Treasury Today Country Profiles in association with Citi

The treasurer’s role in the supply chain

The treasurer’s role has evolved considerably over the years and it now encompasses a much broader range of activities than ever before. The concept of the financial supply chain has also been developing and has had a significant impact on the role of the treasurer. Over the past couple of months we have looked in some detail at the role of the treasurer in relation to the company; this month we explore the treasurer’s role in relation to the supply chain.

The supply chain

The supply chain as a whole is made up of both the physical supply chain and the financial supply chain. The physical supply chain consists of the physical movement of goods from supplier to customer; the financial supply chain runs in the reverse direction and consists of the movement of financial flows from customer to supplier.

Although companies have focused on improving efficiencies within their physical supply chains for some time, the financial supply chain is a concept that has only recently become topical. In theory, by taking a holistic view of the financial supply chain, it is possible to bring about a number of improvements throughout the chain:

  • Increased efficiency.

  • Reduced costs.

  • Freer working capital.

  • Improved relationships with customers and suppliers.

The treasurer has an important part to play in financial supply chain management. In recent years, the treasurer’s responsibility has increased from a payables/receivables focus to encompass the entire financial supply chain.

Diagram 1: The entire financial supply chain

A financial supply chain approach to treasury entails looking beyond specific areas and considering the whole chain to gain an understanding of the impact each process has in order to identify where savings can be made.

Much of the treasurer’s role is now about adding value to an organisation, and the supply chain concept can be a very effective method of achieving this. Once individual processes have been improved, the next step is to analyse how well they are all integrated within the supply chain. This involves facilitating a greater co-operation between departments within the company itself in order to understand the effect of everyday business decisions on the company’s finances.

How to manage the financial supply chain

As described previously, the treasurer’s role in the supply chain can now range from forecast to finance. Treasurers may need to be aware of the individual components of the supply chain and understand how they are all interlinked. This will help treasurers improve efficiency throughout the supply chain to add value to their company.

When reviewing the supply chain, treasurers may identify a number of inefficient processes that are slowing down the movement of funds and/or associated information. Paper-based payment methods such as cheques are often one part of the problem. Although cheques are virtually extinct in some countries, such as Finland, they are still widely used in others – most notably the US. Other areas in which efficiencies may be gained include the following:

Forecasting

Cash flow forecasting is used to ensure that sufficient funds are available to meet the company’s obligations without tying up excess cash. Effective integrated cash flow forecasting solutions are available and often turn out to be a good investment. They reduce the level of manual calculation involved, which in turn reduces the risk of human error. Treasurers’ continued use of spreadsheets in cash flow forecasting has been well-documented and the associated errors can lead to major inaccuracies.

Purchase orders

Purchase orders are often matched with invoices before payment to ensure that all the details of the purchase are correct. They act as a record of the purchase. Although purchase orders are usually created electronically, they are often passed between supplier and purchaser in paper form, either via post or via fax. Electronic delivery of purchase orders can speed up the process and an entirely automated system would rule out discrepancies arising from manual data entry.

Invoices

Like purchase orders, invoices are often issued in paper form and could become more efficient through an electronic automated process. Traditional invoicing can be a time-consuming procedure. E-invoicing is an obvious solution, but adoption has been slow due to the confusion over varying national legislation introduced in response to the implementation of European Union Directive 2001/115/EC (commonly known as the EU e-invoicing directive) in 2004.

This directive requires all member states to accept e-invoices, but has left it to individual member states to determine some of the details, which has led to confusion. However, e-invoicing still has its proponents and has the potential to bring about benefits such as cost reductions and improved efficiency as well as enhancing audit and regulatory compliance.

Payments

Companies that use more than one bank in more than one country are at risk of having to produce each payment in a different format in order to comply with varying systems. A universal standard would make the payment process much simpler and faster, but it has yet to be achieved. In the meantime, a number of groups – such as the International Standards Team for Harmonisation (ISTH) and the Transaction Workflow Innovation Standards Team (TWIST) – have been set up to push for the improvement of the payment link in the supply chain.

Reconciliation

Manual reconciliation between payment order and invoice is time-consuming and therefore costly. It is also vulnerable to errors arising from manual data entry. Differences between clearing systems can also add to delays. Different clearing systems are able to process different amounts of data and may also use different formats, which can result in data loss as information gets converted from one format to another.

