Spotlight shifts to money in the supply chain.

While the spotlight of innovation has shone brightly for the past quarter-century on information automation between trading partners in the domestic and cross-border supply chain, money flows within that same supply chain have labored in the dark, relatively unchanged.

Supply chain automation initiatives--such as e-procurement, e-requisitioning, catalogue management, strategic sourcing and a host of other supply chain solutions--have reinvented interactions between trading partners. These have produced a stronger, more reliable and streamlined flow of goods and services worldwide. These innovations have crept out of the early-adopter phase to become mainstream.

Companies are now turning their attention to financial interactions in this new and improved supply chain and asking hard questions. Even a cursory glance at the state of affairs here reveals much cause for concern.

Consider the following. According to the Federal Reserve System, roughly $6 trillion is due at any one point in time in outstanding payables from buyer to supplier. Financing that cost is the responsibility of the supplier. In the case where the buyer is an investment-grade customer, the supplier is likely the one who can least afford to fund that financing cost.

Estimates indicate that that financing of trade credit, or the time from purchase order to cash, is equivalent to 4 percent of the supplier's cost of goods sold (COGS). For many industries, that is equivalent to freight and logistics costs. And while technology vendors have created entirely new markets around freight and logistics automation, the financial flows between buyer and suppliers have remained virtually untouched.

Worse, solutions such as electronic invoicing, payment and presentment that are focused solely on early payment discounts effectively metastasize noxious financial practices. These merely masquerade as financial solutions; truly, they make ill-considered financial behavior automatic. Reinventing financial flows to the benefit of supply chain ecosystems is a call for not making bad practices work more efficiently.

That dysfunction is costing businesses--and ultimately consumers--dearly. Credit Suisse says that "the value created by reducing the financing cost of goods moving through the supply chain by even a few basis points is far greater than any cost savings possible from traditional transportation and warehousing targets." And with supply chains expanding--the result of dynamics such as globalization, low-cost country sourcing, business process outsourcing and the like--the problem is likely to get worse as current trends play out.

It is within this context that the tom-toms are beating around supply chain finance (SCF). SCF is a combination of technology solutions and services that link buyers, their suppliers and financing providers to optimize the visibility, financing cost and the delivery of cash on the occurrence of one or several supply chain events.

Let's look at it from one supply chain trigger event--the payable/receivable. Present-day SCF functionality takes sum- and date-certain payables from buyers and publishes it to a central Web solution provider. Suppliers view their receivables in a Web-based format, and, at their option, sell them to a funder in return for early cash, less a financing fee.

As the recourse-remote payable/receivable is certain, the financing cost is based largely on the buyer's credit rating--the fulcrum upon which the powerful SCF value delivery is levered. For suppliers, the visibility element of SCF alone is highly compelling. The financing option for non-investment grade suppliers presents financing flexibility they can often only dream about.

Properly deployed, SCF creates a win for all participants. It attacks a problem rife with inefficiency, opacity and uncertainty. Removing the veil and the noise around financial interactions between trading partners results in a prize large enough for all to share--buyer, supplier, financial provider and service provider.

For buyers, SCF offers four broad areas of benefit:

1. The first benefit is around a reduction in COGS. Buyers deploying SCF can maintain that suppliers will now realize a reduction of the 4 percent financing cost of goods sold to it, thus resulting in lower prices.

2. SCF presents the opportunity to optimize working capital, largely in the context of extending payment terms, thus increasing days payable outstanding (DPOs). The beauty of SCF is that it permits a DPO extension, while enabling suppliers to simultaneously reduce days sales outstanding (DSOs) by leveraging the buyer's often-superior credit rating.

3. By offering a flexible, low-cost source of financing, buyers are increasing the reliability and health of the supply chain, particularly in sources of supply from low-cost countries. This meets internal risk compliance directives mandated by corporate policies or external forces, such as the Sarbanes-Oxley Act.

4. SCF also provides a remedy for suppliers seeking respite from the change many buyers/importers are making from moving off of "letter of credit" arrangements to "open account" status.

For suppliers, SCF offers a very compelling story:

* Certainty and visibility of receivables;

* Improved working capital by reducing DSOs;

* "On-demand" access to low-cost cash, off-balance sheet financing; and

* The peace of mind that comes with knowing that--for the first time--they have control of their cash inflow. For suppliers, this is historic, and it effectively changes the phrase "the check's in the mail" to "you want it, here it is, come and get it."

For financial institutions, the availability of a closed-loop infrastructure between buyer and supplier is an undeniable opportunity. It delivers information visibility and linkage to supply chain events perfect for the discovery and pricing of risk, and an instant market for liquidity provisions. As it is deployed over the Internet in an "on-demand" environment, it instantly removes the administrative burden and headache associated with traditional paper-intensive trade finance solutions.

This infrastructure increases the range of solution offerings for existing and prospective accounts. It's no surprise that banks, facing fewer and fewer opportunities for actual non-fee-based revenue growth, are racing to get in this game.

Watch this phenomenon. One of the intriguing implications of SCF is how it will turn "best practice" on its head. Some of what's "best" is actually poison to the supply chain. Aggressive early payment discounts management, for example, is seen by many as mainstream. In truth, this often passes financing cost on to those least able to afford it. In fact, those suppliers who are best able to afford it often have the leverage to push back.

Similarly, unilateral payment term extensions--term extension passed on to suppliers without a supplier-cost mitigating program, such as SCF--are doomed only to increase the cost to the buyer's supply chain. Both of these and other cost-shifting practices are dodo birds in waiting. Forward-thinking companies are gaining competitive advantage by managing payables flows for the benefit of their suppliers, not against them.

SCF organizes money flows in a whole new light, transforming financial information to create new efficiencies in financing events in the same transformative way as other supply chain technologies have changed the physical and services supply chain. SCF providers and their growing flock of proponents see SCF doing for the supply chain what the "track and trace" box did for courier freight, what online airline bookings have done for air travel and what the Excel sheet did for financial planning: linking information, options and power in the hands of those who need it to more efficiently, more accurately and least expensively run their business.

The spotlight is moving away from automating the physical supply chain. The slope of IT-driven value delivery is near or at the point of diminishing returns. The next level of fundamental value delivery lies in the creation and management of financial assets that are created and flow within trading partners in the supply chain.

This shift is subtle, fundamental and will inexorably result in new ways of looking at the supply chain. Old practices will wither while compelling new ones are beginning to take their place. A more reliable, more flexible and more efficient supply chain will come to light.

Peter Lugli is Vice President of Marketing and Corporate Development at PrimeRevenue Inc., a global supply chain finance (SCF) provider headquartered in Atlanta. He can be reached at [e-mail].

RELATED ARTICLE: takeaways

* Supply chain automation initiatives have reinvented interactions between trading partners and produced a stronger, more reliable and streamlined flow of goods and services worldwide.

* Yet, some of these procurement practices perpetuate unfortunate financial behaviors and automate them. And, as supply chains expand, the problem only threatens to get worse.

* Supply chain finance (SCF) is a combination of technology solutions and services that link buyers, their suppliers and financing providers to optimize the visibility, financing cost and the delivery of cash.