For too long the financial supply chain has been overlooked with outdated and outmoded practices. According to the Hackett Group, 67% of suppliers to the world’s largest companies are still submitting invoices manually with little or no automation. In addition, decades old payment practices still predominate with fixed payment terms and static discount programmes. In an age where we can ‘Uber’ a taxi, watch a film streamed through Netflix and order a pizza through JustEat it’s time for the financial supply chain to get much smarter.
Exactly what is the Financial Supply Chain?
First, let’s start by clarifying exactly what we mean by a ‘financial supply chain’ and where it fits into the overall supply chain of a business.
There are three basic components to any supply chain:
- Physical supply chain – the movement of physical goods from suppliers to buyers
- Information supply chain – tracking, recording and evaluating information related to the supply chain e.g. Goods Received Notes (GRNs)
- Financial supply chain – how money flows through the supply chain to fund the purchase of goods and services
Agility and innovation in the physical supply chain
There has been a huge amount of innovation in the physical supply chain with initiatives such as ‘Just in Time’ and ‘Lean Manufacturing’ which have been enabled companies to significantly reduce their inventory, cut time to market and increase their agility – all leading to a big increase in competitiveness. From the financial perspective, these initiatives have enabled companies to dramatically reduce the amount of working capital tied up in inventory and slash stock write-offs.
The financial supply chain – a Darwinian throwback?
In contrast to the physical supply chain the financial supply chain has received little innovation. It almost feels as though it is a poor cousin or Darwinian throwback that resides in an evolutionary backwater. The way companies pay suppliers has changed little in recent decades. It is still normal to pay suppliers on fixed payment terms and where discounts are in place this is normally a static discounting system e.g. 2:10 net 30 (where suppliers accept a 2% discount on a 30 day term if they are paid by day ten).
Part of the reason for the lack of innovation is that the technology that underlies the financial supply chain remains fragmented. ERPs and finance systems can almost be seen as islands of light in a dark countryside. The bridges to connect these islands have remained largely un-built. The Hackett Group report that even within the world’s largest companies only 33% of invoices are received electronically and only 6% of their suppliers have access to a supplier portal. The first iteration of eInvoicing, which could have bridged these gaps, has failed business with value propositions that simply don’t deliver for all parties. It is therefore simply not possible to do innovative projects in a financial supply chain where buyers and supplier are not well connected together. The islands of light need to be connected by bright information superhighways, a common language and an approach that benefits everyone.
The net effect is that today companies deploy relatively blunt tools to improve their finance metrics, for example payment terms extension exercises that risk improving one metric at the cost of another e.g. working capital vs. supplier health and innovation. However, these ‘blunt’ practices are increasingly coming under scrutiny.
In a time where health and innovation in the SME sector is vital to economic recovery, Governments no longer view it as acceptable for large buyers to continue to squeeze suppliers. Administrations are starting to clearly set out there stall – find a way to be fairer to your suppliers or we will legislate to enforce that you do. Such a stance was set out by Philip King, Co Chair of the UK’s Prompt Payment Code Advisory Board and CEO of the Chartered Institute of Credit Management at a recent Taulia executive briefing. Other examples include SupplierPay in the States and BetaalMeNu in the Netherlands.
Time to be SMART
What’s needed is a smart way out of the dichotomy between the competing pressures of global competition for big business, supplier health and Government intervention.
And there is a way forward. One of the big revelations of the last few years is that the value in connecting business and their suppliers together in a digital supply chain doesn’t lie in the automation benefits for the buyers. Instead, it sits squarely in helping buyers and suppliers transact better, in helping vital liquidity flow down the supply chain to the benefit of all.
Enrico Camerinelli, senior analyst at Aite Group, and an authority in how companies manage their financial supply chains has recognised exactly this in the recent series of blogs he has written on ‘Introducing smart financial supply chains’. He highlights the opportunity offered by becoming smarter to help big business better manage and achieve strategic goals such as:
- Working capital optimisation
- Cost of Goods Sold reduction
- Supplier health and innovation
- Compliance and good corporate citizenship
The answer lies in using tools such as eInvoicing, supplier portal and deep ERP integration to provide that bridging digital network between a buyer and its suppliers. This network then makes up an ‘enabling’ platform over which can be layered financing tools that allow for a far greater degree of agility in the financial supply chain. The result is a dynamic financial supply chain. One that can work in near real time and have the agility to flex according to the changing goals of buyers and suppliers.
Now is the time for companies to be smart about their financial supply chain.