Supply Chain Management Primer

What is Supply Chain Management ?

Even among professionals in the industry, there is still confusion between these
concepts. The Council of Supply Chain Management Professionals (CSCMP), formerly
known as the Council of Logistics Management (CLM), defines it as the process of
planning, implementing, and controlling the efficient and effective flow and storage of
goods, services, and related information from the point of origin to the point of
consumption for the purpose of conforming to customer

The following lengthy, but not all-encompassing, list of business activities and functional
areas comprise supply chain management operations.

• Customer service
• Demand management (forecasting, pricing, customer segmentation)
• Procurement (purchasing, supplier selection, supplier base rationalization)
• Inventory management (raw materials, ‾nished goods, MRO3 items)
• Warehousing and material handling
• Production planning and control (aggregate planning, workforce scheduling,
factory operations, etc.)
• Packaging (industrial and consumer)
• Transportation management
• Order management
• Distribution network design (facility location, distribution strategy, etc.)
• Product return management

Supply Chain Management as a Basis of Competitive Advantage

Since supply chain management can help firms become more competitive in their
particular industry, it becomes relevant to examine how it a®ects each of the four
common bases of competition: cost, quality, flexibility, and response time.

In order to increase net income, a company can either try to earn more revenue (often
quite a difficult task) or lower its operating costs. Effeective supply chain management
can reduce a firm's operating expenses by eliminating wasteful redundancies and
inefficiencies within the chain. Many of the solutions take advantage of technological
applications either to execute historically paper transactions electronically or to provide
more accurate information for managers to utilize when making decisions.

E-procurement allows purchasing personnel to execute transactions in a

fraction of the time and for a fraction of the cost that it took them before. This frees them
to concentrate the bulk of their day on building supplier relations and monitoring the
performance of existing suppliers .

One of the most obvious cost reduction opportunities lies in the area of inventory
management. Better relations and information-sharing with suppliers and customers
allows a company to reduce the required levels of inventory that flow through the
channel, thus improving the turnover ratios and decreasing the amount of capital that
must be invested in risky inventory.

Very few companies are entirely vertically integrated {that is, able to perform every act
necessary from extracting the raw materials that are the inputs for the product to
delivering the finished good to the end user's dock. Companies, therefore, must rely on
suppliers, service providers, and distribution channel partners to perform many of the
functions required to deliver a quality product that meets the customers' increasingly
demanding needs. Cooperation and collaboration among the members in the chain can
help to reduce the delays that often result in lower levels of customer satisfaction.

Reliable sourcing and collaborative product development helps the firm to produce
the product correctly the ‾rst time so that the level of defects decreases without the
addition of costly thorough inspection procedures.

More and more, customers are increasing their demands of vendors for customized
products. In some cases the customer is large enough that these requests must be
honored or else the fate of the company is in danger.

The question arises when a company tries to meet the individual demands
of thousands of customers for customizable products. Firms can utilize production
techniques like mass customization and postponement to improve their flexibility in
responding to specific customer demands. The added demand visibility that effective
supply chain management provides enables firms to see this data almost in real time
and react to any changes. The customer receives a higher degree of service without the
need for additional inventory investment within the channel.

Many industries have become increasingly dynamic as new technological advancements

have shortened product life cycles for many products to six months or one year. Firms
must be able to cut their product development time so that they can be first to the market
with the latest technological innovation. Cross-functional teams are now being used to
reduce the time that it takes for new products to be designed. The reduction of inventory
in the pipeline makes a firm more nimble in the market. Since the product life cycle is so
short, companies want to carry lean levels of stock so that they reduce the possibility of
obsolescence when the next innovation hits the market. Without the problem of excess
inventory, firms are much more eager to introduce new products that threaten to
cannibalize the sales of existing ones.
2.1 Supply Chain Management as an Advantage in Cost

The most visible benefit of integrated supply chain management is a reduction of

operating costs. Almost every supply chain integration initiative has cost savings as one
of the primary motivating factors. Any savings that can be extracted from supply chain
operations manifest themselves as direct additions to net income (the proverbial \bottom
line"). Many opportunities exist for companies to capture low hanging fruit by
implementing supply chain projects because these opportunities were much more
difficult to recognize and capitalize on without the recent technological progress and the
business community's endorsement. Some of the techniques and methodologies include
E-procurement and inventory reduction programs.

The main goal of E-procurement is to reduce the transactional (operational) costs

involved with classic procurement. By moving paper-based transactions to an electronic
form, companies can save the costs of expensive three-copy requisitions and mailing
expenses. An important aspect of E- procurement is empowering the employees to
make certain non-strategic purchases (generally MRO items) right from their desktop
without getting approval from a supervisor. This saves each person time in their workday
and drastically reduces the time that it takes for a requisition to be filled once
it is initially made. It also reduces the likelihood that employees will become frustrated
with the approval process and just purchase the item at an o±ce supply store. This
maverick" purchasing costs the company because the employee is not taking advantage
of the firm's negotiated rates with suppliers based on its aggregate purchasing power. E-
procurement also reduces manual errors in purchase order processing that ultimately
provide greater quality of information and reduce the rework expenses. By reducing the
time and e®ort that it takes employees to make day-to-day purchases, procurement
personnel are free to concentrate their e®orts on strategic activities like managing
supplier relations, working with engineering in cross-functional teams on product
development, and evaluating supplier performance. These value-added activities help to
elevate procurement to a strategic-level activity as a source of competitive advantage