Again, automation seems to be the answer. Collection methods such as direct debit schemes are more efficient than individual payments that have to be initiated by the purchaser. Other initiatives have been set up to enhance the information transmitted with payments. For example, in 2003 the standards consortium RosettaNet developed a system designed to facilitate reconciliation through the assignation of a Unique Remittance Identifier (URI) to each payment. However, so far such systems have lacked widespread adoption.

Challenges

Once treasurers have considered the individual links of the supply chain, they can start looking at it holistically – that is, looking at it as a whole rather than just considering its individual components. There are, however, a number of challenges that treasurers may need to overcome before they can effectively manage the supply chain in its entirety.

Visibility

The processes within the supply chain may be quite separate and it can be difficult to see how they all link together. This makes it harder to identify where cash is being held up and where it is most needed. Usually a treasurer will need to obtain more accurate information about the individual components of the supply chain to see the effect each is having on the overall process. This will help treasurers to realise whether cash is being held up in unnecessarily generous credit terms, for example, or in surplus stock.

Managing working capital

It is important to ensure that a company maintains the right level of working capital, as excess idle cash represents a wasted investment opportunity. However, a company needs a certain amount of cash readily available to ensure that it can meet all its expenses and obligations. The treasurer needs to ensure that there is enough working capital within the company for it to be able to operate normally and without struggling to meet its obligations.

Conflicting goals

Another challenge is that trading partners are usually working towards different goals. Suppliers hope to get paid as soon as possible, whereas buyers wish to delay payment for as long as they can. Supply chain management is therefore a balancing act between the needs of the supplier and the needs of the buyer. A holistic view of the supply chain shows that co-operation and compromise between all parties is the most efficient way of dealing with this problem.

Compliance

A paper-heavy supply chain makes it harder for treasurers to ensure compliance with initiatives such as SOX (Sarbanes-Oxley), since paper requires intensive processing with only limited scope for automation. Many companies have taken the opportunity to combine investment in meeting compliance initiatives with investment in initiatives to increase automation and improve processing throughout the supply chain.

The treasurer’s role

Supply chain management is essentially a new way of looking at best practice concepts with which treasurers may well already be familiar. Increased automation has enabled treasurers to take a step back from financial minutiae and look at how individual processes affect each other and make up this chain.

Within the organisation, this may provide the treasurer with additional challenges in terms of communicating with a wider range of departments than before while championing new approaches. Under a financial supply chain management approach, the treasurer’s role is more closely connected with other areas such as procurement.

By its nature, this approach also has wider implications. As we discussed earlier, financial supply chain management takes into account the effect that a company’s actions may have on its suppliers, and by extension, the repercussions that might be felt by the company itself as a result.

This approach recognises that too much pressure on the supplier could result in the supplier raising its prices or indeed going out of business – an outcome that could have a negative impact on the customer. As a result, treasurers may wish to encourage a more mutually supportive approach in the supplier relationship, possibly by implementing one of the supplier finance products on offer, which allow suppliers to receive finance at a preferential rate based on the customer’s creditworthiness rather than on their own.

Another area in which treasurers may further supply chain management techniques is payment standards. As noted above, corporates working with a number of different banking partners may find that diverse message formats present an obstacle to the level of STP and automation that they might wish for.

Organisations such as TWIST provide treasurers – as well as bankers and system suppliers – with a platform for developing standards and an opportunity to be more proactive in voicing their needs in this area. TWIST published a set of standards for ordering and invoicing in 2006 and has also developed standards relating to post-shipment financing.

Beyond the hype

Much has been written about financial supply chain management, and treasurers may be wary about the level of hype associated with this topic. However, by taking a step back from all the talk, treasurers will recognise that many of the principles included in this area are actually familiar.

Working capital management is not new in itself, nor is e-invoicing or receivables financing. What is innovative is the idea that all of these processes should be considered in relation to each other.

Despite the focus on taking a holistic approach, financial supply chain management is not all or nothing. It is likely that treasurers will vary enormously in the extent to which they take this approach on board.

Whether they are thought leaders in this area, pioneering new solutions and developing payment standards, or simply implementing a more efficient invoicing solution, virtually all treasurers will be employing the principles of supply chain management to a certain degree.

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