Chain reaction. #Supplychain finance meets supply chain management. Powering #trade.

First published in Trade & Forfaiting Review, February 2016.

Supply chain management and supply chain financing are the likely pair that never tangoed, until now. Michael Vrontamitis explains what this could do for end-to-end relationships.

 Supply chains are, one might argue, the arteries through which domestic and international commerce flows, and the enablers of economic value-creation and growth around the world, with businesses and policymakers increasingly appreciating the opportunities inherent in linking up to global supply chains in major industry sectors.

Competitive advantage

The processes and disciplines of supply chain management (SCM) and optimisation are well advanced, from inventory optimisation to cost control, end-to-end visibility to digitisation and the application of technology, to strategic supplier management and logistics. The scope of SCM is broad and its impact significant across organisations and industry sectors, delivering a competitive advantage for leading practitioners.

What has been lagging somewhat, and is now gaining momentum and approaching a tipping point, is the parallel evolution – perhaps the inclusion of – finance in the SCM discussion.

Specifically, what has been missing until recently is the inclusion of supply chain finance (SCF) as a strategic element of the optimisation of supply chains and of the overall effective management of an enterprise, and the ecosystem of commercial relationships within which, and through which, that enterprise achieves success.

SCF, a relatively new collection of techniques or solutions and value propositions offered by banks and non-banks, has been gaining traction largely as a result of a clear, near-global shift away from traditional mechanisms of trade finance to trade on open account terms, where buyer and supplier (importer and exporter in cross-border transactions) simply agree to payment at a pre-determined point in the transaction, absent traditional bank intermediation. SCF is so new as a discipline that a global effort is currently underway to devise a set of standard terminology and some common understanding with regards to supply chain finance.

While some practitioners have argued in the past that SCF did little more than repackage a series of familiar products like factoring and other receivables-based finance products under a new name, more recent thinking acknowledges that the evolutionary dimension of SCF has been to promote a more holistic, ecosystem view of domestic as well as international supply chains, and a multi-party view of trade, in sharp contrast to the more familiar one buyer, one seller perspective.

The discussion has now evolved well past that initial, perhaps theoretical realisation, to the point where leading practitioners and top-performing corporates have internalised the critical link between SCM and SCF, and are now actively mandating dialogue and joint planning among areas like procurement, operations, treasury and other areas that would have been managed as separate silos, but are today seen holistically as part of the organisation. Some are at the point of exploring the extent to which misaligned key performance indicators (KPIs) lead to incompatible behaviours across these units, adversely impacting the global results of the business.

SCF and supply chain practitioners frequently present commercial activities linked to trade and to supply chains as two sides of one coin: the Procure-to-Pay cycle and the Order-to-Cash cycle, seeking to articulate the processes and issues related to each. SCF provides a framework within which the financial dimension in particular can be considered, while concurrently appreciating the steps and processes – and the key touchpoints – in each set of activities.

There is both an opportunity and an imperative today, to re-imagine the nature and role of supply chain finance and working capital optimisation, as a core component of supply chain management and the Procure-to-Pay/Order-to-Cash cycles.

While there are certainly variations, the classical Procure-to-Pay process might, for example, begin with some form of requirements analysis, proceed to a request for quotation, creation of a purchase order, preparation for and receipt of goods, and finally, settlement and reporting.

Each of these areas, and similar steps in the Order-to-Cash cycle, is the subject of some level of innovative thinking and solutioning, not least in the context of supply chain finance, and in the wider context of corporate operations and in the context of the ecosystem of relationships referred to earlier.

Actions and outcomes

Even as corporate needs and expectations evolve, and industry solutions develop and are deployed in the market, it is important to take a forward view, to challenge and advance the current state of analysis and discussion, and ideally, to help translate initial theoretical musings into concrete actions and outcomes, including value-added, differentiated solutions to meet the requirements of clients around the globe.