Many firms have been able to realize substantial cost savings by engaging in inventory
reduction programs. Swedish furniture manufacturer Ikea had a major problem in
matching production with demand for its goods. After an unsuccessful adoption of an
enterprise resourse planning (ERP) system, the firm implemented a new demand-
planning decision support system from Manugistics in 2002 that has since resulted in a
20% reduction in inventory levels for the products included in the pilot program

2.2 Supply Chain Management as an Advantage in Quality

The quality of a manufactured good is largely dependent upon the raw materials that are
utilized in the production process. When a firm has strategic partnerships with its
suppliers, its product development teams can tap into the vast knowledge that its
suppliers have about the materials and components that will be used to produce the new
product. Suppliers can help the designers determine which of their offerings would
produce the best quality ‾nished product. Sun Microsystems director of corporate supply
management cites supplier involvement as crucial in the firm's new product development
process.
Quality is currently being interpreted as not only producing a defect-free product but also
delivering it to meet the customer's requirement as well. Customers are more demanding
than ever before, and just like suppliers, their input is inseparable from the development
process. The customer must set the standards of acceptable performance along with the
manufacturer so that every party can agree on what metrics should be measured and
what constitutes satisfactory performance

When suppliers also understand the customer requirements, they are generally more
willing to work with the manufacturer to satisfy the ultimate customer. Many suppliers
recognize that they lose business as well if the end customer is not satis‾ed, so they
strive to meet the quality and delivery requirements of the manufacturer. Relationships
between all of the parties in the channel are absolutely critical to the competitive position
of all of the companies involved in the product's supply chain .
2.3 Supply Chain Management as an Advantage in Flexibility

As discussed above, customers are more demanding now than ever before. Companies
have always dropped everything at the requests of large customers. The loss of any of
these accounts would be devastating to the corporation, so managers always have done
anything they could to satisfy them. The difference now is that many of the smaller
customers as well are demanding some form of customized product whether it be a
choice of color or the ability to design the product specifications themselves. Forecasting
at the specific stock-keeping unit (SKU) level has always been much more di±cult than
considering the aggregated product group. Firms cannot afford to tie up capital in
enough inventory of each style and color to meet customers' highly variable demands.
These manufacturers must develop °exible methods of production in order to respond to
customer desires. One such production method is mass customization, in which the
manufacturer assembles a customized product from mass-produced components.

Buyers think that they are getting a customized product, but they are merely purchasing
a standard product with a certain added feature. Mass customization requires several
attributes in order to be successful. The products should be modularly designed, thus
facilitating quick, easy assembly. Companies need to have a sophisticated order
management information system that can capture customer profiles, accommodate a
large volume of wide-ranging orders, and retain every minute detail about each order.
Real-time inventory levels and lead time information become critical so that the
assembly operation can determine if it has enough components in order to meet the
production schedule .

Supplier relationships again become especially important here regarding current lead
time information. Postponement, also known as delayed differentiation, is the delay of
the final identity of the product until the last possible moment. This allows for production
of base units to be made according to aggregate forecasts, which are more accurate
than those for a specific SKU. The costs are postponed until the goods are actually
assembled, and the manufacturing operation is able to reduce the risk of obsolescence
and produce the exact product that a customer demands.

Thus, postponement practices can be used to combat demand uncertainties that are
unable to be forecast.

Hewlett-Packard has used mass customization with postponement in its European

distribution center (DC) to reduce stockouts for its printers. Production facilities
manufacture generic printers which are customized for individual international markets at
the DC only after firm orders from customers have been received. This strategy has
simultaneously resulted in higher service levels, inventory reductions, and increased
prfitability. Dell, Gateway, Titleist, John Deere, Black & Decker, and Motorola are more
examples of companies currently utilizing mass customization techniques.

A related supply chain strategy that some firms have utilized to establish a competitive
advantage is flexible manufacturing. Many production facilities have dedicated
manufacturing and assembly operations that can take hours or even days to change
over to the production of another product. Firms that are able to design their
manufacturing operations so that they can produce multiple products can more-
effectively tailor their production runs to actual customer demand.

2.4 Supply Chain Management as an Advantage in Response Time

Flexibility and response time are inseparable in practice. Most companies can do almost
anything if they have a year with which to work. Flexibility in the current business sense
is not measured in years but in days and possibly hours. In order to be truly deemed
flexible a firm must be able to respond quickly to changes in customer requirements.
Inventory must be able to be acquired in a short period of time if the production schedule
must be adjusted to meet unexpected demand.

Speed is crucial in today's business environment. With many product life cycles being
one year or less in length, companies must look for ways to develop their products
quickly and get them to market to meet the customers' current needs before their
competitors can. Supported by supply chain management's focus on the organization
(and the chain) as a whole instead of as functional silos, many companies have
introduced cross-functional teams into their design process. These teams include
representatives from engineering, purchasing, Finance, marketing, operations, and
strategic suppliers and customers. With input from the experts in all of these functional
areas, the team can design a feasible finished product in much less time that before.

This technique almost eliminates the need for engineering redesign when purchasing
looks at the specs and says that it cannot procure the appropriate materials at the
projected cost or when operations explains that the die exchange time would be too
long. With real-time input from all of these entities, engineering can draft a design that
satis‾es each party without the need for countless drafts.

