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Managing the Financial Supply Chain – Part 3

In Managing the Financial Supply Chain – Part 1 and Managing the Financial Supply Chain – Part 2, I reviewed the first two parts of a recent Supply Chain Management Review article titled – Managing the Financial Supply Chain by Roland Hartley-Urquhart in their online magazine.
In this concluding post of the series, I want to review Roland’s proposed solutions and recommendations for managing the financial supply chain. Roland proposes three main solutions for managing certain aspects or processes of the financial supply chain. They are:

  1. Early-Payment Programs
  2. Inventory-Ownership Solutions
  3. Virtual Consignment Financing With Assignment of Proceeds

Let’s get down into the meat of his proposed solutions:
Early-Payment Programs
As illustrated in the previous post, there can be a difference in the cost of financing operations between firms that go the outsourcing route and the third party firm that handles the outsourced operations. That rate differential is sufficient for financial insitutions to step in and offer solutions of the kind described below:

Set up as a form of reverse factoring, these arrangements enable suppliers to accept early payment of receivables in exchange for a discount. The funding was provided by financial institutions. SCF products generally originate with the buyer or importer of goods as distinct from traditional receivable financing, which typically originate with the seller (exporter) of goods.


These SCF programs are based on the operational requirements of the supply chain. They usually permit higher advance rates to vendors than traditional receivable factoring or financing and can be used to mitigate a large portion of the capital cost differentials between vendors and OEMs. Moreover, many early adopters of supply chain financing programs have improved their financial supply chain processes to allow suppliers to discount receivables earlier. Earlier discounts translate to higher returns delivered by these programs. Companies have found that the same financial supply chain process improvements that enable earlier capture of discounts help mitigate the risks and better manage the complexities of the procure-to-pay process.

Now, honestly, he lost me on this. There is only so much jargon that I can parse without letting my head get caught up in a death stall and its getting there. KISS, people, KISS. I hope that in my further reading and grasp of the financial aspects of the supply chain, the above will become clearer.
Inventory-Ownership Solutions
This solution also addresses the spread between the financing obtained by a third party vis a vis a branded retailer outsourcing its activities.

This solution provides financing at rates less than what a supplier may have to pay for working capital. This service can be an effective means of mitigating large capital-cost differentials between sellers and buyers. Further, it provides a new source of capital to suppliers at a time when they are facing greater requirements to hold inventory in transit or at vendor-managed-inventory facilities for their customers.

Virtual Consigment Financing with Assignment of Proceeds
As the heading suggests, the branded retailers are involved in financing part of the operations of the third party outsourcer.

It involves having the brand owner buy raw materials and consign or sell them to the contract manufacturer. Consignment financing creates an opportunity to consolidate and reduce unit-cost spend across commodity or component classes.

Next, Roland makes a few recommendations about how to think about supply chain financing:

  1. Adopt a formal supplier-risk-assessment process. Use this process to understand the capital costs and foreign exchange risks embedded in first cost-even if all purchases are denominated in dollars.
  2. Evaluate payment policies and systems (including chargebacks and warehouse receiving data) to mitigate Sarbanes-Oxley risks and assure that what you’re paying for is what you’ve ordered.
  3. Develop collaborative financing solutions. Earlier visibility can be leveraged to create flexibility around early-payment options for suppliers. Supplier portals can be leveraged to consolidate raw-material spend. In combination, these techniques can help you manage assignment of proceeds to reduce credit and transportation costs embedded in your first cost.
  4. Ensure that inventory-reduction programs eliminate inventory across the total supply chain.

All the above recommendations are good ones with the last one leaving a smile on my face but the fact of the matter as I see it is that more information about the financial supply chain, how to design it, what to choose etc is the need of the hour.

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Category: Supply Chain Management, Supply Chain News


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November 2006