The Supply Chain A supply chain is a network of facilities and distribution options that performs the functions of procurement

of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm. Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along an arborescent network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large. Supply chain management is typically viewed to lie between fully vertically integrated firms, where a single firm, and those own the entire material flow where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Cooper and Ellram [1993] compare supply chain management to a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton, but the entire team needs to make a coordinated effort to win the race.

Supply Chain Decisions We classify the decisions for supply chain management into two broad categories -strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy (they sometimes {\it are} the corporate strategy), and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain. There are four major decision areas in supply chain management: 1) location, 2) production,

3) inventory, and 4) transportation (distribution), and there are both strategic and operational elements in each of these decision areas.

Location Decisions The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc. (See Arntzen, Brown, Harrison and Trafton [1995] for a thorough discussion of these aspects.) Although location decisions are primarily strategic, they also have implications on an operational level.

Production Decisions The strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets. As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path(s) through which a product flows to and from these facilities. Another critical issue is the capacity of the manufacturing facilities-and this largely depends the degree of vertical integration within the firm. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility.

Inventory Decisions

These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw materials, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals. However, most researchers have approached the management of inventory from an operational perspective. These include deployment strategies (push versus pull), control policies --- the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels.

Transportation Decisions The mode choice aspect of these decisions are the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy.

Each level of the supply chain is described as a tier. There can be several tiers beneath the final supplier; some of these may also be suppliers to other companies operating in other supply chains. Supply-Chain Management (SCM) is another aspect of Advanced Planning and Scheduling. It administers the flow of supplies, logistics, services and information through the supply-chain, from suppliers, manufacturers, sub-contractors, stores and distributors to customers and end-users. It involves business strategy, information flow and systems compatibility.

Benefits that can be accrued from supply-chain management include:

Improved visibility of information between suppliers and customers: quicker response to changes in demand. Shared knowledge: reducing waste and inventories, improving product quality and services throughout the chain. Development of a longer term learning network for the benefit of customers, suppliers and individuals.

The environment in which SCM can be applied is changing. For many years manufacturing companies have been striving to improve their efficiency to remain competitive. These improvements are characterized by:

A move to Make to Order production. Sub-contracting non-core activities. Smaller manufacturing batches caused by an increase in product variants. Lower inventories.

The net effect of these changes has been to oblige companies within informal supply chains to become more dependent on one another. These closer relationships mean that companies within a supply chain have a natural tendency to be involved in bids for new orders. Initial applications of SCM were developed around the use of Electronic Data Interchange (EDI), the electronic exchange of purchase order etc. While EDI fosters closer relationships between the companies within a supply chain, it tends to be a one-way relationship, driving demand from the end user back through the supply chain, without taking the true current capacity of the supply chain into account. For example EDI is, for our purposes, primarily a way for an OEM (typically a car manufacturer) to place orders on their suppliers. The ability of the supplier to produce the components is taken for granted, i.e. capacity and materials are assumed to be available. EDI works best in vertically integrated supply chains, particularly where a large percentage of a suppliers turnover (>25%) comes from one OEM client. Other SCM solutions have order transfer facilities, but go a step further by controlling stock in multiple locations. In this role SCM attempts to maintain the required stock levels whilst deciding how and from where to fulfill particular customer orders. It is, therefore, only applicable to large companies, typically producing in high volume, making largely to stock and shipping from multiple warehouses.

Risk Management

Compliance and risk management present an additional area of opportunity for the increased involvement of a treasurer. Not being adequately aware of risk exposure, not establishing necessary controls and procedures or overlooking regulatory requirements can expose the enterprise to potential fines and penalties. But even greater threats to efficient working-capital management are the uncertainties inherent in the trade process and logistics management. If the transportation network is unreliable, companies must carry extra inventory to create buffer stock. If the distribution network is inefficient, then inventory is delayed or mishandled, leading to shortages and an inability to replenish stock. If goods are held for inspection due to improper or missing paperwork, then the transaction is disrupted and payment is delayed. All of these can result in lost business and hinder cash flow. Inadequate import and export compliance procedures expose companies to risks, delays and even increased landed costs. Ford Motors subsidiary in Mexico has already addressed some of these considerations. Estanislao lvarez, sales director at the Mexican unit, says: Before looking in depth at our supply chain processes and trade costs, we were adding cost to our imports and exports due to customs duties. So we organized a "Zero Duty Task Force" to address these costs and lowered them mostly due to correct classification of goods we import to and from the US, Canada and South America. All told, we were able to reduce duties by nearly 60%. Having mapped-out and managed processes, automated tools, and professional advisory services can create a more secure and compliant global supply chain, thus minimizing the risk of supply chain delays, penalties, rising expenses or the loss of customers. Conclusions In their quest to manage and optimize working capital, treasurers around the world have the opportunity to bring a greater level of structure and financial accountability to an organization. As globalization increases, technology advances and the number of suppliers and vendors available to an organization proliferate, the need to take a broader view of the cash cycle quickly becomes an imperative. As treasurers become more aware of the business processes that can impact working capital, they gain expanded visibility and a greater understanding of how they can better manage cash. By understanding the interaction of sourcing, supply chain, finance, and risk, treasurers can employ a broader variety of management tools and

thus increase their leverage over the balance sheet. The result can be more cash for strategic investments, for expansion plans or to be returned to shareholders or owners.