The opportunity to advance the discourse is primarily in envisioning how best to take supply chain processes, including SCF-related Procure-to-Pay and Order-to-Cash activities, to a more strategic level. To do so, it is important to consider these areas holistically, as having direct impact on the commercial and financial performance of a business, and thus, to provide a framework that allows for a more rigorous analysis, measuring and benchmarking of these areas of activity. This, with the ultimate objective of devising solutions that meet critical company objectives.

A concrete example in terms of market-responsive solutions is to extend the proposition beyond its current, limited focus on the post invoice acceptance phase, to a more holistic, end-to-end suite of solutions, developed in close consultation with buyer and supplier clients and the supply chains within which they operate.

The intent is to move decisively beyond the historical, silo-based relationships across units that are so familiar to company executives, financiers and other practitioners and to shift to a more integrated view and approach to managing supply chain processes, particularly financing and working capital optimisation.

While global economic conditions are showing signs of improvement, and there is an overall improvement in liquidity across the international system, one reality is that the available liquidity is heavily targeted at multinational clients, leaving the economically important SME segment underserved and under-financed. This imbalance has commercial and public policy implications which could, even in part, be addressed through well-designed SCF solutions.

The Procure-to-Pay Cycle can usefully serve as a proof of concept for developing a framework to address market needs and dynamics, which could then be extended, with appropriate variations, to the Order to Cash Cycle, and perhaps in an over-arching manner, to help create strategic linkages between the disciplines of SCM and SCF.

An underpinning assumption here is that the development of the foregoing ideas rests upon a widely defined ecosystem view of commercial relationships linked by one or more supply chain (domestic or cross-border), and that there is, likewise, an internal ecosystem of relationships, motivations and interests at play within a corporate. That internal ecosystem must be navigated as is, or reconfigured to better align with the commercial and financial objectives of the organisation.

Innovation and transformation

The conception of such a framework must and will consider not only traditional views of the Procure-to-Pay Cycle and the internal/external ecosystems of relationships linked to a company, but will actively challenge assumptions about solution providers, traditional and non-traditional alliances, delivery channels and the application of technology in innovative ways to meet the top-level objectives of a business.

The role of digitisation and general application of evolving technologies will be central to this discussion, but must be seen as tools to transform and optimise business models, not as means of making incremental adjustments to existing propositions. Likewise, the impact of non-traditional, disruptive solution providers must not be underestimated, and their presence in a traditionally bank-dominated market must be seen as a further opportunity for constructive transformation. Complacency and the reliance on long-familiar products are no longer viable, nor is it an option for solution providers seeking to maintain a meaningful role in international trade and trade-related financing.

Cross-border supply chains are the arteries of international commerce. They are also the pathways by which liquidity and financing can be injected into the international system to support international development, emerging markets, growth and the engagement of SME suppliers.

Corporates and solution providers who grasp the enormous potential of a holistic, supply chain-based view of commerce and international trade, and are open to innovative modes of thinking and collaboration, will lead the development of next-generation solutions at the juncture of the SCM and SCF disciplines. This is an idea whose time we believe has come.

Figure 1: Domestic and cross-border supply chain management and financing

A client ecosystem proposes one possible representation of such a framework, wrapping supply chain management and financing around a comprehensive, end-to-end view of commercial relationships, and illustrating the interlinkages between various business activities within a client organisation.

The graphic further recognises the connection of those internal functions to the full Procure-to-Pay and Order-to-Cash cycles. While variations can be imagined, and areas of emphasis will differ across organisations and possibly across industry sectors, the graphic explicitly presents the internal company functions as gears working together to drive the enterprise forward, and not as distinct silos operating in parallel.

The disciplines of supply chain management and supply chain financing are intentionally represented as encompassing the full range of relationships in a company’s ecosystem, on an end-to-end basis. It is this holistic, integrated view that is important to appreciate in seeking to articulate a next-generation view of SCM, SCF and client ecosystems.