The Hype of Physical and Financial Supply Chain Convergence – Part I
Defining the physical and financial supply chains1) The financial supply chain describes the activities involved in planning and executing payments between trading partners through various financial instruments, including Incoterms, exchange rates, credit and country risks. It involves cash management and working capital management and includes departments such as Treasury, Accounts Payable, Shared Services, Compliance, etc.
Financial supply chain services include functionality like purchase order processing, letter of credit processing, invoice presentment, dispute management, foreign currency management, Insurance Management, etc. It is estimated that 4% of finished goods cost relates to financing.
2) The physical supply chain describes the activities involved in planning and executing the movement of goods, including making, storing, and moving products and their related documents (e.g., purchase orders, bills of lading, and customs documents). It involves procurement, supply chain, and logistics. The information around the physical move data, when merged, can give investors a better set of data to make underwriting decisions.
Companies have put a lot of effort into supply chain strategies to manage inventory costs -such as build-to-order, Just-in-Time, lean initiatives, and inventory velocity.
Where are we today?Since the Great Recession, companies have emphasized working capital – and with it extending terms with suppliers, initiatives for faster collection of receivables and various new supply chain finance initiatives to manage balance sheet —because these all have a tremendous impact on cash-to-cash cycle time and working capital.
Banks foray into convergence has been expensive and to date has borne little fruit outside of open account technology (which has been more of a reaction to the decline of the Letter of Credit). I can cite several examples over the years: