Corporate TreasuryFinancial Supply ChainLetters of Credit/Open AccountFinance Solutions for the Supply Chain

Finance Solutions for the Supply Chain

Closer relationships with partner companies and an integrated supply chain are accepted in any enterprise as an effective way to cut costs and increase business agility, yet the financial communications which form an essential part of the continuum of the business operation are often overlooked. The financial supply chain runs concurrently with the physical supply chain to control the exchange of financial information and payments linking every stage and every partner company in the value chain. Efficiency in financial operations is therefore equally critical to efficiency in supply chain operations.

The Financial Supply Chain – Issues and Challenges

A large organisation will have many internal financial stakeholders, including the finance controller, treasurer, auditor and compliance manager, for example. If the company has many subsidiaries or autonomous divisions across one or many geographical territories it may have several people fulfilling parallel roles in different locations, each having a local view of the same part of the value chain for which they are responsible.

As well as multiple internal financial interests, the company may have:

  • Multiple banking relationships, each operated around different currencies in different countries with different service levels.
  • Multiple suppliers and customers, again invoicing and paying in different currencies in different countries.

Therefore, the movement of funds into and out of an enterprise can be diverse and fragmented, both in terms of the data/payments themselves and also the formats in which this data is communicated. Financial directors need to consolidate financial information in order to maintain control of profitability and to provide accurate reporting of many financial metrics, including corporate liquidity, which in turn can deliver opportunities for investing surplus funds. In order to address this effectively, the following ‘critical’ areas must be integrated both internally and externally throughout the multi-enterprise environment:

  • Operating costs – the financial charges against the business.
  • Operating risks – e.g. human errors resulting in financial penalties.
  • Cash management – sufficient funds must be available to meet current and future commitments across all territories, with surplus funds identified and profitably invested.
  • Best price services – securing the best value by selecting the most cost effective services/products, not only in the physical supply chain (e.g. from suppliers of raw materials) but also from suppliers of financial services.
  • Best business visibility – ‘best’ increasingly means ‘real time’ or ‘near real time’ visibility of business processes, both internal and through partners.
  • Currency exposure – forward multi-currency cash forecasting is critical to a manufacturer working on a global level.
  • Investment exposure – liquid investments (e.g. working capital surpluses placed overnight on call) versus term investments (e.g. pension funds).

Each part of the business will often have its own systems (or in some smaller departments, no systems) to manage each of these financial activities. The costs involved in standardising these systems may appear to be unjustifiable and prohibitive and even where standardisation is partially achieved, real-time communication and consolidation across the global enterprise is still a real problem.

The challenge of integrating the financial and physical supply chains is a complex proposition, but not an impossible one. In some areas, regulation has forced companies to meet this challenge head on, a case in point being the EU legislation on e-invoicing. The resulting efforts of companies to integrate invoicing alongside other business processes demonstrate how automating the financial supply chain process can reduce costs and deliver further business benefits.

E-Invoicing

EU directive 2001/115/EC came into effect in 2004. The directive mandates that all EU member states must accept electronic invoices, provided organisations can guarantee the authenticity of an invoice’s origin and the integrity of the invoice content.

Although the move to electronic invoicing has been driven by regulation rather than business needs, it does present a strong case for the value of bringing together the financial and physical supply chains for manufacturers.

Traditional invoicing is time-consuming and costly: a paper invoice needs to be produced, printed and stored – with costs associated with each one of these activities. It then has to be processed manually at the receiver end, with data from the invoice needing to be re-keyed into the customer’s business systems, again adding time and expense to the process. And during each step of this process the data becomes vulnerable to corruption and errors.

Electronic invoicing removes all of the above steps and allows invoices to be transferred directly from business system to business system, in an automated, compliant and low-cost business process.

Banking Relationships: The Third Dimension

The need to communicate with suppliers, distributors and customers across the physical and financial supply chain presents a dual challenge for enterprises, as outlined above. A third dimension of communication must also be addressed to enable the effective management of the financial supply chain – the need to manage parallel relationships with banks and other financial institutions. The diversity of financial communication between a manufacturer and its multiple banks in several countries can cover a wide range of transactions and services running alongside supplier and partner financial communications, including payments, cash management, trade services and trade finance/factoring.

One standard approach by many organisations is to employ either departments of personnel or a range of different bespoke systems to handle these layers of communications and payments activity. However, this can result in further complication when a labyrinth of IT systems already exists, leading to problems further down the line as companies grow or acquire new business or banking partners, which require new capabilities beyond the functionality of existing systems.

Communication Beyond Business and Banking Boundaries

Most CIOs are rightly hesitant to attempt the complete replacement of their existing IT systems in order to streamline the challenging communication matrix described above. A less disruptive alternative to overhauling these systems is available through the implementation of solutions that can enable the integration of existing systems, the automation of data exchange and the intelligent routing of data. Such solutions ensure that reliable information hits the correct operational targets and up-to-date, accurate, data is available for ongoing analysis and strategic decision-making purposes, both within the enterprise and outside the firewall, for the effective management of business relationships.

By streamlining data management and enabling closer relationships with trading partners in a way that ultimately increases customer satisfaction, CIOs can deliver competitive advantage. Improved data quality and the ability to locate data at various points in the value chain helps to speed dispute resolution and invoice payment, two common business pains in the financial supply chain.

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