For many companies, building a global supply chain has become essential to surviving in a highly competitive and evolving global marketplace. It also creates a host of new risks. If your company makes snow shovels, relying on partners scattered around the world inevitably raises the odds that some won't reach stores until the first day of spring.
Managing a global supply chain also puts tremendous pressure on corporate financial managers, who are tasked with ensuring that cash invested in the business quickly returns to the business as cash from sales. That "free cash flow" from operations can be used to pay shareholder dividends, fund new corporate investments, grow sales and more. Failure to keep the cash flowing may force a company to take on high levels of debt just to sustain its daily operations.The longer the supply chain, the greater the risk that too much cash will be "trapped" in the form of excess working capital. When inventory sits in a port awaiting customs review, on a ship stuck in bad weather or in a warehouse while a supplier awaits payment, the resulting kinks in the supply chain all slow down the cash conversion cycle. At each link in the chain, partners must negotiate payment terms that could help speed their own cash flow --or trap even more cash in the chain.
Meanwhile, new challenges are emerging. As profit margins shrink and companies become even more dependent on overseas suppliers, "whole sectors are turning to suppliers in Asia, particularly in China, India and Vietnam, for example, so those suppliers are gaining bargaining power," says Inwha Huh, Head of Global Trade and Receivables Finance, North America, at HSBC. Executives looking to navigate these growing challenges while speeding up the cash conversion cycle should aim for three goals: better coordination within the organization, increased visibility across the supply chain and reliable access to working capital management for all partners.
As the emphasis on managing working capital intensifies, financial managers who used to solely focus on cash and credit --known as the "financial supply chain" --are delving deeper into the physical side of the supply chain as well, Huh says. That requires working more closely with other company functions, including sourcing, compliance and sales.
Sometimes these functions have competing goals, says Samir Moorjani, Senior Trade Sales Manager at HSBC. "For example, salespeople who are getting paid for generating higher sales may be striking deals in which they get to sell more but are willing to wait longer for payment. Meanwhile, procurement is getting paid for negotiating lower prices with suppliers, so they're agreeing to pay suppliers more quickly in exchange for those lower prices. They're both working against the treasury function's objective of improving working capital."
Successful working capital management means all of these teams must work toward the same goals, Moorjani says. Supply chain planning and implementation must be informed by standard efficiency metrics, and incentives must be aligned throughout the organization.
"The most effective strategy to manage working capital efficiently is to fully understand your business and the various levers you can pull to achieve operational excellence, be that in managing procurement, production and inventory, quality control, sales or payments," he says. "Established supply chain management strategies such as Six Sigma and strategic sourcing, while geared towards generating operational and purchasing efficiencies, ultimately contribute to efficient working capital management by reducing cost leakage."
When Moorjani asks corporate treasury executives a simple question --"How quickly do you approve your invoices?" --many admit they don't know. "Therein lies the key dilemma of working capital management," he says. "You can't manage what you can't measure."
Traditionally, invoicing has involved the trading of hand-keyed, paper-based documents between sellers, buyers and logistics providers. An important step in improving visibility across the supply chain is automating the process of tracking and information sharing between partners in the chain. "Systems for order management, warehouse management, inventory control and accounts payable help companies manage and control their sales, inventory and payments --the three components of the cash conversion cycle," Moorjani says.
In recent years, cloud-based platforms have enabled all partners to collaborate in real time and achieve visibility throughout the supply chain. A networked platform carries considerable benefits:
Today's suppliers can't wait for customers' cash to come through before buying raw material, firing up the assembly line or loading up the cargo container. Financing is required every step of the way. "Everyone depends on a steady and reliable stream of capital to keep the machines running," Moorjani adds.
But some companies in the chain may have an easier time accessing capital than others. A well-established U.S. buyer might access a bank credit line at 1 percent per annum, while its smaller Chinese or Vietnamese supplier may be fortunate to get credit at 8 percent per annum. This disparity adds to costs and can even affect the financial stability of valued suppliers. One solution is vendor financing, in which a buyer helps a supplier get credit at the buyer's lower rate. In exchange, the supplier may agree to wait longer for payment.
A bank-run electronic platform can add to the appeal of vendor financing. The bank absorbs the payment risk of the transaction and gives the supplier the option of being paid as soon as the buyer approves the invoice. The bank then collects funds from the buyer on the maturity date of the invoice based on the new payment terms that buyer and supplier have agreed upon.
The arrangement speeds up the cash conversion process for both supplier and buyer. The supplier gets faster and more dependable payment at the discounted rate. The buyers get to keep their cash longer on their balance sheet. And thanks to the automation and visibility provided by the platform, both sides reduce effort on the collection and payment process.
The next generation of cloud-based platforms will enhance supply chain management through data analytics --which can provide predictive insight --and open collaboration between partners. Sophisticated platforms can allow companies to obtain working capital based on recent performance history, which may be faster than having to wait for a credit review.
Predicting cash flow is key to managing the cash conversion cycle. Another solution --cash pooling --is especially valuable for companies that manage cash in various locations throughout the globe. With cash pooling, cash from all operations is pooled into a single account at the end of each day. That makes it easier for companies to forecast their cash or collection positions and redeploy cash quickly where it is most needed.
“Visibility, coordination, automation --all of these are vital to reducing both the financial and operational risks of global supply chains,” Huh says. “By knowing the data, aligning metrics and using technology intelligently, companies can manage their global supply chains to fulfill their goals of reducing cost and improving competitiveness.”
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