A Shared Vision of Supply Chain Integration
“To understand ecosystems ultimately will be to understand networks.” – Fritjof Capra, The Web of Life.
Companies are increasingly aware that they operate within ecosystems, characterized by interconnection and interdependency. An ecosystem can be an organization, a part of an organization (e.g. a business unit), or communities of organizations, such as supply chains. The interaction between and interdependence of the parts define the ecosystem as a whole.
Nowhere is this recognition more apparent than in a supply chain. A supply chain’s overall efficiency and effectiveness helps define the performance of each participant, and each participant’s performance is vital to the supply chain. Supply chain collaboration helps drive improved financial performance. This recognition is driving companies to strive for greater supply chain collaboration.
There is also a growing recognition of the interconnectivity between the ‘financial’ and ‘physical’ supply chains, which together form a larger ecosystem. A just-in-time approach to inventory drives efficiency in the physical supply chain. Likewise, the ability to deliver financial solutions, informational flows, and risk mitigation – where they are needed, when they are needed – lowers cost, drives working capital efficiency and cash flow optimization, and impacts financial performance on the balance sheet (e.g. working capital ratios days payable outstanding [DPO], days sales outstanding [DSO], days inventory outstanding [DIO]) and income statement (e.g. cost of goods sold [COGS], profit margin). Achieving this ideal necessitates tight integration between a supply chain’s physical and financial flows.
As a result, there is convergence between supply chain (including trade finance and logistics) and treasury management (including working capital optimization and FX). Treasurers are increasingly involved in the supply chain domain, since its optimization drives cash flow and affects financial performance on the income statement and balance sheet, including profit margin and working capital efficiency. Treasurers have already extended their influence to key processes beyond their direct control that impact working capital and cash flow, for example, working in a consultative capacity to reshape payables and receivables processes. Supply chain processes are a logical next step, given that commercial open account and commercial trade transactions are also payables and receivables.
The convergence of supply chain and treasury management and treasury’s increased stake also reflect the recognition that all flows within an ecosystem – including the physical supply chain – have inherent financial risk and therefore can impact financial performance.
“Analysis means taking something apart in order to understand it; systems thinking means putting it into the context of a larger whole.” – Fritjof Capra, The Web of Life
The trends toward ecosystems thinking and treasury-trade convergence are also leading companies to rethink how they organize internally and with external partners. Many are focusing on breaking down internal silos and restructuring to facilitate global integration for increased efficiency and effectiveness. Companies are converting manual, paper-based processing to automated, electronic processing; folding accounts payable and receivable units operating at the business line into shared services centers; and selectively outsourcing internal processing. They are expanding from a domestic to a global business focus. The use of increasingly global supply chains and the effort to replace country-driven settlement practices with global settlement practices reflect this shift.
This shift also presents companies with multiple challenges. For example, the growing use of global trading partners lengthens the payables and receivables cycles. A global pool of trading partners intensifies price competition, changes risk profiles, and presents new challenges to communication. And despite the goal of global integration, the longer the supply chain – both in the number of participants and in practical aspects such as physical distance, time difference, and business practice – the potentially more fragmented it can become.
Within this context, companies are rethinking how they leverage their banking providers, who have traditionally served as financial intermediaries. They are looking to their financial providers to help build connectivity between supply chain members. To add value in an increasingly complex and interdependent competitive landscape, banks must look to intermediate at client pain points where they can eliminate fragmentation between physical and financial supply chains and facilitate monetary and information flows.
In response, leading banks are evolving their role within the supply chain to that of integrator and aggregator. Emerging banking solutions plug into the transaction flow to create connectivity at critical points in the end-to-end supply chain where fragmentation persists. An ecosystem implies that the whole is greater than the sum of the parts. Global value chain solutions enable the supply chain as a whole to generate more value- financial and strategic- than each supply chain member could generate on its own.
This section of the article presents a composite corporate vision for integrating the financial and physical supply chains. Like any synthesis of ideas, this vision holds commonalities and differences of individual perspectives. Still, overarching themes and areas of consensus emerge.
Supply chain visibility is a foundational building block in the mutual understanding among and collaboration between trading partners concerning the impact of their decisions- within the context of the constantly moving parts of the supply chain- on profit, risk, and asset efficiency. Interview synthesis reveals two client pain points that inhibit supply chain visibility:
Corporates we speak to envisage total connectivity within their organisations (i.e. logistics, merchants, and finance), and between supply chain participants (e.g. trading partners, logistics providers such as freight forwarders and consolidators, banking providers), as well as others that provide critical information such as customs.
A composite corporate vision emerges of a single, web-based repository of data, built on open standards, that gives universal access to all parties who touch product and financial flows within a supply chain. Authorised participants can accept and contribute information- they are able to input data in order to report at each step as products move through the supply chain. For example, customs officers can provide duty rates, and freight forwarders can alert buyers of a shipment’s exact location in transit. The system enables online communication related to all financial steps within the supply chain- from setting Incoterms and payment terms, to pre- and post-export financing, and to handling chargebacks and related information.
Ideally the process of inputting data would be automated. The system would provide trigger dates (e.g. when product to ship, when to pay). Users could see exactly where a product is in transit rather than having to track this on an Excel spreadsheet.
It is important to index information correctly to simplify the ability to find it, since any given transaction has an abundance of documents that meet specific needs for different end users. Ideally the database either shows each user the information that the user requires or has an index by document type. The use of image technology to enable access to original documents is preferred.