Response time is especially important in service supply chains, where a service delay or
interruption could cost the customer thousands of dollars per minute

3 Challenges to Supply Chain Integration

The previous section highlighted many advantages of effective supply chain

management initiatives. The truth is that while many companies have benefitted from
recalibrating a portion of their supply chains, very few, if any, supply chains are fully
integrated throughout the entire channel. Consequently, these firms have failed to
experience all of the benefits of supply chain management.
Two major challenges to supply chain integration:
Global optimality
Managing uncertainty.

Traditional supply chain strategies have sought to improve a specific piece of the supply
chain, such as transportation cost reduction or increased capacity utilization, without
regard to its effect on the total system performance.

Effective supply chain managers must balance many competing costs and performance
metrics. Decision makers in a fully-integrated channel must consider global optimality by
improving the performance of the entire supply chain, which can encompass many
disparate firms. Even though the potential benefits are great, many decision makers are
reluctant to sacrifice their firm's short-term profit for the long-term benefit of the entire
channel. The metrics that evaluate supply chain decisions must be modified to
encompass this broader objective.

Uncertainty affects practically all of the decisions made within the supply chain. These
are not simply those decisions based on customer demand, but supplier and
intermediary performances are uncertain as well. The effects of uncertainty can be
dampened by the availability and exchange of information throughout all levels of the
supply chain. Working more closely with suppliers, customers, and intermediaries
enables each entity to understand the others' operations and incentives so that contracts
and agreements can be designed and managed to make the entire supply chain operate
more predictably.

4 Summary

Supply chain management provides enormous opportunities for all companies to

improve their competitiveness. No matter how many strides a ‾rm may have made in the
last two decades, many more opportunities still exist because no one has yet ‾gured out
how to manage the entire supply chain completely. Even small companies with a
relatively simple operation can find ways to improve their market position with supply
chain techniques. The main thing to remember in any supply chain initiative is the
importance of strategic relationships and partnerships with suppliers and customers.

None of these techniques will work without support from all of the players in the
chain. The information needed to utilize the systems will not be available without the
cooperation of suppliers and customers. The biggest challenge facing executives and
managers is the difficulty in getting all of the parties in the chain to make decisions
based on what is best for everyone involved rather than on what is best for each
individual organization. This shift in mentality is critical as competition ceases to be
between businesses but moves toward being between supply chains.
 Supply Chain Finance

Introduction
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. Factoring is essentially a loan-shark arrangement where a
financial institution or third party buys receivables from a supplier at some
material -- read: often outrageous -- discount relative to the face value of the
obligation." (Jason Busch, Live Dispatch: Ariva and Orbian Partner to Take on
the Banks, Spend Matters)

However, it's a lot more than just factoring, early payment discounting, or
inventory shifting. It's balancing credit, financing options, inventory management,
and other supply chain variables to optimize working capital, and much more.
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 labor 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.
(Statistic from the recent Demica study.)

Supply Chain Finance is 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 payable outstanding, 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 modeling 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 it's cash flow modeling and working capital optimization
tools.

Parties Involved
There are four primary types of players in supply chain finance. There is the
buyer, the supplier, the technology provider, and the financing institution.
Buyers are the primary drivers of supply chain finance. As the builder of brands,
and associated advertising campaigns, they are largely responsible for shaping
consumer demand for the products they wish to sell. They're also the first in the
chain to feel the pressure to reduce costs in a market where raw material prices
keep rising but consumers expect prices to keep falling in the Walmart Rollback
era.

Suppliers need good supply chain finance the most. As the company that
manufacturers the goods, they not only feel the current increases in raw material,
energy, and labor costs the most, but traditionally hurt the most since they need
to bear the brunt of the cost and typically go the longest between the initial outlay
for raw materials, overhead, and labor and the day they finally get paid for
producing the product.

Technology Providers are the enablers of supply chain finance. They provide the
technology that connects all of parties together, and enables the visibility and
communication required to support modern supply chain finance strategies.
Financing institutions play the role of lender in supply chain finance and offer
various types of financing, including Global Asset Based Lending (GABL),
inventory financing, and insurance, and may offer payables discounting and
receivables management services.

Benefits
This section discusses the benefits to buyers, suppliers, and both parties.
To Buyers and Suppliers

The great thing about supply chain finance is that, when done right, it benefits parties all
along the supply chain. The benefits described in this section, divided into financial,
automation, and general categories, apply to buyers and sellers alike.

Financial

Supply Chain Finance brings a host of financial benefits to the supply chain. Most of
these cannot be obtained through more traditional methods, or at least not to the same
degree that Supply Chain Finance enables them.

Lower End-To-End Costs

The primary benefit is lower end-to-end supply chain costs. By automating most of the
transactions, including approvals and payments when multi-way matching between
purchase orders, good receipts, invoices, and contracts lead to non-disputed invoices,
supply chain finance removes a lot of manual processing, and its associated
administrative overhead and transaction costs from the chain for all affected parties. This
results in an instant cost reduction.

Unit Cost Reduction

Proper Supply Chain Finance, unlike basic sourcing, inventory shifting, or early
discounting, actually takes cost out of the chain instead of just squeezing profit margins
or shifting cost from a buyer to a supplier.

Shorter Cash-To-Cash Cycles

By automating transactions and enabling third party financing at various points of the
supply chain through additional event-based visibility, cash-to-cash cycles can be
converted for buyers and suppliers alike. This can substantially reduce costs of financing
and, thus, overhead costs.

