Financial Supply Chain Management

� Supply chain financial management				metric. Improvements in supply chain design and
				operation may pay off in reduced inventory levels,
Supply chain management definition				thereby improving this metric. Additionally,
- All facilities, functions, and activities associated				modernpayment systems such as EIPP may pay off
with flow and transformation of goods and services				in reductions in both A/R and A/P for companies
from raw materials to customer, as well as the				along the supply chain. Here, the benefit would be in
associated information flows				reduced Working Capital needs.
- An integrated group of processes to "source,"				Impact on Service
"make," and "deliver" products				Expedited financial flows support a smooth-running
- The system of suppliers, manufacturers,				supply chain. Conversely, if a delay in financial flows
transporters, distributors, and vendors that exists to				causes delays in material receipt, then customer
transform raw materials to final products and supply				service (fill rates, availability, on-time delivery) can be
those products to customers				unexpectedly degraded.
That portion of supply chain which				Impact on Inventory
comes after the manufacturing process is sometimes				Financial flow processes associated with A/R can also
known as the distribution network				affect the supply chain. There may be instances
Types of supply chain				where unexpected delays in cash receipts force a
1. Physical supply chain				company to delay ordering of incoming materials, due
2. Financial supply chain				to Working Capital constraints. This could result in
Physical supply chain refers to the movement of				reduced customer service later on, when the
goods as was described earlier between the initial				absence of the missing materials is felt; it could result
supplier to the ultimate customer.				in higher stock outs, lower on-time deliveries, and
Financial supply chain refers to the movement of				decreased revenues.
funds resulting from physical supply chain				Improvement opportunity for finance flows
Integration of FSCN with physical supply chain				Adopting automation solution for financial clows
Financial supply chain integrates with physical supply				such as Purchase card and distribution card and EIPP
chain in multiple places with activities largely around				systems creates improvement opportunities and cost
payments and loans.				saving in several areas.
Generally banks provide these services some time
other agencies also provides				More Efficient Purchase & Sales Processes
Goal of the SCM				P-Cards have provided significant reductions in
SCM is concerned with the efficient				purchasing processing costs. Studies show a 50 to 60
integration of suppliers, factories, warehouses and				percent reduction in A/P invoice processing from
stores so that merchandise is produced and				electronic systems.6 Another advantage of P-Cards is
distributed.				that they can be easily synchronized with
-In the right quantities				companyexpenditure policies. Merchant Category
-to the right location				Codes can be used to direct purchases to vendors
-at the right time				on a company's Approved Vendor List (AVL). There
In order to				may be dollarspending limits set on any single
-Minimize total system cost				purchase, which can vary by individual. To improve
-Satisfy customer service requirements				sales and collections processes a seller may receive
Need for financial supply chain management				settlement of funds as soon as the next day by
Benchmarks of business performance				accepting a P-Card and and/or a Distribution Card as
indicate that enterprise resource planning (ERP)				a payment method.
systems and other enterprise technologies have				Faster Reconciliation through Electronic
transformed customer and supply chain processes				Invoice Presentment (EIP) and Payment (EIPP)
but that the performance of the finance function has				Electronic Reconciliation – A/P
hardly changed. Although some companies have				Matching shipping receipts, invoices, and
managed to improve the performance of their				corresponding purchase orders has been a manual
financial processes profoundly, financial functions are				process for A/P in many companies. It is not
still neglected in many businesses, and day's sales				uncommon to have mismatch rates between 10
outstanding (DSO) and working capital needs are				percent and 25 percent of all invoices received. The
very high in several industries. The working				buyer typically informsthe seller about the mismatch
capital scorecard for 2008 from CFO Magazine				and may not make any partial payment on the
demonstrates that there are significant differences				invoice until the discrepancy is resolved. It may seem
between high and low performers within an industry.				that the buyer is gaining "fl oat"or the use of
In the automotive industry, for example, the best				Working Capital until resolution occurs, but since the
score in DSO was 44, while the worst score was				cause is a document mismatch, there is no way the
241—five times more than the sector median of				buyer can plan on that fl oat systematically.
47. Research from the Hackett Group indicates that				Furthermore, from a supply chain viewpoint, the
finance department costs continue to consume more				uncertainty associated with the delay in invoice
than 1% of revenues in many companies, and CFOs				payment until resolution may create difficulties for
struggle with poor transparency of their daily cash				the seller. Electronic means of improving the
flows				three-way matching process are emerging.
In times when unprecedented economic				Companies that have movedin this direction will
uncertainty and soaring stockholder expectations are				typically perform the three-way match much earlier in
putting every function under closer scrutiny than				the process. It is no longer necessary to wait until
ever before, the finance function should be driving				the invoice is due; the match can be performed
business, not holding it back. Financial supply chain				immediately after the material has been received and
management (FSCM) can help companies to remove				a count performed. (Quality checkscan be done in
some of the inefficiencies in operational processes in				parallel.) If a discrepancy is found, then there is ample
order to become more effective.				time to correct it without delaying payment beyond
Definitions of Financial Supply Chain Management				normal terms, since the reconciliation has been
There are different definitions of the term financial				initiated much earlier in the process. Furthermore,
supply chain , which appeared for the first time in				modern EIPP systems can provide sufficient
2000 and 2001. According to the research company				invoice-level detail so that many mismatches can be
Killen & Associates (2001), the financial supply				quickly diagnosed with the information provided
chain "parallels the physical or materials supply chain				electronically. This speeds up the reconciliation
and represents all transaction activities related to the				processsignificantly and accomplishes it at much lower
flow of cash from the customer's initial order through				cost. Electronic Reconciliation – A/R
reconciliation and payment to the seller." The
Aberdeen Group, another research company, calls the				Electronic Reconciliation – A/R
financial supply chain "a range of B-to-B
trade-related intra- and inter-company financial				The same three-way match discussed above is also
transaction-based functions and processes [which]				present on the A/R side. Companies can easily have
begin before buyers and suppliers establish contact				three-way match discrepancies on the A/R side of
and proceed beyond the settlement process." The				between 10 percent and 40 percent of invoices sent.
