Supply Chain Finance is indeed effective. According to a Hackett study, 1000 of the largest US Companies were able to free up $72B in 2005 by reducing working capital requirements through "improvements in collecting bills, turning over inventory and stretching out the amount of time they take to pay their own suppliers". Improvements in bill collection, days of outstanding payable, and inventory turnover barely scratch the surface of what supply chain finance is or what it can do for an enterprise.
Furthermore, Aberdeen has found that Best-In-Class companies in supply chain finance, who are six times more likely to have gained a competitive advantage, are able to process twice as much volume (measured as annual dollar turnover) and three times as many invoices.
To get the maximum benefit from Supply Chain Finance strategies and solutions, a company will require a significant amount of technological capabilities. It will require e-Procurement and e-Payment software to send purchase orders, track good receipts, receive invoices, and automate the settlement processes to the greatest extent possible. It requires inventory management and tracking solutions to appropriately track and manage inventory throughout the supply chain. It requires collaboration and event tracking software to track supply chain events and permit early detection and resolution of potential problems. It requires cash flow management and modelling tools to make sure the right financial decisions are being made at each stage of the chain. And all of this technology needs to be integrated. For example, information relating to transactions and payments needs to flow from the company's e-Procurement and e-Payment systems automatically into a company's accounts receivable (A/R) and accounts payable (A/P) systems and then, ultimately, into its cash flow modelling and working capital optimization tools.
Supply Chain Finance is gaining in importance for a number of reasons. When one combines downward cost pressures with steadily increasing raw material, energy, and labour costs globally, total cost of ownership strategic sourcing is no longer enough. Companies need to wring as much value out of their working capital as they can, especially in a market where many large corporations are moving away from physical assets to mostly working capital. Moreover, in their rush to implement low cost country sourcing programs, many companies have implemented non-optimal global sourcing and outsourcing programs that are plagued with one or more unintended consequences which often remain hidden until the programs, and fundamental strategies, are examined from a Supply Chain Finance perspective. Given that 73% of large corporations are looking to extend payment terms with their suppliers in 2007, preferably without negatively impacting the supply base, Supply Chain Finance is a great place to start.
What is Supply Chain finance anyway? Supply Chain Finance is the optimization of both the availability and cost of capital within a buyer-centric supply chain. The availability and cost of capital is usually optimized through the aggregation, integration, packaging, and utilization of all of the relevant information generated in the supply chain in conjunction with cost analysis, cost management, and various supply chain finance strategies.
A Supply Chain Finance Solution, in comparison, is a combination of trade financing provided by a financial institution, a third-party vendor, or an enterprise itself, and a technology platform that unites the trading partners and the financing partners electronically and provides visibility into the various supply chain events that can serve as financing triggers. (These include the issuance of the purchase order, work in progress payments, Vendor Managed Inventory or VMI, inventory in transit, proof of delivery via Forwarder Cargo Receipt (FCR), and invoice approval by the buyer.)
Supply Chain Finance is not a new concept. "For decades -- maybe centuries, in developed economies -- supply chain finance has existed in various forms. In the past, the most basic legitimate form of supply chain finance on the payables side was called factoring.
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