Collaborate to Accumulate

A recent article described collaborative financial services as the step that takes banks to closely cooperate with corporate clients in the effort to support them in implementing solutions and services that positively impact the company’s working capital ratios.

This opens the challenge to corporate practitioners to find ways to assess their supply chain and understand what financial solutions are needed to realise a proper programme of supply chain finance. Key to success is the ability to correlate financial flows with the physical processes of a supply chain.

Supply chain management is a disciplined blend of time-based practices and technologies that support users in the design, planning, sourcing, making, delivering, servicing and returning of goods, information and funds relative to products and services delivered to end users in the global market.

There are therefore numerous processes that fall under the responsibility of supply chain management.

To move away from theory and make this article a practical guidance tool to the reader, it is appropriate to select one typical and all-time present set of processes: the source-to-pay scenario. That is the concatenations of actions that flow from the first identification of a potential provider of goods and/or services down to the settlement of payments that closes the commercial deal.

Using Figure 1 as a reference, from the initial selection (source) of a new supplier, the negotiation and ordering of goods and services, through production and shipment, the process ends with the administrative and accounting management (pay) of the commercial transaction. Many of the activities graphically depicted as a continuous flow between the initiator of the transaction (buyer) and the receiver (supplier) in reality overlap and intersect.

Given these conditions, how can a supply chain manager identify the areas to impact in order to improve working capital ratios and – at the same time – work with the finance colleagues to assess the solutions of collaborative finance the company might need to support current and future initiatives? Corporate decision makers do not want to be caught by surprise, especially when the matter is so delicate and key such as financial support and cash planning strategies.

The internal gap between supply chain managers and finance representatives must be bridged in a way that practically provides support to daily operations; otherwise it remains a theoretical attempt that only adds burden to the already busy daily duties of corporate managers.

PRACTICAL STEPS

This article highlights the key functions of a tool, in the form of a proof-of-concept model, that guides through the operational practices that support the improvement of supply chain processes and, at the same time, maps solutions and services sourced from financial institutions to truly implement collaborative finance initiatives.

The first component of the model (Figure 2) benchmarks the company’s financial ratios. This data builds a chart (Figure 3) of the distance from the performance of the best in class. A subset of the most critical ratios can then be chosen for further analysis.

The supply chain manager should select those ratios that are directly correlated and affected by the management of the company’s supply chain operations.

In the effort to assess their supply chain and understand what financial solutions might be of help, it is advisable that corporate supply chain managers articulate their message starting with the key financial figure of working capital:

Working capital = accounts receivable + inventory - accounts payable

Turning back to the example of the source-to-pay process, the first action is to identify which components of working capital will be most likely affected. The management of the relationship with the supplier, plus the organisation of the physical flows attesting and concluding the commercial agreement clearly underline a strong correlation with the accounts payable and the Inventory items of the working capital equation. These are reflected in the chart as days purchasing outstanding and days inventory outstanding ratios.

Widening the perspective of how the source-to-pay process activities link with the company’s financial numbers beyond working capital, it becomes evident that another key figure, the cost of goods sold, is also heavily involved.

The higher the projected value, the higher the priority to attack and fill the correspondent financial performance void.

If well engineered, the concept model moves to a next step and presents the supply chain manager with a list of supporting practices that most likely will contribute to achieve the expected result.

It is a good and advisable approach to adopt those practices that present the characteristics of being current, structured, proven and repeatable. That is, must not be emerging or antiquated, have clearly stated goal and scope, have been successfully applied in a working environment and have been proven in multiple industries.

The output of the model as it is would satisfy the supply chain manager’s appetite to speak the financial words, by empowering him/her with methods that present a high probability of success for the purpose of closing the performance gaps. Hence it would be possible to link the manager’s name to the positive result of the company’s improved economic profit.

In reality the dynamic nature of modern supply chains, their intercontinental reach, and the need to financially sustain cross-border trade relationships demand a continuous injection of capital. The need to establish a symbiosis between enterprises and banks pushes financial directors to seek internal support when selecting the most appropriate and effective solutions to be sourced from their financial partners. The ability to look at operational processes under a financial lens provides the supply chain manager with the best option to succeed.

THE SUPPLY CHAIN MANAGER’S BEST FRIEND

Within each of the source-to-pay process elements a number of transactions are generated. These operational transactions trigger corresponding financial transactions. As an example, when the flow foresees the issue of an invoice from the supplier (issue invoice process element in Figure 1), this same operational (supply chain-related) transaction triggers an equivalent set of accounting transactions (financial chain-related) such as transmitting, reconciling, confirming payment orders, and establishing a final position for the transfer of funds.

The model therefore provides a tool that increases the visibility of the supply chain manager as to how the company’s finance department manages an activity triggered by the physical chain.

The model can be used as well as a pre-sales tool by banks who want to come up to the corporate executives with a more process-oriented approach to generate new sources of business.

As soon as the institution is able to intercept the instant when the accounting transaction is triggered by the supply chain process (trigger point in Figure 4), it will be able to offer added value services. As can be noted from the picture, there are many trigger points that can activate added value financial services. The bank can intercept them – and therefore increase its offer – integrating the processes of the physical chain upon a technological platform capable of recognising them and, consequently, activate the proper triggers.

Many banks are already approaching this at an international level. JPMorgan, Deutsche Bank, ABN AMRO, Abbey-Banco Santander and Unicredit Group are on the verge of selecting offers that fall under the clout of collaborative finance solutions.