The Supply Chain Council: Examining the Role of Financial Instruments to Enhance your Supply Chain
European executive retreat report, Monte Carlo, Monaco, 10-11 May 2007.
The financial value chain is increasingly recognised as an area offering significant potential for generating bottom-line improvements and creating competitive advantage.
Many studies today suggest that a typical billion-dollar company spends between $25m-$30m annually for unnecessary working capital and inefficient processing functions because they lack visibility into the financial value chain and don't recognise its connection to the physical supply chain. This can equate to literally billions of dollars wasted across the global supply chain.
There are several questions that emerge once the scenario just described surfaces on the agenda of a business decision maker.
The CFO questions what to do better in order to understand the connection between the physical and the financial chains. There is the need to identify the financial instruments that can be used to better equip the supply chain and enable it for future success.
It is often the case where a pressing question emerges as to why the financial supply chain proved elusive. It is important to identify and analyse the constraints that prohibit trading partners from the timely exchange of information and contractual documents.
Unlike the physical supply chain, which has seen improvements ranging from demand to fulfilment management, there remain significant performance gaps in the financial value chain which contribute considerably to the trapped value.
EXECUTIVE RETREAT PROGRAM
Tailored to fit the needs of dynamic executives, the retreat addressed key challenges faced in day-to-day company management. More particularly, this proved to be a unique occasion for the supply chain manager to understand the point of view of the financial decision maker of the company, and find common solutions and synergies to improve the day-to-day management of both parties.
The agenda provided three keynote presentations on topic subjects of the financial value chain, from the perspectives of the chief financial officer, the bank and the supply chain manager. Each presentation was designed to trigger a subsequent panel round-table discussion with expert panellists, which included corporate representatives of major global companies, as well as supply chain experts.
Jeff van der Eems, COO and CFO of United Biscuits – building synergies between the physical and financial supply chain: the CFO's viewpoint.
The overall presentation showed how a well-managed supply chain is critical to the success of any FMCG (fast-moving consumer goods) business. Jeff van der Eems illustrated the critical role the supply chain plays in driving the virtuous circle of business performance, as well as the challenge of balancing service with cost release and cash delivery.
A thorough discussion followed on the philosophy behind dos and don'ts of SC finance KPIs and a definition of business intelligence was provided. That is, a solution that takes the raw data and makes it actionable. The purpose is to take all the data and make sure to pick out the three to ten most important things and translate that so the plant manager understands.
Mr van der Eems also discussed the necessity and options for supply chain to constantly innovate and move up the value curve in terms of relationships, execution, communication and delivery.
The important thing about productivity driven from the supply chain turned out not to be the extra pounds and pence that are brought down to the bottom line, but the fact that it is the fuel that allows the company to reinvest in the top line. The loss of profit consequent to special product promotions and discounts that foster market share penetration can be offset by the savings from an improved supply chain initiative.
Brand companies have to keep evolving their product. They need to keep striving to understand the consumer and find new ways to address their needs. This can only be done if the company finds room in its P&L to invest in developing it. That is where supply chain management comes in.
It can only work if there is a really good partnership between the finance group and supply chain managers.
To accomplish such a daunting objective, United Biscuits has introduced league tables to its 15 factories in the UK and Europe. Mr van der Eems said that with a factory league table everyone wants to be a leader. This enables the factories to be ranked using key metrics such as waste, labour utilisation and throughput. Then the results can be compared and see what each factory does differently.
United Biscuits has created an atmosphere where information can be shared in an open fashion, and factories can learn from each other's experiences.
Andrew Betts, global head of supply chain business, ABN AMRO – banking solutions for supply chain finance.
This session presented the current banking instruments, trends and best practice for supply chain finance on the corporate and supply side. Concrete ways of combining solutions, such as factoring, were also demonstrated, together with the move to greater complexity, e.g. conduit securitisation.
The presentation also stepped through the connection between working capital management and inventory financing, reviewing different solutions such as changing title, INCO terms, and corporate risk management, as well as the widening influence of the CFO – encompassing logistics and global trade operations, regulatory and the financial reporting environment.
A lively presentation triggered an intense Q&A debate on how banks can support supply chain strategies, and in particular how ABN AMRO is positioned with its MaxTrad solutions.
