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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

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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.


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ASDN Logistics Analysis Software

While surfing the web for logistics related software, I came across the site hosted by the International Centre for Innovation and Industrial Logistics (ICIIL).
ICIIL has some information about an open source logistics analysis software that is being developed University of Vaasa, Finland and ABB Corporate Research Center.

ASDN – “Agile Supply Demand Networks” is software for analyzing and developing logistics networks. This rapid modelling tool should help decision-making in network architecture design and performance management.

The project home page is located at http://asdn.sourceforge.net and the source codes (Java) are distributed via SourceForge: ASDN


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Managing the Financial Supply Chain – Part 1

Supply Chain Management Review has an article titled – Managing the Financial Supply Chain by Roland Hartley-Urquhart in a recent edition of their online magazine.

Understanding and managing all aspects of the financial supply chain is an essential ingredient for business success. While that statement has always been true, it takes on a new level of importance in today’s world of global sourcing and production outsourcing. The recommendations offered in this article can help supply chain professionals more effectively integrate the physical flow of goods with the financial flow.

As the previous series on Creating the Optimal Supply Chain amply demonstrated, there are three essential flows in a supply chain – Material, Information and Financial flow. While the first two are often frequently dissected and analyzed, the third is comparitively less so and thus I thought that I would do a piece on that.
Voila!!
Never have truer words been spoken:

Global sourcing and outsourcing have the added benefit of generating cash for many companies, as investments in plants, equipment, and working capital shift from the brand owners and original equipment manufacturers (OEMs) to their trading partners, who in many cases are overseas. While these benefits can’t be denied, business leaders need to assess the unintended consequences of their global sourcing and outsourcing strategies beyond direct cost and capital savings. In particular, they need to recognize that the labor cost advantage of moving these activities offshore masks hidden costs and risks within the financial supply chain.

And furthermore the implications for the supply chain are clearly:

While global sourcing and outsourcing may reduce the cost of the actual product—the “first cost”—they often decrease the capital efficiency of the value chain. Specifically, plants and equipment are often far more expensive to finance in emerging market countries. In addition, inventory tends to get pushed downstream to suppliers, which often have a higher cost of capital. Furthermore, global operations can add weeks to the value chain, tying up as much as 30 percent of product price in working capital.

There is no denying savings in direct costs and capital savings when it comes to decision making around offshoring or outsourcing – its simply ludicrous to do that. However, that is only one portion, the very visible portion, of the Total cost picture and that is what is frequently forgotten.
So what are some of the hidden costs that are implicitly present in offshoring or outsourcing?

Global sourcing and outsourcing also weaken control over the financial supply chain. This reduction in control can affect shareholder value, erode competitiveness, and introduce new business risks. Common challenges include the complexities around Sarbanes-Oxley compliance, complex chargeback management processes, and implicit foreign exchange risks.

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Creating the Optimal Supply Chain – Review (Supply Chain Enterprise Systems: The Silver Bullet?)

In this concluding review of the report titled – Creating the Optimal Supply Chain published by experts from Wharton and BCG, I take a look at the section titled – Supply Chain Enterprise Systems: The Silver Bullet?. In earlier posts, I had reviewed the first three sections namely, You Can’t Manage What You Can’t Measure’: Maximizing Supply Chain Value, Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management and Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption. The report – Creating the Optimal Supply Chain is available online as well.
There can be little doubt in the minds of supply chain professionals and practitioners that managing the supply chain is no easy task no matter how simplified the meta level process diagram looks like that neatly shows product flows in one direction and information flows in the other. It is precisely because supply chain management is such a complicated issue that Supply Chain Enterprise systems have appeared on the scene from a variety of vendors – SAP, Oracle, i2, Manhattan etc. However, since supply chain management is a rather complex task in itself, systems deployed to facilitate supply chain management are also complex such that a practitioner now has to deal with supply chain complexity through a complex system. And thus go I to say – “Have you really solved a problem when your solution creates two new problems?” This task is not made any easier when you have to wade through not only a complicated solution set but oodles of marketing gimmicks, ploys (and well meaning marketing professionals as well), endless half promises with inflated verbiage and out and out term misuse.

