Convergence of Physical and Financial Supply Chains--Part Three
on Sep 7, 2010
Network/Community Platforms are playing an essential role in the world's migration to new financial supply chain models.
Full Article Below -
In Part One of this article, we discussed the convergence of physical and financial supply chain; what it means for people in supply chain, finance, treasury, and banking functions; and the various types of trade finance. Part Two of this article explored the evolving financial models, in particular the widespread shift from Letter of Credit to Open Account. In Part Three here we delve into the impact technology has on this shifting landscape.
New Technology Required
In the 1990s, ERP emerged as a way to unify systems within an enterprise, replacing and/or augmenting fragmented legacy and departmental systems. More recently, with more and more being done outside the four walls of the enterprise and so many more players involved, we see the growth of platforms that sit on the network between companies, designed to enable rapid integration and coordination between multiple enterprises in a supply chain. These Network/Community Platforms (which may or may not be SaaS-based1) help to coordinate and communicate, providing a Single Version of the Truth (SVoT) amongst all the players.
In Network/Community Platforms, once a trading partner has joined and integrated into the network, that integration can be leveraged across all the companies in the network; this is in contrast to private trading hubs where the burden of integrating each new trading partner falls on the one company operating the hub, and is not leverageable across a wider community. Network/Community Platforms can be procurement-centric, such as Ariba’s Supplier Network, or focused on transportation/supply chain such as GT Nexus Community, Descartes Global Logistics Network, and Savi Networks, or hybrids such as TradeCard’s Multienterprise Collaboration Network, which focus on financial and supply chain visibility.
Network/Community Platforms for supply chain tracking are particularly relevant in dealing with the evolving financial supply chain discussed in Part Two of this article, where we are seeing a shift from Letter of Credit to Open Account. An Open Account (OA) arrangement has a lot fewer rules than a Letter of Credit (LC). LCs are governed by a set of codes called the Uniform Customs and Practice (UCP600 is the current version), which has matured and been refined over many decades. With the LC, if something goes wrong, the parties have these rules to fall back on. OA payments have no equivalent set of governing codes or customary practices, so there is a greater need to manage risk.
Visibility between Physical and Financial Supply Chains
To mitigate risk, all the players want visibility to see that everything is executing to plan, providing an early warning system if things are late or going astray. This visibility comes in part from electronic documentation of physical movement (such as cargo receipts and Bill of Lading) to track each stage — carrier took possession at factory, loaded at vessel, offloaded, arrived at the destination DC, etc. (See Figure 1 - Visibility between Physical and Financial Supply Chains)
1 - Visibility between Physical and Financial Supply Chains
A supply chain-oriented Network/Community Platform can provide this visibility and the required integration between the physical and financial supply chains. This visibility creates more predictability in supply chain events, reducing the risks in financing the flow of goods. Banks are able to charge less when the risk is lower. The network platform is especially valuable to banks in two critical roles that they play in the new OA world:
1. Managing Importers’ Payables
LC processes tend to be paper document-centric. With OA, banks are not as tied to paper documents as they were with LCs. Banks would like to streamline and automate processes. Having the suppliers, carriers, and all the key players tied together on a networked platform using electronic trade documentation reduces errors, provides visibility at each step, and speeds the process tremendously; compared with shipping paper documents via courier all around the world, as is typically done with the LC. For participants in emerging economies, who often have less sophisticated IT infrastructures, document creation and presentment can in many cases be done using just a web browser to connect to the Network/Community Platform.
2. Providing Liquidity Across the Supply Chain
When banks have visibility to the supplier’s history of past performance and can see confidently and quickly the ongoing status of current transactions and milestones, they are more willing to provide pre-export and post-export financing. A bank providing pre-export financing has a strong interest in knowing, at the earliest point, whether a shipment went out on time or was delayed. Banks and other financial organizations that finance in-transit inventory can offer more attractive rates when their risk is reduced through better visibility.
Ultimately, the pre-export and post-export finance and payment processes should be automated as continuous processes, rather than as a series of one-off discrete decisions. Automation of the release of funds to the exporter, and receiving payment back on that invoice from the importer, are all driven off what is happening in the physical supply chain. That automation and efficiency can be achieved when the systems of the multiple companies involved in the end-to-end supply chain are integrated onto one platform, as if they were a single virtual company.
Opportunities — Looking Ahead
As financial and physical supply chains integrate more tightly, it opens up opportunities for all the players. When banks and other financial organizations have reliable and comprehensive scorecards of suppliers’ past performance and complete visibility into events as they unfold in the supply chain, they have the ability to offer a much broader pallet of services, and provide earlier and deeper financing, creating liquidity in the supply chain. In addition to the new revenue it creates for these financial institutions, it improves cash flow for suppliers, enabling them to invest in expansion of their business. Earlier and deeper financing lowers suppliers’ cost of capital; those savings can be shared by the various players across the supply chain and/ or ultimately translate into lower-priced (more competitive) products for the end consumer. These benefits can only be fully realized when there is tight integration between the financial and physical supply chains, which can be enabled by a Network/Community Platform.
To view other articles from this issue of the brief, click here.
1While multi-tenant, single-instance SaaS (Software-as-a-Service) is a natural fit for providing a network/community platform, it is possible to build a network-based platform using a traditional licensed software application that is federated and integrated into an online hub connecting all the players.