PDF File: 

ASC4_wp_Tsung.pdf

Accenture

Individually improving the physical and the financial supply chains can improve efficiency. When both supply chains are successfully integrated, companies can achieve breakthrough levels of economic value.

Companies today invest large amounts of capital and human resources attempting to wring the last bit of inefficiency out of their physical supply chains. At the same time, they're investing millions on solutions to streamline their financial supply chain. Both of these efforts have yielded significant benefits. Yet they fail to capture the full economic value and efficiency that could be achieved through closer collaboration between the physical and the financial supply chains.

Two supply chains exist in virtually all forms of commerce—the physical supply chain and the financial supply chain. The management of the physical supply chain has evolved from an emphasis on the individual logistics functions like transportation and warehousing, to the integration of those functions within the organization, and now to planning and collaboration between trading partners. Over the past few years, most well run companies have focused on improving their physical supply chain efficiency. In doing so, they have realized such benefits as shorter time to market, reduced production costs, lower inventory costs, and closer collaboration between trading partners.

Similarly, leading organizations have been working to improve their financial supply chains in recent years. They have streamlined their financial information flow by implementing ERP applications targeted at specific parts of the financial supply chain such as the accounts receivables (A/R), accounts payables (A/P), and general ledger (G/L). The financial supply chain is much broader as it incorporates not only the flow of financial information, but also financial products such as credit assessment, risk management, financing, payments, aand servicing. (Figure 1 shows the products, information, and processes of the financial supply chain.)

Financial products and information, which continue to evolve, are used throughout the physical transaction process. Emerging financial products such as online trade financing and letters of credit, for example, are helping companies speed up the process and reduce the cost of facilitating international trade. The supply chain efficiencies enabled by financial products and information have given organizations greater visibility over their receivables, working capital needs, and overall financial position.

Multiple Inefficiencies Remain

Although companies have made significant progress improving their physical and the financial supply chains individually, they have made comparatively little progress toward integrating the two. The result: there's a powerful, largely untapped opportunity to dramatically improve supply chain efficiency and add economic value.

The extent of that opportunity is reflected in the inefficiencies that currently exist. For example, while procurement seller hubs automate the procurement process, they still require buyers to go offline to make the payment. This increases the time-to-order-completion, transaction costs, and reconciliation activities. Following the decision to buy an item, a customer might still need to call his banker to finance a purchase. This elongates the purchase execution cycle and the inventory hold time while delaying the receipt of payment for the seller. Product managers that do not consider the payment history of their customers may price products at a margin insufficient to recover the long payment cycle and the many hours of customer follow-up work by their A/R staff.

These examples of real life problems occur at the interface between the physical and financial supply chains. Typically, such issues have been handled in a cumbersome, manual way. Or they fall through the cracks because they do not fit squarely into one supply chain, and thus are not owned by any single individual or department. These examples of uncoordinated physical and financial supply chain activities are a financial detriment to an organization. Further, they impede the development of a mutually beneficial and financially solid relationship with trading partners.

The damaging financial impact of this dropped intersection point is clear from the following realities:

• 86 percent of all electronic B2B transactions are manually paid by check reconciled with paper invoices and POs, resulting in high processing costs.¹
• 20 percent of orders contain discrepancies that result in inflated days of sales outstanding (DSO) averaging 57 days. Resolving these discrepancies through reconciliation and dispute resolution requires extensive manual processing and consumes working capital.²
• The Fortune 500 companies unnecessarily consume more than $20 billion of working capital because they lack visibility over their receivables.³

Problems at the physical-financial supply chain interface affect other performance metrics as well, such as inventory turns, safety stock availability, manual processing costs, and dropped transactions because of inefficiencies. Granted, the lack of collaboration between the two supply chains is not solely responsible for poor performance in these areas. Yet it certainly is a major contributing factor—one that needs to be aggressively addressed.