According to supply chain experts from the Boston Consulting Group (BCG) and Wharton, applying enterprise systems technology to supply chains is often a difficult undertaking with an uncertain outcome; in reports and cases cited by both BCG and Wharton, companies that have implemented supply chain technologies often fail to leverage the new systems for a competitive advantage.

That is by itself not surprising at all. The success of a supply chain system implementation (or for that matter any type of implementation) is limited by the capability of the people deploying and using the system. Furthermore, in order to use such technology to create competitive advantage is a task of an order well above the capability that some firms possess or are even in the process of acquisition.

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Creating the Optimal Supply Chain – Review (Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption)

In the continuing review of the report titled – Creating the Optimal Supply Chain published by experts from Wharton and BCG, I took a look at the section titled – Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption in this post. In earlier posts, I had reviewed the first two sections namely, You Can’t Manage What You Can’t Measure’: Maximizing Supply Chain Value and Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management. The report – Creating the Optimal Supply Chain is available online as well.
Supply Chain disruption is making headlines in recent times because of events that occurred in recent months past such as terrorist strikes, hurricane Katrina and the longshoremen strike at the US West coast ports. I must reiterate again, that the macro picture against which such supply chain disruptions might occur is the globalized, outsourcing/offshoring manufacturing/procurement business world. That implies that while the world’s resources and manpower is at a firm’s disposal, more or less, so also are the world’s problems – in a global supply chain, the disruptions even though occurring locally might have multiplied effects far beyond the locally known or observed effects. Also, those effects might not even be noticed by those decision makers who sit far removed from the means of procurement or production and the first intimation of the crisis might be at the supply level by which time it might be far too late.
The authors state,

Today’s leaner, just-in-time globalized supply chains are more vulnerable than ever before to natural and man-made disasters — a reality that creates greater demands on companies to keep supply chains flexible and integrate disruption risk management into every facet of supply chain operations.

That’s just way off-base. Today’s globalized supply chains, whether or not they are just in time, cannot be in any sense leaner than before. Given the fact that lead times have increased in a globalized world through outsourcing/offshoring, inventories have gone up in every stage of the supply chain – so how have globalized supply chains become leaner? But it is also true that exposing one’s lines of supply (just as in the case of war strategy) globally, the risks of disruptions have also increased. Now, the question has to be asked, was it worthwhile to have gone the route of globalization in procurement/manufacturing on the basis of per unit cost without taking into account the total costs of procurement that are involved for the supply chain?

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Creating the Optimal Supply Chain – Review (Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management)

In Part 1 of Creating the Optimal Supply Chain, a report made available publicly by Supply Chain experts from BCG and Wharton, I reviewed the section titled You Can’t Manage What You Can’t Measure’: Maximizing Supply Chain ValueYou Can’t Manage What You Can’t Measure’: Maximizing Supply Chain Value. In this post, I want to review the next section of the report titled – Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management.
When I’m having my groceries checked out at Walmart, the clerk almost always asks me the following question in some form or the other:
“Did you find everything you wanted?”
And invariably I answer – “Yes!” whether or not it is true. I can only think of one time when I was searching helter skelter for 1 particular product (a baby boppy pillow) that I told the clerk. And I set a chain of events in motion. The clerk didn’t know where I’d find it. So she called up her manager and she led me straight to the product even though I had been searching that exact aisle for a good 10 minutes.
Ofcourse, there’s no such thing at Walmart.com and that I consider a slip up. Amazon.com addresses this question in a different way by serving up recommendations that my buying/searching profile conjures up in their algorithmic search technique on their page but coming to think of it whether it is 1-click checkout or a haphazard checkout online, none of these retailers bother to ask me this question.
In this section of the report, the authors contend that,

But the process of getting the right product to the right place at the right time at the right price

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.

@ SCM Clustrmap

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