Unlock the full potential of your supply chain with financial supply chain management
Upstart competitors are disrupting the way we work and forcing companies to evolve from focusing purely on the top and bottom line to harnessing risk, maintaining cost control, and collaborating internally to grow the business. Sharing of knowledge, capital and trade are essential, and it’s not just start-ups who understand this; companies as large as AT&T and Nokia Networks have also rewritten business rulebooks*.
One crucial area where the chief financial officer (CFO) and treasurer can positively influence change is in the financial management of the supply chain. With access to larger volumes of corporate data than ever before, companies are able to better analyse areas where efficiencies can be achieved – from the suppliers from whom you procure, to the terms and conditions of a contract – these areas provide opportunities for companies to become disrupters rather than being disrupted.
It’s important to start with aspects of your operations you can change quickly – changes that you can implement without any major upheaval. An example would be being able to better handle your suppliers’ working capital. For a company involved in trade, one way to do this would be to strike a more effective balance between days payables outstanding (DPO) and days sales outstanding (DSO). If a top-tier company can shorten payment terms to its suppliers, then it will have extra working capital to increase product output. Increased output will then lead to increased sales for the client.
But let’s be realistic, this strategy is not feasible, and only benefits the supplier.
Shortening DPO unilaterally pushes the financial buck up the chain. A CFO is unlikely to approve such a move, especially in today’s environment. Herein lies the problem: with a majority – 98.5% – of the suppliers in Malaysia made up of small-medium enterprises (SME), access to additional working capital on their own terms is limited. Banks are less willing to provide additional lines to SMEs since they are not deemed sufficiently strong or creditworthy.
Not getting that facility in a timely manner can be a hindrance to businesses, especially those in the Fast-Moving Consumer Goods (FMCG) industry where turnover is fast, and the ability to react to market needs is critical for a company to be able to take full advantage of seasonal periods when sales volume is high.
This is where effective financial supply chain management (FSCM) comes into play. Originating from a function of logistics, transportation, purchasing and supplies, FSCM takes into consideration the planning, management, and control of all processes and transactions related to financial flows along the entire supply chain.
A successful FSCM deal will result in a win-win situation for both the anchor company (principal) and its stakeholders (spokes). The anchor company (principal) can leverage its eco-system to assure financial stability and sustainability, while the stakeholders (spokes) in the eco-system can leverage the anchor company’s financial strength to reduce their funding costs. Banks are able to provide an anchor’s suppliers with sound working capital by factoring in that anchor’s own financial and business aspirations in relation to their chain. In turn, top-tier suppliers are able to receive favourable pricing for working capital loans used to boost output for the anchor.
After securing loans for key suppliers, the anchor can now improve operational efficiencies by stretching the number of days that suppliers have to pay them (assuming there is still a networking capital advantage in doing so) and the anchor would be able to lock in the payment schedule for better treasury management. Through DPO enhancement, there is reduced working capital intensity, and the anchor’s liquidity position is greatly enhanced. This in turn potentially improves shareholder value.
The terms and conditions of the loans are based on the relationship between the anchor and the spoke. Despite the relationship, the anchor will not normally carry the financial burden in any structured arrangement, such that the arrangement is kept off the anchor’s balance sheet, freeing them of any liability for arrangements that banks might have with the spokes. In addition, spokes would normally not face additional obligations outside of the ones specified in the terms for drawing down the working capital loan.
FSCM CANNOT BE VIEWED IN ISOLATION
“It is important not to treat FSCM in isolation and to ignore the other aspects of good treasury management. A more effective way to maintain a high-functioning operation is to view working capital, trade facilities and cash management in unison. Superior management of cash will support operational cash flow, covering all aspect of the chain, from collections to payments.” remarked Lucas Chew, executive director and country head of transaction banking, UOB Malaysia.
A well-formulated and executed FSCM has assisted numerous CFOs in not only achieving their core financial strategies, but also helped shape the way customers run their businesses.
Take for example these actual cases. Case 1 - UOB Malaysia greatly improved a company’s (as an anchor) DSO from an initial 45 days to less than 7 days. This dramatic achievement stems from its improved ability to collect payment after sales have been made to its distributors. Case 2 - the bank also assisted a Malaysian retail company to boost interest income up to MYR500,000 ($120,000) per annum through an FSCM-cash management solution.
FSCM does not only benefit the typical FMCG, retail, oil and gas, construction or pharmaceutical businesses. With an open mind, managers will realise that its benefits are far-reaching and that better management of their supply chain not only helps achieve their financial metrics, but also bring them closer to their key suppliers.
* For example, as a technology company, AT&T faces a future in which its legacy businesses are quickly becoming obsolete. With the industry moving from cables and hardware to the internet and cloud, AT&T had to reinvent itself to become relevant once again. In 2013 it started on a new path by engendering a culture of perpetual learning, rather than hiring new talent wholesale.