This means that not only the buyer has to be using the same system, but the whole community of participants in the transaction, the materials suppliers, the final manufacturers, logistics and even inspection providers. More than likely it has to be a neutral system that does not limit these participants to using one bank – it has to be flexible with the community as it is and as it changes.
But is all this possible? Yes and there are an ever-growing number of companies using these systems. In 2004, Richard Karlgaard, publisher of Forbes Magazine, said: “CEOs are challenged with top-line growth in a deflationary world. What do CEOs want? Three things: growth, no supply chain disruption, and to stay out of jail.” Automating your financial supply chains can certainly help you with the first two – the last one you have to take care of yourself.