Most of the time we attribute supply chain management to logistics, but what if supply chain management is used in the field of finance. Financial Supply Chain Management does exactly that. It is the expansion of techniques developed in the fields of finance and financial risk management into the field of supply chain management. Financial Supply Chain Management (FSCM) refers to a specific set of solutions and services to expedite the flows of money and data between trading partners - that is buyers and suppliers, along the supply chain.
RISE OF FINANCIAL SUPPLY CHAIN MANAGEMENT
Globalization and increased competition has had a profound impact on the supply chain of both the big and small companies. This has led companies to keep larger inventories to prevent shortfall, ensure just-in-time deliveries and accept longer payment terms from the buyers. This has resulted in working capital problems for both the suppliers and buyers, as suppliers need to wait for the buyers to sell the product so as to get back their money. FSCM helps the company to improve their working capital financing, accelerate the cash flow to suppliers and connect supply chain events to financing decisions. The ultimate aim is to optimize working capital throughout the supply chain, reduce total supply chain costs and increase supply chain resilience.
Earlier, companies used the letters-of-credit for transactions to improve their working capital financing. But now the trend is shifting away from them, letters-of-credit involves a lot of documentation work and it also doesn’t offer adequate protection for the parties involved. Companies need more flexible and easier ways to finance their supply chain operations. Open account – payment against an invoice – does exactly that. Open account transaction is simpler and cheaper to use and it covers more than 70 percent of all global trade payments.
HOW OPEN ACCOUNT TRANSACTION WORKS
There are mainly three parties involved in an open account transaction.
- Financial Institutions (FI) like Banks or NBFC
Once the buyer has approved the payment for the goods supplied, FI can purchase the supplier's receivables. So if I am a supplier, I will get my money without waiting very long, because FI purchases my receivables. On the other hand, if I am a buyer, this transaction allows me a longer payment term. As such, the suppliers improve their cash flows, and both buyers and suppliers have better working capital. FIs increase the amount of business they conduct with the traders and it improves their bottom line.
It is a way to monetise receivables or payables in order to maximize the scarcity of liquidity available to suppliers. FSCM helps to connect buyers, suppliers and financers to reduce costs and increase credit availability throughout the supply chain.
Supply chain financing is gradually evolving from covering payables and receivables to encompassing other parts of the supply chain, such as inventory. Technology is important in order to understand the financing needs of both buyers and suppliers and also for gaining greater visibility across the entire supply chain process. Key innovations should leverage the latest in web based technologies to provide buyers and suppliers with a wider range of innovative financing options. Moreover, FIs have to come up with more innovative supply chain finance programs which will help to lower the supply chain cost and build stronger supply chains.
1. Global Finance, Best Supply Chain Finance Providers, by Anita Hawser, August 2009
2. Export Wise, Supply Chain Finance: Lower Your Costs and Build Stronger Supply Chains, by Dennis and Sandi Jones, Spring 2010.
This article is written by Thousif Mohammed A. He is a PGDM student of 2012-14 batch of IIM Raipur. He has a work experience of 2 years in TCS. His areas of interest include finance and technology. He can be reached at firstname.lastname@example.org and can be followed at https://twitter.com/thousifmohammed