Core Collaboration Opportunities

Gaining visibility over the transactional flow among buyers, suppliers, logistics providers, intermediaries, and financial services providers can eliminate many of these costly inefficiencies. Just as importantly, it can open the door to revenue-generation opportunities. Collaboration between the physical and financial supply chains is the key to fully realizing these cost-reduction and revenue-enhancement advantages. Three types of collaboration opportunities are especially promising:

Collaboration of physical supply chain systems to ERP systems (for example, the procurement system to the payment system). This type of collaboration allows for information to flow from one system to another (an "electronic handshake") such that trading partners do not have to re-enter information or step out of the interaction to complete the next step. Effective collaboration between systems can do following: cut the time required to complete a transaction; reduce errors in re-keying information and reconciliation cost on the back end; increase the likelihood that trading parties complete transactions; and facilitate a more efficient interaction between trading partners.

Collaboration between customer behavior and financial products and services. This opportunity speaks to the ability to understand the trading partners' financial needs and preferences at a particular interaction point, and then provide the appropriate financial products at the right time to streamline the supply chain. Consider the following example of a foreign buyer that is purchasing a large piece of equipment. At the point of transaction, the seller may be able to offer that buyer a letter of credit option, a financing option, and a capability to electronically track the shipment through customs, allowing for immediate payment upon custom's inspection of the goods. This arrangement brings important advantages to both parties. The seller not only reduces the time needed to get the inventory out and accepted at the destination, but also taps into a new revenue stream by offering access to financial providers. The buyer is happier because of the "no-hassle" transaction process.

Collaboration based on business intelligence. This opportunity means that the right financial or physical information is made available to the right person at the right stage to enable superior decision-making. Today, trade terms often are set a standard way (for example, two percent discount in 10 days/net 30) and usually do not discriminate based on past performance. Take our same example of the international buyer. Typically, the buyer would pay 90 days out—which means that the seller is basically funding the buyer 60 days of capital. Assuming a cost of capital at 10 percent, that is 1.67 percent of lost capital for the 60 days of outstanding receivable. On a $100,000 invoice, that would be $1,667 for 60 days. Armed with this kind of information, a company can more intelligently price the product and the relationship.

The key to capitalizing on these collaboration opportunities is to automate the business processes and integrate financial processes and information throughout. Few of these processes are integrated today. But once those processes are integrated, trading partners will have access to the right products and service when they need it on a transaction basis—irrespective of which electronic channel they use. Further, the buyer, seller, and all of intermediaries will have a single, consistent and complete view of the transaction. The buying process will be less prone to error, and management will have a complete and accurate base of enterprise information.

Collaboration Benefits Everyone

The benefits of physical and financial supply chain collaboration are compelling for all parties involved in a transaction—sellers, buyers, and solution providers.

For sellers, end-to-end financial integration facilitates demand forecasting, improves the ability to manage credit risk, sharpens the focus on dispute resolution, and reduces the need for internal financing of accounts receivable. When purchase orders, shipping documents, and invoices are error-free, buyers accept them faster, decreasing a seller's DSO. Working capital is thus reduced in two ways: (1) fewer exceptions in order processing smoothes order flows, trimming inventory levels and (2) faster and more predictable cash flows create earnings stability, lowering company-specific risk and, thus, the cost of capital. Processing costs decrease by reducing the need for labor, paper, and manual processing equipment. This can translate to a three to five percent reduction in a seller's total purchase costs.

Physical and financial supply chain collaboration also paves the way for creating new revenues. Sellers can offer buyers a broad selection of financial services, such as risk mitigation and spot financing, on an individual transaction basis. In turn, access to information opens up other possibilities in planning and analysis and in customer service. Detailed account histories help build a better base for forecasting and identifying service and sales opportunities. And importantly, the availability of accurate invoice and payment information lets companies do a better job of negotiating trade terms.

Buyers can enhance their ability to forecast and synchronize purchase arrivals, thereby reducing working capital. By eliminating manual processes and reducing reconciliation costs, buyers can reduce overall purchase costs by two percent to four percent. They also can improve transaction efficiency by being able to walk through a transaction in one sitting without having to go offline for activities like financing.

