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Managing the Financial Supply Chain – Part 2

In Managing the Financial Supply Chain – Part 1, I reviewed the first part of Supply Chain Management Review recent article titled – Managing the Financial Supply Chain by Roland Hartley-Urquhart in a recent edition of their online magazine.
In this post, I want to go deeper into Roland’s article about Managing the Financial Supply Chain because of its critical importance in how the efficacy and direction of progress of supply chains are decided under the headings of New Processes & New Competencies, Forex Risks and Capital Cost Inefficiencies
So a firm has decided to go the route of outsourcing or offshoring some of their non-core competencies, what is the immediate effect of such a strategic decision on the financial processes within the firm.

New Processes & New Competencies
As Roland notes,

In conducting this analysis, companies need to recognize up front that global sourcing and production outsourcing complicate the value exchange process. In particular, they increase the quantity, velocity, and complexity of interenterprise financial transactions, leading to higher administration costs. As global sourcing and outsourcing continue, the number of financial transactions handled within the four walls of the enterprise decreases. At the same time, the number of transactions handled by outside vendors increases.

What’s more, in the case of applying JIT to an outsourced supply chain, the following could be expected to occur:

When global sourcing and outsourcing are combined with just-in-time supply chain practices, the velocity of payment transactions is accelerated because the smaller consignments require additional payments or the aggregation of many discrete transactions.

Roland notes a shift from the traditional payment terms such as using Letters of Credit (LC) to open account i.e. making payments the purview of the buyer rather than international banks that have always been the traditional intermediaries of such transactions. However, moving away from using the traditional intermediaries implies that the work performed by these intermediaries have to be brought inside the firm’s four walls i.e. the creation of new competencies within the firm in order to handle the outsourcing/offshoring of non-core competencies. Moreover, along with the creation of a new competency within the organization, this change also introduces the vagaries of international finance.

In addition to complicating financial transactions, global sourcing and production outsourcing introduce a higher degree of risk into the supply chain. To cite one prominent example: Saks Inc.’s lack of centralized controls and visibility into its sourcing operations’ procure-to-pay process contributed to the company’s alleged illegal collection of excess vendor markdowns. In addition to facing numerous legal and regulatory battles and distractions, Saks saw its total market capitalization drop by 20 percent immediately following the announcement of the scandal in 2005.

Read the rest of this entry »

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

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November 2006