Increasing supply chain efficiency is a priority for companies around the world. What role can treasurers play in addressing the pain points – and how is technology supporting the adoption of more efficient practices?
While the topic of supply chain efficiency is nothing new, the pressures and challenges which arise within supply chains evolve over time. Supply chains, by definition, involve multiple companies – and with companies operating on a more global basis than in the past, the potential delays and obstacles that can arise within those supply chains are considerable.
New sales models
One notable development is the rise of new sales models and the impact this may have on payments. Luc Belpaire, Head of Product Management and Business Development, Trax, FIS points out that the move towards eCommerce models means that just-in-time delivery and zero inventory practices becoming more prevalent. As Belpaire observes, these practices ultimately affect the financial supply chain – meaning that treasurers need to understand how they can capture the equivalent financial transactions.
“Those supply chains are getting more compressed and more real-time, which means there is a requirement for real-time settlement scenarios,” says Belpaire. “They need real-time insights into when goods are being delivered, and delivery against payments.”
Consequently, Belpaire says that treasurers need to investigate what the options are, including considering the adoption of new real-time instruments. “If a real-time payment instrument is selected, they need a real-time communication channel with the bank to help facilitate the real-time payment and that is where open APIs comes to play,” he says. He notes that treasurers need to “be an advisor to the supply chain and rest of the business on how the company could potentially adopt these new real-time payment methods in order to keep up with the supply chain models.”
Enrico Camerinelli, Senior Analyst at Aite Group, argues that the biggest issue that companies face in increasing the efficiency of their supply chains lies in collaborating more effectively with their supply chain partners. However, various obstacles can impede this collaboration in different ways.
The first of these is the issue of connecting disparate systems when different areas are separated into silos. “The second is the issue of data privacy,” he says. “If you want to share some data with some and not with others, how can you manage that?” A further obstacle, Camerinelli adds, is that “nobody wants to be the first” to adopt new methods of collaborating.
However, these obstacles are not insurmountable. Camerinelli says that innovation in areas such as blockchain can help with some of these issues. “If everybody has their own system, that is perfectly legitimate in a blockchain world because data is shared using distributed ledgers,” he comments. Data privacy can likewise be addressed by the cryptography used in distributed ledgers, or by the use of private blockchains. And when it comes to the need for common standards, Camerinelli cites the work done by global business communications standards organisation GS1 to support the adoption of blockchain.
Supply chain finance and the financial supply chain
For corporate treasurers, one area of focus is the financial supply chain, which incorporates the flow of cash and information relating to payments. Companies may have opportunities to improve their working capital positions by increasing the efficiency of these processes.
“There is always more to be squeezed out of the supply chain,” comments Peter Jameson, Managing Director, Co-Head EMEA Product Management, Global Transaction Services at Bank of America Merrill Lynch. He notes that since the financial crisis, there has been a greater recognition that companies can free up significant amounts of working capital by focusing more closely on this topic. “What I’ve seen is that a lot of corporates realise they can put specific numbers against the working capital enhancement that they can generate,” he says. “Those numbers resonate, because they correlate with the amount that companies would otherwise need to borrow from the market”.
Different techniques are available to treasurers looking to drive financial supply chain improvements. Greg Person, Vice President Global Presales and Strategic Value at Kyriba, says that transparency is key to optimising both the physical and the financial supply chain, noting that where the latter is concerned, inefficiencies can arise if suppliers do not have visibility over the status of their invoices once they have been submitted. “While it sounds simple, this transparency is often not implemented properly, especially by larger organisations with different procurement systems and IT systems,” he comments. Person points out that once this level of transparency has been achieved, companies may have the opportunity to take advantage of early payment discounts, either on an automated or on-demand basis.
Indeed, treasurers increasingly recognise that solutions such as supply chain finance can drive working capital improvements by enabling suppliers to receive payment sooner than they otherwise would. Such solutions can also reduce the risk that supply chain disruptions could have a negative impact on the buyer’s business.
As such, supply chain finance has become increasingly mainstream in recent years. Jameson says that the benefits of a supply chain finance programme are becoming better understood beyond large corporations. “One of the big areas of development is that there are different tools out there to provide the same outcome,” he says. “When you look at using supply chain finance for smaller suppliers, it’s a bit like using a sledgehammer to crack a nut. So, for example, we’re talking to a lot of companies about the benefits of a purchasing card programme, and the possibility of combining this with supply chain finance.”
Jameson adds that a combination of these two solutions can address the needs of both large suppliers, as well as the “long tail” of smaller suppliers. “I guess that’s the next evolution: looking at other tools to achieve that working capital benefit, but in a lighter-touch way for the smaller suppliers.”
Role of the treasurer
Person says that supply chain inefficiencies are becoming an increasingly major focus for CFOs, corporate controllers – and corporate treasurers. “For treasurers who have a broader role in the working capital strategy or liquidity strategy for their firm, they may be the one who is tasked with executing and operating a free cash flow target,” he explains. “Or treasurers may have a lot of debt on their balance sheet and be trying to optimise their cash position in order to pay down debt.”
Collaboration within the organisation
That said, supply chain is not a topic that comes solely under the treasurer’s remit: it also involves looking at procurement and considering the contracts and agreements that the buyer has with suppliers. “So it does involve a collaborative cross-functional type of project which the treasurer can champion and initiate,” says Person.