Increased Cost Transparency

Effective Supply Chain Finance programs not only point where the costs are, but what
they are for. This allows an organization to compare its cost to market averages and
increase focus on the areas of the supply chain that are truly ineffective from a cost
perspective. No more guessing.

Reduced Cash Flow Uncertainty

With appropriate Supply Chain Finance solutions, buyers know what they owe, to who,
when, and for how much as soon as the invoice is created and suppliers know when they
are going to be paid, how much, and what opportunities they have for discounted early
payments or third party financing and how much it will cost.

Working Capital Optimization

When a holistic Supply Chain Finance program is put in place, and all areas that impact
the supply chain appropriately aligned and connected, for the first time an organization,
with the proper tools, can truly being to optimize its working capital. No more excessive
hoarding of cash or borrowing to hedge against the unknown.
Through the enhanced visibility and collaboration that results from a sound supply chain
finance program, as discussed in later sections, treasurers will have direct knowledge of
sourcing strategies, payment terms, seasonal variations, and transport methods and this
will allow them to plan cash requirements with greater precision and take advantage of
more investment opportunities.

Automation

Supply Chain Finance brings a host of automation benefits to the supply chain. Although
many of these can be obtained through more traditional supply chain technology
solutions such as e-Procurement, e-Payment, and inventory management, the benefits are
greatly enhanced when these traditional technology solutions are integrated into a Supply
Chain Finance Framework.

Reduced Paper

Automating the processing and payment of purchase orders, goods receipts, and invoices
when there are no discrepancies in a multi-way match considerably reduces the amount
of paper that must be manually processed.

Minimization of Data Errors

Every time something is manually entered, and re-entered, another opportunity for human
error creeps in. Since human error is usually the major cause of discrepancies, that only
results in considerable man hours being invested to clear up the confusion, it's easy to see
how improved automation can substantially reduce data errors.

Reduced Transaction Processing Time

Automation allows non-disputed transactions to be processed in a seconds, not minutes,

hours, or days.

Faster Dispute Management

Since discrepancies are brought to light faster, as well as their root causes, they can be
clarified and resolved much faster using automation-enabled Supply Chain Finance
solutions than they could be resolved using purely manual methods.

Increased Inventory Visibility

Automation, and the increased visibility that it offers, allows you to query where your
inventory is at any time. It enables an organization to instantly know when it hits a
checkpoint, clears customs, and changes ownership.

General

The increased supply chain visibility enabled by good Supply Chain Finance solutions
lead to more than just the automation and financial benefits discussed in the previous
sections. This section overviews some of the additional benefits Supply Chain Finance
solutions enable.

Improved Agility

With an integrated end-to-end Supply Chain Solution, an organization can more quickly
respond to demand changes, transportation delays, production short-falls, and unexpected
changes in cash-flow.

Increased Analytics Capability

The additional data made available through end-to-end Supply Chain Solutions enables
additional analytics. This allows for the continual refinement of demand forecasts,
inventory optimization, and working capital plans.

Enhanced Productivity

Supply Chain Finance reduces the amount of time an organization needs to spend on
tactical manual processes such as invoice approval, payment, and data collection, and
frees up an organization's resources to spend their time on more strategic activities. This
allows for a significant leap in productivity.

Improved Customer Service

Less time on manual transaction processing, better demand forecasting, and improved
productivity will allow any organization to make great strides in its customer service.

Improved Supply Chain Reliability

Having timely information on a regular basis naturally leads to improved supply chain
reliability. An organization knows where it's inventory is, what its suppliers are working
on, and if they are currently experiencing problems that could lead to a slow down. It
even allows parties to work together to detect, and resolve, potential problems before
they appear.

To Buyers

In addition to all of the benefits outlined in the previous section, Supply Chain Finance
also brings some specific benefits to buyers that can not be achieved through more
traditional supply chain improvement programs.

Off-Balance Sheet Financing

Knowing precisely where inventory is at any given time allows a buyer to securitize it's
assets and obtain off-balance sheet financing using a number of different options that
might include early receivables programs (where a buyer can ensure early receivable
payments to its supplier for as little as 0.5% to 2.0% per annum against non-disputed
invoices), toll manufacturing and netting programs (where off-trade positions between
Original Equipment Manufacturers (OEMs) and Contract Manufacturers are netted), and
inventory financing programs (using consignment). This allows it to obtain additional
capital at low cast without negatively impacting its balance sheet.

Increased Supplier Interest

A buyer with a strong supply chain finance program becomes considerably more
attractive to a supplier than the average buyer since most suppliers are constantly in a
capital crunch in a market where the average buyer is trying to improve their financial
position at the supplier's expense by increasing Days-Payable-Outstanding (DPO) terms.
More Days-Payable-Outstanding flexibility

By enabling a multitude of financing options for it and its suppliers, the buyer has a lot
more control over its DPO options and the cost associated with each option.

More Control Over The Procure-To-Pay Cycle

An integrated Supply Chain Finance solution gives the buyer more control over the
Procure-to-Pay procedure than a traditional e-Procurement, EIPP (Electronic Invoice
Presentation & Payment), or P2P (Procure-To-Pay) solution which does not take the
broader financial picture into account.