The platform would be a valuable reporting tool for multiple purposes according to another participant. It would eliminate paper and streamline information flows within an organization, facilitate supply chain collaboration, and enable the bank to view trade activity and to maintain its role as a payments provider. Such a tool would also enable the buyer and seller to make better production systems.
The end result of this vision is a multi-directional information flow that gives a complete view of all logistical and financial aspects of the supply chain. This translates into cost transparency and visibility into the multiple drivers of cost to facilitate a shared understanding of how a transaction’s dynamics affect profit margin. It would give finance staff a powerful tool for communicating total landed cost to merchants within a timeframe that helps merchants to understand how their decisions impact profit margin.
To gain insight into total cost, the solution must enable buyers to do three things:
Complete transparency among trading partners is a key concern. It is important to limit access to some information if all participants are accessing a single web-based system. Users should have authorisation to view only those aspects of the supply chain that are mutually beneficial to facilitating collaboration.
In the words of one interviewee, communication is “the most important [aspect of the supply chain] and the most messy.” The ideal solution institutionalises and standardises communication to facilitate online collaboration and supply chain connectivity. While communication is vital, much of it could be automated.
Communication is a top challenge for one interviewee. There are ‘disconnects’ between the sourcing, buying, and payments departments- often too many people get involved, someone is left out of a communication, or information is missing. Exacerbating the communication issues is a lack of clarity on roles and responsibilities, lagged response to issues due to time differences, and charge backs.
Another interviewee sees communication as “one of the weakest links in the chain” in integrating physical and financial supply chains. The finance, production, and merchant departments have different visions. The biggest breakdown is between production- which aims to fulfill store orders as quickly as possible- and finance, which focuses on the financial value of these choices on product cost and the bottom line. The next biggest breakdown is between the foreign office and finance. For example, the foreign office does not weigh the cost effectiveness of transportation methods when rushing to meet an order fulfillment schedule. Purchase orders presented for payment may not reflect last-minute changes in transportation cost.
Physical distance between sourcing and finance teams, lack of familiarity among team members, and systems constraints contribute to internal communication challenges around operational issues for a third interviewee. Turnover in the merchandising group exacerbates the problem. There is also a lack of data synchronization between the company and its purchasing subsidiary. There is a need to streamline and better define business processes, educate on these processes internally, and standardize data formats.
Some interviewees are automating communication with key supply chain participants such as freight forwarders and consolidators. Some are working toward giving vendors access to their trade systems.
Two interviewees are pursuing EDI to automate information flows and to develop online logistics solutions that enable vendors and freight forwarders to enter a Web portal to perform certain functions, such as updating freight and duty costs and shipment status. Verifying customs and product harmonization codes is a time-consuming process. With online logistics, freight forwarders and vendors can enter harmonization codes directly into the buyer’s system to help ensure accurate product cost.
One interviewee is implementing electronic invoice feeds (EDI) for open account and giving vendors online access to view account status. Despite automation with supply chain participants, communication may remain fragmented within an organization due to the persistence of internal silos. For example, freight forwarders separately send the same set of imaged documents to the logistics and finance departments as proof of payment. Vendors also send duplicate sets of documents for financial and logistical purposes.
Streamlining communication also would strengthen control to mitigate risk. By way of example, one interviewee cites an letter of credit (LC) payment scenario in which logistics notifies the finance team of a shipment that does not clear customs after a company takes possession of the goods. Ideally there would be a systematized layer of control, whereby an online notification system enables logistics to alert the finance department. In turn, the finance group would notify the bank to hold payment.
Another interviewee has a product inspection process in place when merchandise arrives in the US. Ideally, any product defects and/or problems would be detected prior to export, however, this is not always the case. An online notification system would also enable the company’s quality assurance department to alert the finance department to hold payment.
Ideally banks would take a more integrative approach. The approach would ideally help increase visibility, provide insights to support decision-making, and automate for efficiency and cost savings. Integrating all supply chain participants within a single Web-based system would position banks to participate in all aspects of payments and financing, says one interviewee, and would be an important tool for banks to understand supply chain costs. Banks involved in open account transactions could handle PO financing.
The LC chargeback process is a pain point. Online communication and the ability to insert language in an LC to take a percentage of payment as a deduction would be ideal.
There is a role for banks to provide value-added information to help optimize payables and receivables. For example, there may be pieces of information that a bank could provide to clarify the cost savings of open account versus LC. A report that recaps the cost to vendors of LC utilization as a percentage of a total purchase, and which shows differences by beneficiary name and by country, could be useful input for choosing sourcing countries and negotiating with vendors.
Providing payment details to vendors can be a challenge for companies handling their own open account payments- truncated detail can generate vendor inquiries. A purchase-order-to-pay system, online account visibility, or an e-mail tool for providing payment detail could relieve a company of its vendor relations role. The ability of banks to provide EDI payment information could enable companies to populate their accounts payable file to perform three-way matching between PO, invoice, and receipt of goods.
Establishing payment terms and financing vendors are key challenges for some interviewees. Banks should help clients optimize the cash cycle. Ideally, a bank could provide alternatives to LC like open account vendor financing based on the PO (could involve guarantee).
Vendor financing is a top priority for some, but it is important to be able to weigh how financing affects bottom-line cost. Facilitating dialogue with vendors on financing alternatives seems like a good role for the bank. It is difficult to understand the potential impact of supplier financing on product cost. If financing gives a vendor cost savings, then this benefit should be shared with the buyer. Buying units may not consider the impact of vendor financing, since they lack the information to assess its impact.