Treasury Today Country Profiles in association with Citi
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October 2006

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Editorial

Getting to grips with the supply chain

At the recent EuroFinance International Cash and Treasury Management conference in Florence, the overriding theme was the financial supply chain and how this should be managed in order to gain efficiencies. Indeed, EuroFinance’s annual Award for Excellence was presented to Hewlett-Packard in recognition of the company’s thought leadership in this area. But what exactly is the financial supply chain? And what can treasurers do to manage it?

In the past year, the concept of supply chain management has been gaining momentum. The thinking behind it is straightforward enough. In recent years companies have gained control and efficiencies in their physical supply chains – ie the processes involved in the movement of goods from supplier to purchaser. However, the financial supply chain – the processes involved in the procurement-to-pay and order-to-cash cycles – have been left behind. Over €500 billion is estimated to be locked in the global supply chain as a result of the inefficiencies embedded in these processes. Streamlining the processes and unlocking the working capital has become a holy grail for many in the industry.

However, while there is a lot of talk, it is clear that there is a long way to go before much of the theory can be put into practice. Part of the supply chain theory revolves around the idea that multinationals should be looking at their suppliers as partners, rather than adversaries. For many companies who have concentrated on improving their working capital positions, in part by extending payment terms offered to suppliers, this will require a significant volte-face. Supply chain theory recognises that what damages your suppliers also damages you – if a supplier is pushed to the limit they will put up their prices or may even go out of business. However, co-operation among all parties in the supply chain is a longer term vision which cannot be achieved overnight.

Industry professionals are becoming increasingly vocal on the importance of this topic. The banks have developed products such as reverse factoring, which allow suppliers to finance their receivables based on the credit positions of their customers. However, so far managing the financial supply chain remains a big question with few concrete answers. In the coming months, Treasury Today will be reporting on the reality behind all the hype and identifying where there are real industry developments.