This may involve overcoming some practical obstacles. In the past, treasury and procurement – and indeed treasury and sales – have tended to be positioned separately within the organisation. However, this can result in a certain disconnect when it comes to supply chain efficiency, hampering the organisation’s ability to drive improvements.
For example, the use of a purchasing card programme to extend payment terms to 60 days might be wholly valid from the treasurer’s point of view – but this will only succeed if the procurement team is equipped to explain the benefits and mechanics of the solution to suppliers. Likewise, where sales is concerned, treasurers may see the working capital efficiency gains that could be generated by asking customers to pay sooner – but they may not be aware of credit conditions in specific countries and the competitive threats that may arise if another company offers better credit.
This gap is closing up, however, and Jameson says he is increasingly seeing greater connectivity between those groups. “Whether procurement reports into treasury, or whether they sit alongside each other will vary hugely – but there’s a much greater need for them to collaborate in order to drive success,” he says.
Working capital champion
In many cases, companies opt to appoint a working capital champion, such as a chief working capital officer, who may report directly to the CFO. “The purpose of that is to try and tie these strands together,” says Jameson. “If you think about it, the treasurer’s job of optimising working capital is heavily dependent on the level of efficiency within the procurement process, or equally in the management of the sales process and how much credit is being extended to customers.” Consequently, some companies are “putting in senior leadership between those functions to bring them together, because it’s only when you start looking across all those components that you really see the working capital benefit”.
Belpaire adds that treasury is partnering with sales and procurement in order to drive process efficiencies throughout the entire financial supply chain, in areas such as collections and dispute management, in order to help free up working capital. He adds: “Real-time access to data and collaboration are key components to providing much needed improvements across the supply chain. Some of these improvements are achieved through accurate predictions of future collection risk of each customer, customer portals for immediate self-service payments, as well as early identification and resolution of deductions and disputes.”
What about inventory?
While treasurers have a clear role to play in optimising DSO and DPO, they tend to have less of a role in optimising the other component of the cash conversion cycle, days inventory outstanding (DIO). However, this may be changing too.
“When I was in treasury, I worked for a medical device company – we were looking at how much inventory was kept in sales people’s cars,” explains Person. He points out that while not all treasurers will have the opportunity to get involved in this area, their involvement can bring certain benefits for the company: “Treasury may not be able to own the area of inventory management, but they may be able to expose it as an area for analysis and optimisation, and an opportunity to improve the organisation’s liquidity position.”
This area continues to evolve, bringing both new challenges and new opportunities. One pain point relates to KYC documentation and the increasing burden associated with this. “A lot of compliance and regulation goes into the suppliers that the bank will pay on behalf of the buyer, so there’s a lot of due diligence from a banking standpoint when on-boarding those suppliers,” explains Person. “That can be a barrier to adoption – if the process is too challenging or onerous for suppliers, you won’t see the level of adoption you are looking for, which means that the value proposition of the programme is diluted.”
This is an area that supply chain finance vendors are actively working on, however. Person says that Kyriba is spending time and effort on R&D to build more integrated and simpler on-boarding tools which allow suppliers to opt into programmes and rapidly be onboarded. “This involves not just the fintech side of things, but also the bank documentation and how this component can be digitised, making it simpler, faster, more transparent and ultimately easier for suppliers to participate in these programmes,” he explains.
Jameson notes that another interesting trend is the move in certain industries towards selling directly to consumers. “That is going to place very different pressures on the organisation, because if you are dealing with a large distributor your payment terms – and hence the whole working capital dynamic around that – is very different from if you are selling to individuals,” he points out.
Building on blockchain
Meanwhile, much has been said about the potential use of blockchain technology to support international trade by building trust between trading partners and facilitating new financing opportunities. Notable developments include last year’s launch of we.trade, a platform developed by a consortium of banks to connect the different parties involved in a trade transaction. Where supply chain finance is concerned, Kyriba’s Person says that the company is currently working on its blockchain strategy, with prototypes currently in place in areas including supply chain finance and treasury management.
Supply chain performance as collateral
Finally, Enrico Camerinelli, Senior Analyst at Aite Group, says that he is seeing increasing interest in the idea of using companies’ supply chain performance as additional collateral to secure payments. “The model of just relying on the large anchor company that guarantees the whole system works is still there, but it has to be integrated with another manner of assessing the credit profile of companies you want to finance,” he explains. “By using supply chain performance as collateral, you can use technologies like AI, predictive analytics and data analysis to take the huge amount of data that is exchanged between partners and, for example, anticipate the reliability that a supplier has with its customer.”
Among the new technologies set to improve supply chain processes, one of the more intriguing is the use of 3D printing. Notable developments in this area include GE’s success in deploying metal printing to create fuel nozzles for jet engines, resulting in shorter lead times – and higher fuel efficiency, as the 3D printed item weighs 25% less than its predecessors.
While only certain products can be printed in this way, 3D printing – or additive manufacturing, as it is also known – offers the opportunity for certain components to be distributed digitally. “3D printing definitely allows companies to dematerialise inventories and digitise the supply chain, because instead of manufacturing and shipping certain items, you can just send the file,” comments Camerinelli. “While this might be limited in scope, it revolutionises the whole supply chain paradigm when you don’t have any inventory.”