September 2016

Supply Chain and Supply Chain Financing – stuck in a bad marriage

The challenges for suppliers is that they want to convert their inventory to cash as early as possible, with buyers wanting the exact opposite, to optimise their cash positions by stretching the payment terms.

Supply chain financing purportedly does exactly that, providing a win-win situation for all parties involved; the buyer optimizes working capital, and the supplier generates additional operating cash flow and thus minimizing risk across the supply chain. Supply chain financing seems like an optimum solution for both suppliers and buyers, however it does come with its own list of issues.

The movement of physical goods has been constantly making advances with technology, making it possible to track the exact location of the product and accurately forecast how long it will take to reach the destination and finally informing the supplier when the product has reached its destination. This greater visibility within the supply chain enables corporates to have more control over their business and stay ahead of the competition.

The same cannot be said for financial data, which consists of a lot of paper and manual intervention, in essence it has remained the same as it was decades ago. Even with the implementation of electronic resource planning (ERP) solutions, corporates continue to have poor visibility on their cash position. More often than not, CFOs and treasurers do not rely 100 percent on the information they have on their ERP, still having a strong reliance on manual intervention and spreadsheets. The majority of Asia requires at least a week to consolidate their cash flow analytics for their regional office.

Although Payments can take place in an instant, the problem lies in the management of what triggers this payment. Legacy technology still controls the manner in which purchase orders are generated, printed, sent, track and finally paid. Then there is the tedious process of consolidation and rectifying errors, which requires extensive to and fro communication between buyer and supplier, causing further delays to even the smallest payments. Not helping matters is the inability of many suppliers to follow up on collecting payments from their customers and what exactly it’s for.
 

 

ERP solutions that corporates invest in should be able to provide the end-to-end management of their business by automating many back office functions relating to technology, services and human resources. An example of some processes include; product planning, purchases, manufacturing, service delivery, marketing, sales, inventory management, shipping and payments, and finance. The ERP is supposed to act like the nerve centre, into which all the information is keyed in and processed. However, very often, these solutions are not fully utilised and manual spreadsheets are still kept as a belt and braces.

Despite heavy investments in technology, headcount in the account payables and account receivables department is still on the rise, together with the number of banks corporates use. Cheques are still a frequent sight in the market, and responsible for large transactions requiring multiple signatories. Manual preparation of transactions and constant verification is still prevalent as are non-electronic payments methods which still make up a large chunk. The constant wait in terms of processing times and error rectification is unforgivable in today’s age.

In South East Asia the three most common ways Corporates finance their supply chain is via term credit lines, available working capital and trade finance solutions. However, in the more mature markets in the region, there is visible decline in use of term credit lines for trade finance solutions.

Corporates take approximately two months (57.3 days), from invoice generation to receiving payment. In reality they have no idea where the cash is, and when it’s going to arrive. It has come to a point where both suppliers and buyers are willing to pay a premium to receive and send money in real-time.

With the emphasis on efficiency and everything being fast, accurate and delivered on time, Payments have a long way to catch up with the movement of physical goods. The next revolution in supply chain financing will be the commercial adoption of blockchain technologies, which will bring cash and information at the same speed and efficiency within the supply chain.
     
The Corporate Supply Chain Financing Map: Today
(% of Total)


 

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