Firms in the past have mainly focused on improving the material flow in a supply chain using various innovative methods like cross docking, Vendor Managed Inventory (VMI), Collaborative Planning, Forecasting and Replenishment (CPFR) etc. Firms have also used IT solutions to automate the material flow. Today, they have also begun to focus on improving the financial flow in the supply chain. Many firms have adopted best practices of cash flow management to improve the financial flow. One of the key elements which helps in efficient financial flow in a supply chain is the use of IT solutions in the purchase-to-pay and order-to-cash processes. By automating these processes firms can minimize inefficiencies and improve the effectiveness of the supply chain.Many firms have automated the same or all of the elements of the financial flow in a supply chain through implementing ERP systems and cash flow management solutions. However, most firms have not focused much on integrating the material and the financial flow in a supply chain. By integrating material and financial flows, firms can remove the inefficiencies in the supply chain. Integration of these two flows can be done in three different ways.
- Linking of functional systems with financial systems. For example, by linking the procurement system with the accounts payable system or the ERP system, the physical order information can be matched with the financial information, thus reducing the errors arising due to improper information flow between the two systems. This linking can also be extended to the supply chain partners thus enabling the physical order information flow to closely match with the payment information flow. This enables increased collaboration between supply chain partners.
- Linking supply chain partner’s or customer’s preferences and behavior with the financial elements. Firms can track and analyze the behavior of supply chain partners and customers. Based upon the needs and requirements, firms can provide financial options to the customers and supply chain partners. Suppose, a firm orders a large consignment from a supplier. Then, the firm can provide the option of paying the amount through traditional means like checks or through electronic means. The supplier can decide upon the payment option. If the supplier wants a faster payment, he may opt for the electronic payment means.
- Linking financial and physical flows based on business intelligence. Firms can set the pricing of the product and payment options based on the customer’s requirements and the existing market conditions. This may help the firm in maximizing its revenue. This policy is well utilized by airline companies where flight ticket prices are changed depending on supply and demand conditions.
In order to align financial and physical supply chains, firms need to re-engineer the physical flow processes so as to integrate them with the financial processes. Automation of financial processes is an area in which firms have to focus. Integrating the financial flow with the material flow provides many benefits to the members of the supply chain. Members can obtain the products as per their requirement and pay the supplier using a suitable payment mode. With such integration, members share a common and full view of all their transactions, increasing efficiency in the supply chain. Specific benefits for the members of the supply chain are:
- Suppliers can make accurate forecasts about working capital requirements and also product demand. Thus inventory levels and working capital can be reduced as they have a better view about the situation. They can resolve disputes easily as both the supplier and the customer share the same information about the transaction Payment processing can become faster. The processing costs due to personnel and paperwork are reduced. Errors are minimized, thus helping the supplier to obtain correct payment.
- Buyers can benefit from perfect order delivery. This helps the buyer to forecast and plan effectively. Thus the buyer can reduce working capital requirements to deal with the payables. With the automation of the processes, buyers can reduce the time and costs in processing the invoices like routing for approval, matching the invoices and payments.
- Trade terms can be negotiated more effectively between the buyer and the supplier because of the availability of precise information about a transaction. Buyers and suppliers have an accurate view about the risk involved. Hence, the buyer and the seller can negotiate financing options like insurance, supplier credit etc., more optimally.
Credit: Strategic Financial Management-MGU