For solution providers (such as ERP companies and providers of financial products) the greatest opportunity lies in creating new revenue streams. They can accrue reseller and "click-charges" from corporate clients for initial solutions such as invoice presentment and payment, which perhaps could be jointly marketed with physical fulfillment and logistics software providers.

Additional possibilities center on the availability of more comprehensive data about transactions and their participants. Such information has great value in enhancing supply chain processes. The buyer-seller negotiation process can be improved through actionable information about the total cost of responding to a request-for-quotation. Such comprehensive information would, for example, allow companies to more accurately quantify the risk and cost implications of using certain financial products like insurance and trade financing. The negotiation process also can be improved by the capability to track the cost (working capital, float, and so forth) of a supplier's prior deviation-to-service level in areas such as invoice accuracy. Third-party solution providers are especially well positioned to offer such value-added information.

A Fast-Moving Market

Over the last two years, more than 150 companies have introduced e-enabled financial products designed to improve supply chain efficiency. ERP, logistics and e-procurement vendors such as Oracle, i2, CommerceOne, and Ariba, for example, are actively trying to integrate physical and financial workflows between buyers and sellers. These companies have identified this as the next frontier of supply chain improvement—and as a way to upgrade their revenue stream. Payment companies such as Visa are focusing on financial supply chain integration with new, targeted solutions. The accompanying sidebar outlines Visa's vision and approach to this market space through the Visa Commerce product. Logistics companies such as UPS are offering financial capabilities such as payment and risk management linked to their service offerings.

Even as early entrants take these initial steps, the challenge of achieving full financial and physical supply chain integration is becoming more and more complex. As B2B commerce takes hold, the required financial capabilities will become increasingly varied, extending well beyond the payment process. At the same time, the physical supply chain itself is becoming more sophisticated, incorporating an increasing numbers of parties, more complex terms-of-trade, and geographies that do not fit neatly into existing logistics and risk-management operations. The growth of cross-border trade adds additional complexities such as multiple currencies, languages, and tax requirements.

Vision Becomes Reality: Are You Ready?

The benefits of physical and financial supply chain collaboration are far too compelling to ignore. But for companies to fully capitalize on the opportunities, they need to first overcome some key challenges:

• Organizational maturity and sophistication. Physical and financial collaboration is best undertaken by organizations that are already on the supply chain transformation path. Companies need to improve the efficiency of both their physical and financial supply chains before they can begin to successfully integrate the two.

• Organizational barriers. Departments within organizations have long tended to operate independently, acting within their individual silos. Breaking down these walls will help ensure ownership of all the collaboration activities-regardless of where they occur at the physical-financial supply chain interface. As the barriers crumble, companies will find that many touch points between the physical and financial supply chain need to be examined and redefined.

• Solution provider network. There is no silver bullet or single provider that can bring about physical-financial collaboration. The solution needs to be carefully pieced together from various providers. Companies must be willing and able to knit together providers that enable the successful collaboration of the two supply chains.

The task of integrating the physical and financial supply chains may at first seem overwhelming. But organizations can take certain steps to get them on the road to realizing the full value of collaboration. First, break up the task into bite-sized chunks. Identify two or three key pain points, such as reconciliation costs or days of sales outstanding, and begin to focus intensely on those areas. Don't try to take on the entire supply chain all at once. Second, once the critical pain areas are identified, work backwards to define the interaction points, information needs, and product/service requirements. Third, create a cross-functional task force. The team should include representatives from finance, logistics, procurement, and IT. Task the team with defining the entire flow of processes surrounding the pain point and then solving the problem. Finally, act quickly. Delays only forestall the realization of the benefits

The economic advantages of efficiently managing the physical and the financial supply chains have been demonstrated over and over again by the industry leaders. Companies that can successfully integrate the two chains will see those competitive advantages reach a new, breakthrough level.