Published: January 01, 2000
To operate successfully in a global market, companies rely on distributing their products in a timely and cost-effective manner. While globalisation is not a new concept, many firms have been working with overseas sourcing-, manufacturing-, transporting- and distributing suppliers for years – what has changed recently is how quickly they may need to respond to sudden changes on the demand side and unforeseen disruptions on the supply side. This need for agility is leading companies to focus more closely on how to manage their expanding network of suppliers through a more holistic lens, rather than treating elements of their supply chain in isolation. By examining the wide range of suppliers with whom a corporate works and the huge amount of processes involved, companies can simplify their strategic, treasury and procurement objectives and seek solutions to help achieve them.
Corporates have widely varying goals and concerns and there is no one-size-fits-all solution to address all supply chain challenges. Some firms focus on reducing risk, others in shoring up their supply chain, while others may prioritise efficiency improvements. Moreover, companies may have multiple objectives.
We see many companies looking to align procurement within the treasury function.
In addition to addressing specific concerns relating to their supply chain, increasingly we are seeing companies having broader objectives such as greater centralisation, which may be expressed in a desire to reduce the number of enterprise resource planning (ERP) systems used. The benefits of such rationalisation are considerable.
Increasingly, to reflect today’s broader scope of treasury activity we see many companies looking to align procurement within the treasury function. This has several benefits including improved visibility, lower costs, and enhanced risk management across the company. Companies often have 90% of their spend with just 10% of their suppliers so by taking this holistic view of their supply chain, they can more effectively drive efficiency, reduce complexity and increase transparency.
Companies need to gather data to facilitate informed decisions. In addition to establishing the amount of spend for each supplier, companies must collect information relating to:
Gathering the necessary information can be challenging for companies, as it may be held by multiple functions within a company. A company’s bank or solution provider – which should have experience of sourcing and analysing supplier data – can help its client to obtain the necessary information and validate its integrity.
Once appropriate information has been gathered, a decision-making process can begin. Given the different objectives of companies, choice of solution is necessarily specific to each client. While common themes exist across sectors and companies, banks should offer tailored recommendations that help clients meet their objectives by weighing the importance of risk (which may prompt a focus on supply chain management) and efficiency (which could determine a focus on automation).
Regardless of a client’s objectives, a bank should be able to identify specific financial benefits for the client. The ability to demonstrate a financial benefit can be crucial to achieving buy-in for a project given that supply chain processes often touch disparate parts of the organisation. Moreover, the level of resource commitment required to achieve supply chain projects can be considerable. A clear financial benefit can therefore motivate the entire company to work together to achieve the desired outcome.
The process of gathering information can also be important in facilitating supplier rationalisation. Collating data can reveal opportunities to improve efficiency or strengthen supplier relationships.[[[PAGE]]]
Regardless of the solution chosen, a bank that has worked closely with its client can help it prioritise its objectives and determine suitable solutions. As importantly, they should be able to deliver practical assistance to convert suppliers to other payment methods to automate processes, increase efficiency and reduce costs.
A bank should offer tools to analyse accounts payables so that suppliers with the right spend profile can be identified and should be and moved to "the or an" appropriate payment process or moved to appropriate payment processes. For example, suppliers that receive many low-value payments could be moved to payment by purchasing card and reduce the number of invoices issued. A bank should also be able to provide tools to help clients automatically recognise which suppliers can accept a card payment. Some banks offer clients additional services to encourage their suppliers to accept card payments, and some will even contact and enrol suppliers in a card programme on the client’s behalf. A credible bank should also be able to identify the reporting benefits of such a solution to the client.
In the case of supply chain finance (SCF), there are opportunities – in addition to extending payment terms and providing access to affordable liquidity for suitable suppliers – that a bank should be able to identify. For example, the adoption of SCF as part of a broader drive to centralise procurement and integrate it into treasury, provides opportunities to create tax efficient structures. Centralisation can also be extended to FX, hedging, payments and even third-party financing to improve visibility, increase automation and efficiency and lower costs.
In an SCF programme, a bank purchases approved receivables and facilitates early payment to the supplier. Traditionally, SCF was driven by the procurement function within companies and was, consequently, primarily focused on driving down costs. The changed business and financial environment of the past five years has led to an increased recognition of the importance of a stable supply chain. As a result, SCF generally now has broader aims, including making the payment process more efficient, lowering costs for both buyer and seller, and protecting the supply chain. However, at its heart, SCF continues to employ the same methods and deliver the same core benefits of extending days payables outstanding for the buyer and providing liquidity to the supplier.
Purchasing cards are well established in most global markets and have long been used in EMEA. Levels of usage depend on the experience and sophistication of the company using them. However, purchasing cards are most commonly used for low-value (below €600), high-volume transactions. Cards are still frequently used ‘in-hand’, although there is a trend towards cards being embedded within a profile stored in the buyers’ or suppliers’ ERP.
Virtual cards are typically used for higher-value items. Each transaction generates a unique, one-use card number for a transaction that specifies the amount and the merchant. Consequently, the buyer has far greater control over spend. In order to enable efficiencies, virtual card accounts can be fully integrated into the purchase process flow so that card numbers are automatically generated. Moreover, the buyer is able to define reconciliation data and is therefore not dependent on the merchant or a bank’s back office to provide useful data for reconciliation.
Corporates need to look at their supply chains with an open mind — clearly defining their objectives and assessing their circumstances so that the relative importance of goals such as working capital optimisation or automation to drive efficiency can be determined.
SCF, purchasing and virtual cards should be seen as part of a range of solutions that can help clients achieve their supply chain objectives. They should be seamlessly integrated so that the client can include the maximum proportion of suppliers as part of a programme to improve efficiency and integrate procurement and the treasury.
It is essential that corporates work with a bank which takes a similarly broad view of supply chain optimisation. A bank must have suitable experience, expertise and tools so that thorough, careful and timely analysis can occur and informed decisions can be made. Equally important are product specialists in SCF and card solutions that can recommend the right mix of solutions and a strategy for implementation.
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