Supply Chain Financing Physical v Financial Supply Chains? Physical Supply Chain Information and processes related to the status and movement of the physical goods in transit or storage E.g. Procurement, supply, logistics, Customs, quality inspection and regulatory aspects of the physical movement Financial Supply Chain Information and processes related to the status and compliance stages of the financial aspects of Supply Chain Management E.g. Supplier and Buyer Finance process progress status, DC and Open Account term and progress monitoring Treasurers should also understand an organizations cost of capital versus the suppliers 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 sellers access to working capital financing and increase its costs of working capital. The costs the supplier bears for accepting extended payment terms, for example, could be finding their way back into the cost of goods. In most cases, longer payment terms place a greater financial burden on the seller, while shorter terms place a greater burden on the buyer. 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. In higher inflationary environments in growing economies, procurement staff may be dealing with suppliers that will not want to have extended receivables if payment terms are already quite long. And some companies ad-hoc collection practices, such as restrictions on when checks can be distributed, can further lengthen the collection process. There are a number of strategic financial considerations that should be included as part of the decision-making process. For buyers, is there a better use of balance sheet cash? And for sellers, is it more important to convert receivables to cash quickly? Is a discounted early payment really beneficial to the bottom line? For organizations working in a global environment, currency issues can also affect working capital.

Transaction fees, volatility of dollar-based invoices versus a domestic currency and fluctuating exchange rates can complicate otherwise well thought-out plans. The Financial Aspects of the Supply Chain aims to give companies a real insight on the role the supply chain plays to reduce costs in the wider company business model. It focuses on how you can reduce costs and create value without resorting to lowering supplier rates. This involves moving the discussion beyond rate card discounts to inventory and network optimization. To methods in how through greater internal collaboration between finance and logistics departments, cash flow and working capital improvements can be realized. And in how greater collaboration with partners within your supply chain will result in lower total supply chain costs. Supply Chain Financing Solutions Vendor (Supplier) Financing Post Shipment Financing Pre Shipment Financing Inventory Financing (VMI) Distributor Financing Receivables Financing and Risk Management Improved collaboration between finance and other business and supply chain functions is necessary to facilitate the process to develop activity based costing. This collaboration should help to overcome the seemingly widespred inability of supply chain managers to articulate the cost and benefit of supply chain activities. Capitalsing on these opputunities requires the ability to plan for and measure supply chain performance and to effectively communicate performance implication in financial terms. The supply chain managers ability to articulate the financial implications of exchange between firms will become more important in future. Financial manager strive to obtain borrowed funds at lower costs, to select projects that offer best return, to balance the financial risks taken with investor expectation of returns and to keep the business liquid. Depending on the structure of the Supply Chain it will both tie up capital and the operating costs will also consume the business funds Funds to run the business come from the share holders, banks and other financial institutions or business revenue Possibility to make investments Independence from external stakeholders Resilience to high interest rates Capital bound When does the product cost occur and when are we paid for that product

 Parts and finished goods has to be accessible to be productive Lead time has practical impacts on the business model supporting the plant or supporting the sales organization Key Performance Indicators There are various key performance indicators that are relevant for measurement in financial supply chain management. One key metric is the cash flow cycle, which defines the period from delivery by suppliers until the cash collection of receivables from customers (Figure 1). It is the time period required for the company to receive the invested funds back in the form of cash. The cash flow cycle can be divided into the operating cyclewhich is the time period between delivery by suppliers and the actual cash collection of receivables, and the cash flow cyclewhich is the time period between the cash payment for inventory and the cash collection of receivables. The longer the cash flow cycle, the greater is the working capital requirement of a company, which means that a reduction of the cash flow cycle will immediately free up liquidity. Financial Supply Chain Management (FSCM) is a holistic response to todays business environment and challenges. We observe that todays companies are no longer satisfied with simply managing the operations and finance function with yesterdays processes and tools. Many are closely examining how they can perform better within their core finance areas. FSCM is an integrated approach to provide better visibility and control over ALL cash-related processes.

Better predictability of cash flow Reduction of working capital Reduction of operating expenses End-to-end integration of business processes

There are various FSCM components, which make up the entire FSCM solution suite within mySAP ERP and can be used independently from each other to optimize the financial aspects of the cash flow cycle. The founders of ParXlns Consulting, Inc. have implemented FSCM Solutions for many clients.

Integration of financial aspect

TURBULANT BUSINESS ENVIRONMENT

FINANCIAL DIMENSION OF DECISION MAKING

EFFECTIVE FINANCIAL MANAGEMENT Managers goal : enhance shareholder value SUPPLY CHAIN DESIGN PROBLEM- FINANCIAL ISSUE Processdata a set of products a set of markets. a set of potential geographical sites. a set of potential equipment lower and upper bounds for capacity increment

product recipes Financialdata product prices directcosts relationship indirect expenses/ capacity. relationship investment/capacity coefficients for marketable securities discount factors (Qty., prompt payment) pledging costs. tax rate and depreciation data. interestrates salvage value premium risk (shareholders)