In addition, properly managed supply chain finance will help a company treat its payables
as an asset. In some cases, this will mean trading on their credit to reduce the amount of
cash they need today to pay their suppliers. In others, it might be using a dynamic bid/ask
marketplace that offers early payment discounts down to the specific day that the supplier
wants to get paid.

To Suppliers

The great thing about Supply Chain Finance is that, when done properly, it provides as
much advantage to the supplier as it does to the buyer, which truly allows costs to be
taken out of the chain without unreasonably impacting profit margins or shifting costs to
the parties least capable of bearing them.

Below Market Financing Rates

A good SCF solution, by increasing visibility into supply chain events throughout the
chain, gives the supplier the ability to leverage the buyer's credit rating against their
receivables. This is an enormous benefit to a supplier whose normal cost of short-term
financing is 20% to 40% when their buyer has a much lower cost of capital, often under
12%.

Reduced Cash Flow Uncertainty

If a supplier does not know that a payment will be late(r than expected) until the payment
fails to materialize on the expected date, the supplier could end up scrambling for cash
and be forced to accept very costly short-term capital financing (in the 20% to 40%
range). This will ultimately drive up the cost of the products they make by a significant
amount. A good SCF solution allows the supplier to see posted payables, with the
payment date, as soon as they are posted.

On-Demand Access to Funding and Financing

A good Supply Chain Finance Solution will include an on-demand software-as-a-service

payment or intermediation platform that will connect all parties, buyers, suppliers, and
lenders, together in a manner that will allow suppliers to instantly take available of the
low(er)-cost lending options available to them (as enabled or co-negotiated by the buyer)
at any time.

More Days-Sales-Outstanding Flexibility

The supplier now has much greater control over it's Days-Sales-Outstanding as it can
choose to convert receivables from the time the invoice is approved until the maturity
date into cash using early payment discounts from the buyer or through low-cost sales of
such receivables to third party lenders.

Strategies for Success

This section overviews a number of supply chain finance strategies that anyone can use to
improve the cost of the capital used by their business. It also points out some additional
strategies for success that are specific to buyers and sellers as a lead in to the following
sections that outline a methodology that buyers and sellers can use to establish and take
full advantage of supply chain finance programs.

When you consider that global sourcing and outsourcing considerably complicates the
value exchange process, Supply Chain Finance quickly rises in importance. As such, its
important to have solid strategies from day one, lest you select the wrong ones and
instead of seeding success find failure down the road instead.

Balance Open Accounts and Letters of Credit

It's important to understand an organization's cost of capital versus the supplier's cost of
capital. Open account terms, for example, may bear lower fees than a letter-of-credit
based transaction, but they can also restrict a seller's access to working capital financing
and increase its costs of working capital. The additional cost borne by the supplier for
accepting extended payment terms, for example, could be finding their way back into the
cost of goods. Treasurers and procurement staff should determine which party has the
lower financing costs and greater access to capital, and payment terms should take this
discrepancy into account. Furthermore, today's technology is steadily blurring the lines
between 'pure' letters of credits (LCs) and open account transactions. As the platforms
become more sophisticated, automated, and flexible, users will be able to pick and choose
the best features from the two payment methods, specific to the situation at hand.
Letters of Credit (LCs) are a traditional risk mitigation tool for suppliers, but they come
with costs. Some of those costs are financial, such as higher financing charges for the
buyer. Other costs are operational and may not show up on typical financial reports. For
example, returns for credit are usually impossible when using LCs. There is also the
considerable cost and complexity of processing change orders through a LC system in
parallel to the procurement system.

However, open accounts have their costs too. Although much less expensive for the
buyer, they can be much more costly for the supplier who may not be able to leverage
them when short term financing is required. However, a buying company must carefully
consider whether they want to help finance a supplier. This is particularly true when the
buying company is only a small fraction of a supplier's total sales. How does the buyer
know the costs of using LCs will be reflected in the price that particular buyer pays?
More, And Better, Financing Options
Identify and enable financing for you and your suppliers at multiple points in the supply
chain, including raw material production, intermediate production, point of shipment,
customs clearance, and arrival at a Vendor-Manged Inventory (VMI) hub. This will allow
you, as a buyer, to select the right financing vehicle at the right time to minimize your
cost of capital.

More specifically, you should have three or more of the following available to you: low-
cost line of credit from a bank from which you have an established relationship, third
party financing opportunities at various points in the supply chain where inventory could
shift ownership, factoring, trade receivables securitization, and, providing it is not more
disadvantageous to the supplier than other financing options, early payment discounts.
Also look for off-balance sheet supply chain finance, which is often cheaper than junior
debt. This can position the buyer as a partner and low-cost customer to a supplier who
can get paid faster through this arrangement. A number of different options for off-
balance sheet programs exist in the marketplace, including early receivables programs
where a buyer can ensure early receivable payments to the supplier for as little as 0.5% to
2.0% per annum against non-disputed invoices, toll manufacturing and netting programs
where off-trade positions between Original Equipment Manufacturers (OEMs) and
Contract Manufacturers are netted, and inventory financing programs using consignment.
Improve Forecast Accuracy

One of the best ways to take cost out of the supply chain is to take unnecessary inventory
out of the chain, as this just leads to additional storage, overhead, and financing costs and
losses when it has to be cleared at considerable markdowns.
Inventory Optimization

Optimize inventory management across the supply chain. This involves reducing total
supply chain costs and lead times, not just inventory shifting onto a supplier. Also, when
considering whether or not to (temporarily) transfer control to a third party during
shipment (possibly using consignment), make sure to include the additional customs fees,
excise fees, and taxes that could result. Look for free trade zones, secure trade zones, and
free trade agreements that could reduce not only these fees, but fees in general if goods
are simply being shipped through a country to their final destination.
When attempting to optimize inventory, consider segmenting customer channels and
products which can allow for more accurate forecasting and faster response times,
leading to a higher return on assets and reduced stock-outs in response to demand
changes.

