Understanding How A Financial Supply Chain Provides Solutions For Your Company

By Author: Darlene Alvar
Total Articles: 4762
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With the continuing economic troubles and the expansion of "global sourcing"-especially from low-cost Eastern European, Asian and South American countries-the risks, costs and complexities of supply chain management have all increased. Historically, of course, "buyer firms" have tended to push supply chain concerns off on "supplier firms," resulting in most benefits accruing to buyers, often to the disadvantage of suppliers. This approach, it seems, may finally be changing.
Large buyer firms now realize that a cooperative, even "collaborative" approach is much more likely to be beneficial to all participants. Now the focus is shifting from the shortsighted redistribution of costs to a more widespread cost reduction, one that sees financial institutions, customers, clients and customs brokers as "stakeholders" with common goals.

Into the future
For years, may of the processes involved in supply chain management were based on paper and manual efforts. Logistics partners and financial institutions have worked hard to streamline and automate these processes as they relate to physical and economic fulfillment. ...
... This momentum needs to carry forward.
Unfortunately, the degree of sophistication in supply chain management varies a great deal across business sectors, industries, company size and international borders. Initially, the focus was on improving the physical supply chain mechanisms, but the financial supply chain has finally been placed in a position of primacy. Leading practitioners of supply chain management have also concluded that the physical and financial processes cannot be efficiently managed if they are handled separately, so there is new attention being given to coordinating efforts.

Trends, traps, troubles
The desire to realize increased value from one's supply chain is fueling a number of trends that will certainly transform the relationship among buyers and suppliers. Key trends to stay abreast of include:
- A shift to "open account" trading: Driven at first by the very largest American and European buying firms, the "open account" trend is taking hold much farther down the companies' supply chains. It is also being widely adopted by ever-smaller buyers.
- Extension of liberalized payment terms: This change, of course, is being driven, in particular, by buyers.
- Consolidation of suppliers for managing "complexity": Numerous major buyers are dealing directly with just a limited group of more sophisticated, "first tier" (or "tier one") suppliers, and they in turn are dealing with "second-tier" suppliers and down. This enables buyers to garner bulk discounts and also exert greater quality control.
- Integration of logistical (physical) and financial chains: As companies get an increasingly "holistic" look at their sourcing processes, it is inevitable that the two parallel chains should be combined into a single management scheme.
- Adoption of the latest communications technology: Advances in such areas as digital imaging and "virtual" document transfer is leading toward the ultimate goal, which is a future of "paperless trade."

Opportunities abound
All of these trends present the opportunity (rather, multiple opportunities) to reconsider and reconfigure the financial supply chain. When potential savings can be thus identified, the overall cost reduction will benefit all parties to the process, and add untold value. Many of these developments are amenable to isolated, uncoordinated application, however, and if so instituted will only produce marginal savings. Coordinated efforts are key.
Again, it is a "holistic" overview of the financial supply chain that will result in real benefits from the adoption of these new processes. A lot of energy will be wasted if it becomes an exercise is shifting costs back and forth between buyer and suppliers. This would be a self-defeating trend, as supply chain costs will usually settle at that point along the chain where the relative bargaining power is lowest among the involved parties. It doesn't even matter so much where the costs are incurred if this sort of gamesmanship prevails.

Optimizing the financial supply chain
Those firms that do not become part of the supply chain answer will remain part of the problem. The true benefits of optimization will come from collaborative efforts, so all the key parties in a supply chain must work together. Ones that do not are liable to be replaced by firms that are both better equipped and more motivated to integrate their processes.
Consider the typical trader's supply chain costs, in particular those associated with financing, processing paperwork, making payments and collecting them and maintaining effective interparty communication. These costs generally fall into three categories:

(1) Internal administration: These are the costs, paid by the trader, for preparing trade documents, and are often fixed in the form of specific overheads and salaries, making them exceedingly hard to "scale."

(2) External administration: These costs are primarily incurred as bank processing fees, and represent the bank's processing costs plus its profit margin.

(3) Financing: This means the cost attributable to trade-related financing, comprising a base rate plus the "lending margin."

There is a great deal of inefficient overlap and duplication here. Internal administration costs, in fact, are broadly fixed and unrelated to the actual size or number of deals processed. This limits the trader's operational "scalability," a critical consideration for those involved with seasonal industries. It is also difficult for companies to expand their operations rapidly with this situation.

In the big picture, key information need to be received, analyzed, understood and processed before it is sent along its way to other supply chain members. Introducing common platforms and creating efficient interfaces to share this data will eliminate task duplication and transform the core processes into effective, efficient, collaborative efforts. When buyers, suppliers and banks can all reduce their own, and others' costs, they will all share in the benefits. This is the most important thing of all to understand about your company's position vis-a-vis a financial supply chain.
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