Published: July 01, 2014
Companies of all sizes recognise the importance of optimising liquidity to reduce funding costs, improve on investment returns and maximise the cash available for strategic growth. To achieve these aims, many treasurers and finance managers have undertaken a range of tactical initiatives, often in combination with other departments such as procurement, accounts payable and receivable, in order to automate or enhance elements of their order-to-cash or purchase-to-pay processes. While these projects have undoubtedly delivered value in many cases, the next step in optimising liquidity and balance sheet efficiency is to look beyond working capital into financial supply chain management, which has wider implications for corporate processes and relationships and can ultimately lead to competitive advantage.
Firstly, it is important to distinguish what we mean by financial supply chain management as distinct from working capital management. Working capital management involves looking at processes within the organisation, such as billing and collections, inventory and payments. Traditionally, treasurers and finance managers seek to optimise working capital by increasing days payable outstanding (DPO) and reducing days sales outstanding (DSO). This could involve extending supplier payment terms, seeking earlier, more predictable customer payments and/or becoming more proactive in chasing overdue invoices to reduce DSO. In addition, many companies have focused on automating payment and collection processes and streamlining bank connectivity.
However, companies do not gain competitive advantage simply by optimising their internal processes. For a company to be competitive, the whole supply chain must be competitive. Looking first at suppliers, the more tightly integrated a company is with its suppliers (and suppliers’ relationships with their own suppliers and so on) the more robust and reliable the supply of goods and services and the more refined the pricing. The company can then offer its customers better quality, reliability and pricing of goods and services, increasing the number and loyalty of customers. This creates a virtuous cycle with a positive effect throughout the entire supply chain. The way that company connects with its customers is also important. Prompt allocation of customer collections maximises credit availability and therefore enables customers to do more business, more quickly. Resolving disputes quickly and chasing outstanding collections only when necessary builds customer satisfaction and again benefits the entire supply chain.
The continued growth of cross-border trade, including south-south trade, is resulting in increasing competition, more complex supply chains and new business dynamics. Companies that will be most successful are those that recognise the interconnectedness of the supply chain and the linked fortunes of each participant. Treasurers and finance managers have an important role to play in this by optimising the financial transactions that link suppliers and customers, which we refer to as the financial supply chain. This includes expanding payment and collection processes to incorporate the customers to which the company supplies goods and services, and the suppliers who enable it to do so.
Recognising the value of the financial relationships between a company and its customers and suppliers, and the way that these organisations behave towards each other represents a significant departure from the transaction banking industry’s traditional emphasis, which is primarily focused on working capital management. It is, however, pivotal to the unique proposition we offer at Commerzbank and impacts on the advice we offer to customers and the solutions we develop to meet the challenges they face.
Instead of seeking to improve individual tasks or processes on a tactical basis, we work with customers to take a more holistic view, embracing the entire financial supply chain management, an approach that we are finding our customers warmly support. We are finding that once customers have recognised the value of our integrated approach, and in particular how every point in the supply chain, and every internal department involved in the financial supply chain can benefit, they are becoming very proactive in collaborating with both internal and external counterparts to find ways of strengthening connections and delivering value.
The techniques used to do this are familiar, but the way in which they are deployed may differ from the tactical initiatives of the past. For example, SEPA has allowed companies to harmonise payment and collection methods and formats not only across Europe but more widely through adoption of XML. SEPA Direct Debits (SDD) increase convenience for customers whilst eliminating overdue collections and enhancing predictability of funds. Trade instruments such as letters of credit involve the bank effectively buying the counterparty risk and also serve to increase the predictability of funds. However, when considered in isolation, these are simply banking products; when put together in a way that recognises and benefits the entire financial supply chain, they can become powerful solutions.
Supply chain finance (SCF) has become increasingly popular as a means of enhancing suppliers’ liquidity, increasing supply chain resilience and improving the company’s working capital position. Once again, however, it is just one product, and the rationale, objectives and wider context is essential. For example, while effectively obliging suppliers to join a SCF programme by introducing otherwise punitive changes to payment terms may be successful in terms of supplier adoption and working capital benefit to the company, it may damage supplier relationships and therefore compromise wider financial supply chain objectives.
In some cases, when implemented in a way that recognises the needs and objectives of each financial participant, SCF programmes can offer considerable value; however, in others, there may be other financing and/or liquidity techniques that achieve the company’s aims, and those of its suppliers and customers more effectively. Once again, the focus should not be on individual products, but on solutions that achieve overall financial supply chain objectives.[[[PAGE]]]
There are a number of factors that are contributing to the success of Commerzbank’s unique approach to financial supply chain optimisation and transformation of the relationships within it:
Firstly, we recognise how important it is that Commerzbank and our customers speak a single language and share a common view of corporate objectives. We are doing this by building teams with a range of complementary skills, including senior professionals with significant corporate experience.
Secondly, we make it clear that projects to streamline and strengthen the financial supply chain do not necessarily have major cost or resource implications. Instead, the aim is to understand the connections within the financial supply chain, what value each connection offers and how it could be enhanced. In many cases, this will involve making better use of solutions and resources that are already in place.
Thirdly, corporate treasurers and finance managers need to rely on consistent advice and solutions around the world, recognising the global nature of multinational corporations’ supply chains. Consequently, our advisory services team operates from locations across our footprint, from Europe to Asia and North America, with a common approach and business culture. Advisors work closely with our customers and product managers to create end-to-end solutions that can be adopted in a coherent fashion globally, whilst respecting local regulations and conventions.
Over time, we anticipate that our pioneering approach that recognises the value of the financial supply chain in reducing costs, enhancing liquidity and ultimately increasing competitiveness will become more widespread as a growing number of corporations, together with their suppliers and customers, realise the advantages. While few individual products can genuinely offer the ‘win win’ that companies are seeking, a holistic approach to the financial supply chain can offer a ‘win’ for every participant, an essential characteristic of the supply chains of the future.
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