Lower Your Supplier's Cost

A recent Aberdeen benchmark report found that 39% of suppliers indicated that their top
issue is their ability to access financing at acceptable terms. The more it costs a supplier
to make a product, the more it will cost a buyer to buy it. Therefore, any strategies that
reduce a supplier's cost of production or operation should be strongly considered and
employed. After all, when faced with increased risk, suppliers are more likely to shorten
payment terms, raise prices, or limit product availability, all of which ultimately drives up
product, and supply chain, cost. Some specific programs that may be beneficial are:

Early Payment Programs

To make a product, a supplier needs to acquire raw materials, pay its employees, and
maintain it's plant and equipment. This adds up. If there is a significant time lag between
when the supplier needs to acquire the raw material and when a buyer finally pays for a
finished product, the supplier will have to draw financing, which can be costly if they are
a small or mid-sized supplier without a lot of leverage and access to cheap capital. Thus,
paying early will reduce the supplier's cost of capital, the markup they need to charge to
make a profit, and, ultimately, the buyer's price.

Inventory Ownership Solutions

Consider engaging a third party who will buy, and take ownership of, the product from
the supplier as soon as it is finished and then sell it to you on a Just-In-Time (JIT) basis.
Although the third party would charge a mark-up for their services, if the cost is
considerably less than the combined inventory and financing cost to the supplier, the
supplier would be able to lower their price considerably, which would still result in a
lower price to the buyer even after the third-party mark-up costs. (On average, an
inventory management company is likely to have more space, financing leverage, and
inventory management expertise and, thus, a significantly lower storage cost than a
supplier.)

Virtual Consignment Financing

If a buyer is considerably larger than a supplier, and especially if the buyer needs a
considerable amount of a certain raw-material across its supply base, the buyer could
consider using its added leverage to buy the raw materials itself and then sell them back
to the supplier at its cost. If the buyer's annual needs were, say, five or ten times that of
the supplier, one could see the potential for significant volume-based discounts. Also,
when this strategy is combined with early payment (i.e. instead of selling the product to
the supplier, the buyer simply trades it to the supplier and deducts the raw material cost
from the cost of the finished good at purchase time), this can often enable a supplier to
significantly reduce unit costs.

Innovative, Collaborative, MindSet

Supply Chain finance requires the collaboration of multiple parties to succeed.

Furthermore, it requires an innovative mindset as many of the best solutions will be
relatively non-traditional solutions compared to the non-collaborative silo solutions
traditionally employed by many business units. Practitioners must be prepared to embrace
new ways of doing business in order to achieve the full value that is there for the taking.
It takes more than just "thinking outside the box". It takes a commitment, and a drive, to
continually innovate the business to the next level.
Align Purchasing, Engineering, and Finance

Purchasing, which includes logistics for the purpose of this wiki, is responsible for many
of the payables that end up in accounts payable. Engineering, responsible for New
Product Design (NPD), is responsible for much of the product cost, baking in up to 80%
of the costs in the design phase. Finance is responsible for making the payments
generated by Purchasing and generating the reports necessary to comply with federal
regulations, such as Sarbanes-Oxley. Thus, in order to reduce operating costs and
optimize working capital, all units need to work in unison.

Create a Cross-Functional Team

Aligning purchasing, engineering, and finance is a great start - but it's not enough. To
truly succeed, each of these units will need to work together on a daily basis. This will
require a cross-functional team whose driving goal is to optimize costs across the supply
chain while not only preserving, but increasing value to all parties. This will include
increasing quality, reliability of delivery, and reducing risk as well.

Employ Capital and Cash Management Tools

Be sure to make heavy use of automation. Manually-intensive financial transaction and

trade document processing leads to long processing times, poor visibility, and high
transaction costs. Well designed e-Procurement and e-Payment systems can perform 2-
way and 3-way matching and automate routine transactions within pre-defined contracts
and tolerances.

Also, be sure to take currency issues into account. Transaction fees, volatility of dollar-
based invoices versus a domestic currency, and fluctuating exchange rates can complicate
otherwise well thought-out plans.

Strategies for Failure

As with any other endeavor, if done improperly, or non-commitally, it is possible to fail -

and in the case of supply chain finance, fail spectacularly, especially if an organization
uses one of these unfortunately all-too-common examples of supply chain finance.

Shifting Inventory to Suppliers

With increasing costs across the board and little or no room to increase prices, companies
are scrambling for new ways to increase profits. This has resulted in many companies
scrambling to find new ways to reduce inventory and reduce one of the biggest costs on
their balance sheets - inventory carrying charges. Unfortunately, many of these
companies have chosen the unenlightened solution of simply delaying purchases until the
last minute, which forces their suppliers, who are often ill-equipped to do so, to hold the
inventory instead. Considering that most suppliers have to wait an unduly long time
between their initial cost outlay to make a product and the eventual payment for that
product in an environment where many buyers are now demanding payment terms that
include 60, 90, or even 120 Days-Payable-Outstanding (DPO) and that most do not have
large storage facilities or inventory management expertise, this drives up their costs from
all angles. Their financing charges go through the roof as they have to take out more
high-cost short-term financing, often at rates of 20% to 40% per annum (which are
especially common in developing economies), their costs of operation go through the
roof as they have to either acquire additional assets or pay a third party to manage the
inventory, and their opportunity costs rise as they are prevented from ramping up
production, due to lack of funds and storage, on New Product Development that could
ultimately prove more profitable to them, and the buyer.