MaxTrad supply chain management infrastructure, explained Mr Betts, digitises the flows of information, providing levels of visibility in the purchase-to-pay cycle.
The modules of purchase order management, invoice management, shipment management, warehouse management, discrepancy management, supply chain finance and payment, provide a platform for managing and settling all transactions that originate with a purchase order.
David Hennah, supply chain management, banking industry division, SWIFT – the importance of mastering supply chain management to build SWIFT's TSU.
David Hennah showed how important it has been to SWIFT to have a sound knowledge of supply chain management processes to build the trade services utility (TSU) solution. The presentation addressed the following key questions:
- How successful have corporations been in automating the supply chain?
- Where are the gaps?
- How can banks help?
- Could corporations finance trade without bank support?
It was highlighted that world trade is growing and changing fast; change brings challenges (both opportunities and threats). Banks need to provide more complete solutions to support not only risk and finance but also liquidity management and process efficiency. Those banks that cannot respond to the supply chain challenge risk losing revenue, relationship and relevance.
In the typical global trading scenario the letters of credit still represent the major financial instrument used to pay transactions and ensure a visibility that enables banks to mitigate risk and offer finance.
New technologies and the internet are bringing another instrument to the forefront: open accounting. Open accounting is increasing in interest and value among organisations. However the correlated loss of visibility limits bank involvement.
In fact, the letter of credit ensures a high degree of control of all the steps involved in tracking the flow of goods and correlated flows of funds. Each financial transaction corresponds to a precise step of the supply chain process flow.
In an open account structure, the importer and exporter sign a contract and the importer will send the money at some stage to the exporter for the goods. The direct consequence of this shift in market trends entails that supply chain management capabilities must be enriched with document and compliance management derived from global trade practices.
The solution presented, the SWIFTNet trade services utility provides the necessary visibility that enables banks to offer supply chain financing.
It is an internet-based platform that connects banks in a common network that facilitates the exchange of data under standard message formats and protocols.
TSU establishes an initial baseline by comparing purchase data submitted by the buyer's and seller's banks. It then compares purchase data with commercial or transport datasets and notifies the bank(s) concerned. Finally, it delivers reports to assess the completion of the transactions.
Expert panellists included corporate representatives of major global companies:
- Nando Galazzo, VP procurement, Borealis
- Dieter Heinke, corporate process executive SCM, corporate information office, Siemens
- Jose Ramon Ribate, CEO, Ribate
As well as supply chain experts:
- Jaume Ferrer, lead partner, supply chain management, Accenture
- Enrico Camerinelli, chief analyst, Supply Chain Council
- Michael Ginap, CEO, Avineo
- Reinhard Geissbauer, director, PRTM
THE VALUE OF THE EVENT
The SCC European executive retreat was built around a central theme – the financial value chain – from two different standpoints: the supply chain, and the associated financial operations.
Each keynote presentation, followed by an intense panel discussion, involved different stakeholders: supply chain managers, industry experts, consultants and academics.
The audience took an active part in the debate and shared practical experiences to enrich the discussion. Furthermore, the networking breaks continued the dialogues initiated during the sessions around themed tables.
At the end of the retreat, participants declared they not only gained extensive knowledge about the specifics of the financial value chain, but they also returned enriched by new concepts and ideas to enhance their operations.
The lesson learned is that the financial value chain bridges the gap between the CFO and the supply chain manager. Moreover, it was clear from the presentations that the supply chain manager needs a new reference from the CFO, who has to be more of a counsellor and coach rather than the traditional cost-accounting 'gate keeper' and 'pass / fail' ruler of budget proposals.
ABOUT THE SUPPLY CHAIN COUNCIL
The Supply Chain Council (SCC) is a global, not-for-profit trade association open to all types of organisations.
It sponsors and supports educational programs including conferences, retreats, benchmarking studies and development of the supply chain operations reference model (SCOR) – the process reference model designed to improve users' efficiency and productivity. The council is dedicated to improving the supply chain efficiency of its practitioner members.
For further details about the supply-chain council, please contact Colm Clarke
Tel: +32 2 627 0160