Optimizing the financial supply chain through electronic commerce: PowerTrack[R] puts DoD transportation on the right track.

Internet-based business solutions and electronic commerce are sweeping through the procurement and manufacturing communities, and businesses are reaping the benefits of improved inventory management and more streamlined business processes.

However, in the financial community outmoded, paper-based processes prevail to the detriment of financial managers' effectiveness. Optimization of financial processes, also known as the financial supply chain, is essential if an organization wants to compete successfully in today's global business environment.

The Department of Defense (DoD) recently has taken important steps to adopt electronic solutions in order to improve financial processes within elements of its logistics community and private sector trading partners. One such solution is the PowerTrack[R] service, which the Department implemented to pay transportation bills. This article explains the associated financial supply chain so that readers may understand the model and how to use it for greatest effect.

Elements of Supply Chain Management

The most familiar supply chain process is the physical supply chain, which describes the flow of products and services that a business either sells or uses to produce the product or service that it sells. These may be raw materials, end products, or an intermediate resource.

The physical supply chain starts from the origin of raw materials and ends once a depleted product has been discarded or recycled, a cycle often referred to as cradle-to-grave management. A key element of the physical supply chain is transportation, since resources continually move through the process. As depicted in Figure 1, the essence of the physical supply chain is to transport the right product to the right place in the right quantity, with the right quality, at the right cost, and at the right time. A transportation event occurs each time that a product moves from one stage of the process to the next.

A less familiar, but equally key, element of supply chain management is the financial supply chain, which contains the financial services every enterprise, whether public or private sector, needs to conduct its business. Every enterprise has a financial supply chain, which operates parallel to the physical supply chain and other processes of the organization. The financial supply chain operates within the business and also interconnects with external organizations such as banks, customers, and suppliers.

Businesses generally organize their financial supply chains into two elements: operations and functions. The operations element includes those basic "do the work" services such as accounts payable, accounts receivable, payroll, bill payment, and accounting.

For DoD Components, many of these operations are performed by personnel assigned to the Defense Finance and Accounting Service (DFAS). The functions element includes planning, forecasting, and policy responsibilities that can be used by Component managers to make business decisions that benefit the entire organization. DoD activities usually perform these functions using in-house and contractor personnel. To operate effectively, the organization must ensure that both the functions and the operations elements are working in harmony with one another. Figure 2 on page 13 depicts the interaction between the internal and the external parts of the financial supply chain.

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Optimization of the Financial Supply Chain

Ideally the financial supply chain should be structured to enable complete visibility of pertinent information between the internal and external parts so that each entity can effectively perform its functions. Accurate, timely data should be passed from the operations element to the functions element, thus enabling the functional managers to communicate effectively with external components and pass informed decisions concerning financial issues back to the operations element. Any breakdown in this communication among elements of the chain results in inefficiencies that impair each element's ability to operate effectively and to provide the proper support to other elements.

In a commercial enterprise, an inefficient financial supply chain may generate significant costs associated with negative cash flow (float), manual internal processes, a lack of visibility into the cash position, and excessive banking fees. For DoD activities, the absence of valid information generates costs associated with unobligated balances, unliquidated obligations, a lack of visibility into the organization's financial status, and interest penalties due to late payments. It is essential that these inefficiencies be addressed to maximize the use of available resources.

Evolution of the DoD Financial Supply Chain

Until recently, the DoD financial supply chain was characterized by many of the problems described in the preceding paragraphs. The process to effect payments for transportation services was completely dependent upon paper bills of lading prepared by transportation officers and paper invoices prepared and mailed by transportation firms to the DFAS paying office, where payments were computed manually and keyed into the appropriate bill-paying system.

In many cases the documentation was incomplete, or payments could not be prevalidated because necessary funds had not been obligated in the accounting system. Either condition caused significant delays in paying Nils. There was no flow of information between financial and transportation personnel and no visibility of the status of the merchandise during shipment. DoD activities were incurring significant interest penalties due to the inability to pay invoices in a timely manner.