Increasing Days Payable Outstanding

One of the the primary actions that buyers who are new to supply chain finance take is to
extend payment terms for their suppliers, which often have constricted access to short-
term financing with a significantly higher cost of capital. This cost-shifting to suppliers
might result in better Days-Payable-Outstanding (DPO) statistics to the buyer in the short
term, but ultimately results in a less financially stable, and thus higher-risk supply base,
and, eventually, an overall higher cost of goods sold versus competitors who have
mastered sound SCF practices.

Strapped for cash, and lacking adequate access to affordable capital, these suppliers may
be forced to delay raw material ordering, squeeze work-in-process inventories, or skimp
on plant maintenance or quality processes. Each of these options negatively impacts the
buyer's return on investment and could lead to significant supply shortages, especially if
demand spikes.

Mistaking Early Payment Discounts and Factoring for Financing Options

Early payment discount programs, regular or automated, do not address the root causes of
financial flow inefficiency and can in fact exacerbate the underlying drivers. Instead of
shifting inventory to a supplier, you're essentially shifting costs and this often results in
cost increases, rather than cost reductions, across the supply chain.

Buyer SCF Program Implementation

This section overviews some steps a buyer could take in defining and implementing a
Supply Chain Finance program.

Align Purchasing, Engineering, and Finance

Consistent with the strategies for success, the first thing a buyer should do is be sure to
align the various business units within its organization around the common goal of
improving operations across the supply chain within and beyond the four walls of the
company.
Create a Cross-Functional Team

Once the different business units are aligned along the common goal of improving supply
across the supply chain, the next thing to do is to form a cross functional team that will
lead, monitor, maintain, and improve the initiatives on a going-forward basis.

Adopt a Formal (Supplier) Risk Assessment Process

It's important to understand the capital costs and foreign exchange risks embedded in
every purchase from your perspective and from your supplier's perspective. As a buyer,
be sure to assess key pressure points for your suppliers that are important for their
business continuity. Negotiating ten million dollars worth of savings will not do your
organization much good if the supplier goes bankrupt three months into the contract.

Holistically Evaluate Payment Policies and Systems

In addition to the impact on your company, make sure to assess the impact of your
payment policies on your borrowing base, credit, existing banking relationships, and
suppliers and whether or not they buffer your organization from credit rating changes.
Also be sure that they mitigate any potential risks from accounting and reporting acts
such as Sarbanes-Oxley.

Identify IT Deficiencies and Integration Challenges

According to a recent Aberdeen brief (Get Ahead with Supply Chain finance), an
astounding 90% of enterprises reported that their global supply chain technology is
inadequate to provide the corporate finance function with the timely information it
requires. It's vital to identify your needs up front to make sure the right technology is
selected and the integration requirements addressed before implementation, and
integration, begins.

Set Up an Automated Payment Process

Whether you use or extend your current e-Procurement, EIPP (Electronic Invoice
Presentation & Payment), or P2P (Procure-to-Pay) system or bring in a new e-Payment
system for the purpose, it is important to set-up, by way of business defined rules, an
automated payment process that will perform automatic multi-way matching between
purchase orders (cut off of contracts where they exist and current catalog quoted prices
where they do not), goods receipts, and invoices and automatic scheduling of payments
(using contracted terms or standard terms where contracts do not exist) where there are
no discrepancies that would be cause for a dispute. This will seriously reduce the amount
of manual processing required and allow the organization to set up an early payment
discount program.

Integrate Financial And Physical Supply Chain Processes

In order to truly optimize your supply chain, your costs of operation, and your working
capital, physical and financial supply chain processes have to be synched.

Identify Collaborative Solutions To Inventory, Cost, and Risk Management

Traditionally supply chain operating managers hedge by holding more inventory, but this
simply results in higher working capital. Insure that the inventory-reduction programs
truly eliminate inventory across the supply chain. Simply shifting responsibility does not
reduce costs and, if shifted to the wrong party, can significantly increase costs across the
supply chain.

Determine the Breadth of Changes to Internal Processes, Roles, and Responsibilities

that Will Be Required

The recent study The Growing Role of Supply Chain Finance in a Changing World by
Demica found that the largest hurdle for a buyer in the identification and adoption of a
supply chain finance program is "the perceived need to change internal processes".
Although this need is likely real, it's more than a necessary-evil. There's always room for
improvement, and making process changes that will improve not only your productivity
but operational costs is always a good thing, as long as they are well planned and the
necessary change management identified up front.

Implement Collaborative Processes Across the Supply Chain

This will enable early visibility into supply chain events that can be leveraged to create
flexibility around third party financing and early payment options for your suppliers
when needed. Enhanced visibility gives a buyer the ability to finance at multiple points in
the supply chain, including raw material production, intermediate production, initial
shipment, inventory holding, customs clearance, and arrival at a local vendor-managed
(or third party) inventory hub.

