Page 39 - Linkline Summer 2016

Supply Chain Finance: The State of the Art and Future Directions
Colm Beckett
Institute of Technology Carlow
Supply chain management has become a strategic business function for most corporations over the last half century, and supply chain nance has recently come to the forefront of that paradigm. But what is supply chain nance and why has the concept gained such attention from corporate treasurers and their banks?
After speaking with representatives from manufac- turing companies, nancial services providers and logistics services providers, two main issues are emerg- ing: the impact of working capital management on the company, and impact of company decisions on the ex- tended supply chain. The combination of these two is- sues amounts to a recognition of the importance of cash ow management throughout the supply chain.
Working capital management is concerned with three factors: inventory, accounts receivable and accounts payable. Inventory investment can tie up large amounts of cash for long periods of time. Similarly, extending credit to customers keeps that cash tied up even after the goods have been sold. Depending on the industry, inventory and receivables may represent an investment of thousands or millions. However, purchasing raw ma- terials on credit reduces the amount invested depend- ing on the payment terms.
Working Capital Management
Steeman (2014, pp. 11) presents three SCF schools of thought, moving from broad scope to narrow.
In this way, the management of working capital in the rm bears an impact on the cash ow of both suppli- ers and customers, illustrating the link between work- ing capital management and supply chain management. This presents a role for collaboration in the manage- ment of working capital across the supply chain.
ing)”.
These de nitions give a good account of the supply
Supply Chain Collaboration
Receivables factoring involves the sale of the receiv- ables book to a third party, i.e. the factor. The factor gives the firm an advance on the value of the book, which will be paid back once the debt has been collect- ed.
Supply chain management is concerned with three ows: ow of materials, ow of information and ow of nance. Collaboration in supply chain management has, in the past, yielded substantial bene ts to stakeholders and has contributed to the development of some lead- ing business concepts, such as lean production. Howev- er, this collaboration predominantly relates to the man- agement of materials and information, while nancial ows have been unduly ignored.
Reverse factoring – rather than selling the supplier’s receivables book – involves the transfer of buyer’s paya- bles book. The factor, in this case, is responsible for the timely payment of invoices. The buying rm can bene t from an extended period of credit granted by the fac- tor, while still maintaining the relationship with their sup- plier, and even bene t from early payment discounts. In addition, the buying rm can effectively outsource its payables management function. So, rather than han- dling numerous invoices from numerous suppliers, the buying rm need only send payment to a single factor (Klapper, 2006). Furthermore, the margin charged by the factor is based on the typically lower credit risk of
Supply Chain Finance
The relationship between working capital manage- ment and supply chain collaboration is the essence of supply chain nance (SCF). More & Basu (2013, pp. 625) de ne SCF as “managing, planning and controlling all the transaction activities and processes related to the ow of cash among supply chain stakeholders in order to improve their working capital”.
These schools of thought are de ned as follows:
• “SCF as nancial supply chain management, en- compasses all activities in the supply chain that can
be related to nance...
• “SCF as supply chain nancing is a set of supply
chain nancing instruments which can be used in
managing the nancial supply chain...
• “SCF as buyer-driven payables solutions mainly re-
fers to reverse factoring (also called supplier nanc-
chain nance concept, but what tangible solutions are being used currently? Steeman (above) mentions re- verse factoring.
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SUPPLY CHAIN FINANCE