In the spring of 1997, senior DoD officials became aware that problems in the financial supply chain were seriously affecting the Department's relationships with commercial carriers. Bills were not being paid in a timely manner principally because the documentation was inaccurate, incomplete, or missing altogether. Consequently, the Under Secretary of Defense (Comptroller) directed a complete reengineering of transportation documentation and financial processes, to include incorporating the PowerTrack[R] system into the financial supply chain. This decision was a turning point for the Department in improving its transportation bill-paying process.

PowerTrack[R] is an Internet-based freight payment system designed and operated by US Bank. Transportation transactions are entered into PowerTrack[R] electronically, and carriers are reimbursed for their services by US Bank within 3 days following completion of service. Each month, US Bank prepares and electronically submits to the DFAS a statement containing all of the transactions paid by the bank during the billing period. The DFAS reimburses the bank for its payments, using the transportation account code or line of accounting established in the PowerTrack[R] record.

With the implementation of PowerTrack[R], the documentation required to monitor transportation services and to pay transportation bills is transmitted electronically rather than on paper and is available to all stakeholders (such as transportation officers, financial managers, and carriers) on a real-time basis.

As an added benefit to the taxpayer, the operational costs of PowerTrack[R] are paid by commercial carriers in the form of a user fee--similar to those borne by businesses that accept credit cards--so there is no recurring cost to the Department.

The one portion of the financial supply chain that has yet to be fully automated is the certification and submission of monthly billing statements. The Department has approved a concept of operations and implementation plan for automated settlement of statements that it expects to implement later this year. Unlike the current manual process, obligations for transportation transactions will be recorded electronically, using the documentation already resident in the PowerTrack[R] system. Since the source documentation for obligation and payment is identical, no transactions should fail the prevalidation process, and billing statements should be paid without any suspended transactions.

Within the revised certification process, both the transportation officer and the financial manager will need to ensure that respective documentation required for settlement is correct in PowerTrack[R] before the statement is generated. This is necessary to ensure that transactions are being paid from the correct budgetary accounts.

The statements will be certified and forwarded to the DFAS paying office electronically rather than printed out and faxed. Consequently, late payments--and their associated interest penalties--should be substantially reduced or eliminated.

DoD Goals for Financial Supply Chain Optimization 

The Department's top leadership has articulated the clear vision that DoD will be managed in an efficient and a business-like manner. In July 2001, Secretary of Defense Donald Rumsfeld established the Department of Defense Business Management Modernization Program (BMMP) as a step toward achieving this vision. The goals of this program include developing a DoD-wide Business Enterprise Architecture and a new DoD business transformation supporting finance, accounting, and financial management operations.

PowerTrack[R] clearly supports the goals of the BMMP by providing reliable, timely information, to the transportation and financial communities. It uses standard data elements and electronic transaction sets with little or no government-unique documentation. PowerTrack[R] facilitates data input at the source of the transaction with no requirement to re-input data or to transfer information from one form to another for invoicing or payment. It also provides an interface between government and commercial entities for exception management and dispute resolution. The improvements in the transportation business and financial processes since PowerTrack[R] was implemented already have significantly shortened the payment cycle, enhanced customer relations, and improved DoD resource management.

Conclusion

The Department has made great strides toward optimizing its financial supply chain through implementation of PowerTrack[R], and it continues to seek additional ways to improve financial supply chain management. The use of such best-practice systems enhances the financial supply chain process and extends its benefits to a larger community.

It is essential that DoD financial managers incorporate modern systems and processes into their daily work routines to ensure that the financial information used by decision makers inside and outside the Department is timely, accurate, and complete. The more involved financial managers become in using the available financial supply chain tools, the more successful the Department will be in maximizing its use of existing resources and empowering its managers to make sound business decisions.

Mr. Thomas Tucker is a financial manager with Naval Transportation Support Center, Norfolk, Virginia. He received a bachelor's degree from Pennsylvania State University and a master's degree from Golden Gate University. He is a Certified Government Financial Manager and a member of the Hampton Roads Chapter of ASMC.