Actively Monitor New SCF Offerings for Additional Advantages

Supply Chain Finance is a relatively new pursuit and not a lot of vendors have solutions
that are specifically targeted at Supply Chain Finance yet. Furthermore, most of the
solutions are new and not very extensive. Thus, as time goes on, the footprint and
capability of these solutions will expand. Therefore, it is important to regularly evaluate
new technologies as they become available on the marketplace to see if they are able to
provide the organization with new capabilities or benefits that could result in a lower cost
of ownership or help the organization remove additional costs from the supply chain.
Supplier SCF Program Success

Align Sales, Engineering, and Finance

Consistent with the strategies for success, the first thing a supplier should do is be sure to
align the various business units within its organization around the common goal of
improving operations and working with its buyers to do just that.

Create a Cross-Functional Team

Once the different business units are aligned along the common goal of improving
production and supply chain operations, the next thing to do is to form a cross functional
team that will lead, monitor, maintain, and improve the initiatives on a going-forward
basis.

Adopt a Formal Risk Assessment Process

It's important to understand the operational and production risks inherent in every
contract and production run as a supplier. Be sure to understand the costs associated with
each production run from a raw material, labor, operational, and financing perspective
and the financial risks these costs carry if payment is not received in a certain time frame.
Also understand any risks to production from a potential raw material or energy shortage
or price hike.

Communicate Risks to Production and Inventory Caused By Cash Flow Barriers

Once you understand the risks you face, be sure to clearly communicate these risks to
buyers, and focus on the risks that the buyer's policies impact in particular, which include
the financial risks to your operations and their production runs that are caused by either
their inability or unwillingness to pay within a certain period of time.

Routinely Evaluate Your Various Financing Options

If the buyer is concerned about the health of their supply chain, they should be willing to
work with their suppliers to jointly set up financing options that will include their existing
banking relationships as well as yours, third party financing providers, and early payment
discounts if they have a relatively good cash situation. As a supplier, you should evaluate
each of these options on a regular basis to make sure you always get the best deal when
you secure financing either for the short term or the long term.

Identify IT Deficiencies and Integration Challenges

According to a recent Aberdeen brief (Get Ahead with Supply Chain finance), an
astounding 90% of enterprises reported that their global supply chain technology is
inadequate to provide the corporate finance function with the timely information it
requires. It's vital to identify your needs up front to make sure the right technology is
selected and the integration requirements addressed before implementation, and
integration, begins.
Automate the Invoice Process Whether you use or extend your current e-Procurement,
EIPP (Electronic Invoice Presentation & Payment), or CRM (Customer Relationship
Management) system, it is important to set-up a system that automatically invoices the
customer against defined contract terms when a shipment is initiated. This will reduce the
amount of manual processing that is required and reduce the overhead associated with
each shipment as well as the payment timeframe, especially since this will remove
manual error, the largest cause of invoice discrepancies and payment disputes that only
serve to lengthen the time between shipment and payment.

Integrate Financial and Physical Supply Chain Processes

In order to truly optimize your supply chain, your costs of operation, and your working
capital, physical and financial supply chain processes have to be synched. Furthermore, it
is this integration that allows for the injection of liquidity at various stages of the supply
chain.

Participate in Collaborative Solutions to Inventory, Cost, & Risk Management

The Demica study The Growing Role of Supply Chain Finance in a Changing World that
found that largest hurdle for buyers is "the perceived need to change internal processes"
also found that the largest hurdle for suppliers was that they found the programs to be
"invasive to their finance departments". Although these programs will require you as a
supplier to be more open about your costs, this can be to your advantage if your buyers
are willing to work with you to reduce your costs.

Determine the Breadth of Changes to Internal Processes, Roles, and Responsibilities

that Will Be Required

One of the largest hurdles in the identification and adoption of a supply chain finance
program for most companies is the the perceived need to change internal processes and
the amount of work that will ensue. Although this need is likely real, it's more than a
necessary-evil. There's always room for improvement, and making process changes that
will improve not only your productivity but operational costs is always a good thing, as
long as they are well planned and the necessary change management identified up front.

Increase Supply Chain Event Visibility

Enchanced visibility into order and shipment status and historical performance allows
financial transactions to be assessed, securitized, and (often) sold at a lower credit
premium. Furthermore, effective supply chain finance essentially provides a "virtual cash
float" by way of the receivables trading opportunity that begins with the purchase order
approval and continues until payment maturity. At any point during this process, there
exists the potential for the recievables to be securitized, financed, and even sold.

Consider Long Term Leasing Programs

Instead of buying your equipment, consider long-term leasing instead. This can not only
reduce payments up-front, but reduce your overall costs of ownership if you find that you
have to update or replace it on a regular basis.

Regularly Conduct a Cost-Benefit Analysis of Upcoming SCF Solutions

Supply Chain Finance is a relatively new pursuit and not a lot of vendors have solutions
that are specifically targeted at Supply Chain Finance yet. Furthermore, most of the
solutions are new and not very extensive. Thus, as time goes on, the footprint and
capability of these solutions will expand. Therefore, it is important to regularly evaluate
new technologies as they become available on the marketplace to see if they are able to
provide the organization with new capabilities or benefits that could result in a lower cost
of ownership or help the organization remove additional costs from the supply chain.

Authors

Michael Lamoureux, PhD of Sourcing Innovation

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