two definitions emphasize different topics. Killen's				It may take up to 40 days to resolve the
focuses on the parallelism between the physical and				discrepancies. The company may receive only a
the financial supply chain, and it stresses a section of				partial payment on their invoice during this period, and
the cash flow collaborative nature of				sometimes no payment at all, until the discrepancy is
financial supply chain management and reveals that				resolved With automated systems, reconciliation can
the financial value chain isn't limited to the inner walls				be accomplished earlier, more easily, and faster.
of a company but includes communication and				Modern e-payment systems can include detailed
cooperation with business partners				information such as P.O. number, Invoice number,and
Both definitions focus on a process-oriented view of				sufficient invoice and P.O. line item details to resolve
the financial supply chain that is basically correct;				many mismatches without further manual effort. The
however, in many respects the explanations do not				result is significantly faster cash inflows (e.g., a better
go far enough:				Cash-to-Cash cycle) and reduced Days Sales
They focus very much on the collaboration between				Outstanding (DSO). Furthermore, automated
companies—specifically, suppliers and				A/R processing can improve customer relationships
customers—and they do not consider other
important business partners within the financial supply				Improved Flow of Information
chain, such as banks.				Data Integration
They describe primarily the status quo, and do not				Use of P-Cards allows companies to obtain detailed
stress the various dimensions for the optimization of				data that is very helpful in the reconciliation process
business processes within the financial supply chain.				and could also be useful in the product supply chain.
The motivation, as well as the key , for an efficient				While all card transactions contain "Level One"
financial supply chain are not obvious.				information (the minimum needed to clear and settle
Another definition that includes these three aspects is				the financial transaction), modern systems allow for
the following: Financial supply chain				"Level Two" and "Level Three" data capture and
management (FSCM) is the holistic and				transaction reporting. In particular, Level Three
comprehensive planning and controlling of all financial				datamay include invoice-level details such as discount
processes which are relevant within a company and				amount, freight/ship amount, order date, account
for communication with other enterprises. The goal				number, item commodity code, item description,
of FSCM is to increase the transparency and the level				quantity, unit of measure, and unit cost.
of automation of business processes along the				Vendor Web Portals
financial value chain. The purpose is to save				A vendor Web portal allows vendors electronic
processing costs and reduce the working capital of				access to a company's information records pertaining
the company. This definition doesn't consider where				to their company, such as invoice status. Modern
the financial supply chain actually begins and ends,				e-payment systems can contain sufficient detail to
because there are also analytical processes that are				allow many vendor inquiries to be handled by a self
not directly related to a business process but which				service vendor portal. This saves both buyer and
belong nonetheless to the financial supply chain				seller time and expense; it reduces telephone calls to
				the buyer and provides a faster response to the
Key Performance Indicators				seller.
				Outsourcing Credit and Collections
There are various key performance indicators that				Credit Limit Optimization
are relevant for measurement in financial supply chain				When setting appropriate credit limits for customers,
management. One key metric is the cash				a number of different factors come into play,
flow cycle, which defines the period from delivery				including account profitability and credit risk. Monitoring
by suppliers until the cash collection of receivables				credit limits dynamically is difficult for companies to
from customers (Figure 1). It is the time period				accomplish by themselves. There are
required for the company to receive the invested				economicefficiencies in outsourcing the task of
funds back in the form of cash. The cash				determining optimal credit limits and monitoring them
flow cycle can be divided into the operating				dynamically. Not many companies can claim their core
cycle—which is the time period between delivery				competence is optimizing credit limits. This business
by suppliers and the actual cash collection of				function is a natural candidate for outsourcing to a
receivables, and the cash flow cycle—which is				financial institution. Such institutions have specialized
the time period between the cash payment for				staff to deal with assessment of credit risk, as well
inventory and the cash collection of receivables. The				as standardized collection procedures. Due to
longer the cash flow cycle, the greater is the				economies of scale, they may be able to provide this
working capital requirement of a company, which				function in a more cost-effective manner.
means that a reduction of the cash flow cycle will				Receivables Financing
immediately free up liquidity				If a company or an industry has traditionally had
Within the cash flow cycle we can differentiate the				lengthy payment terms (e.g., 90 days or more), the
following parameters,				suppliers will often want to have their receivables
- Days in inventory: This is the length of time				financed. This is another opportunity for banks to
between the delivery of the goods and the invoice				provide value.
from the supplier, and the sale of the goods and the				Collections
invoice to the customer. It describes the average				Companies are also using Distribution Card solutions
number of days the goods of a company remain in				to streamline their collections and reconciliation
inventory before being sold. This metric is the focus				tasks.Selling can be more effective when banks
for all activities around classical supply chain				manage collections duties.
management				Lower Working Capital Needs
- Days in payables: This is the length of time				Improved financial flow processing can contribute to
between delivery of the goods and the invoice from				reduced Working Capital through better visibility. More
the supplier, and the actual payment for the				effective financial processing can help remove
inventory. This figure describes the average time it				uncertainties in financial flows and thereby
takes to pay a supplier. The parameter considers the				contribute to a significant decrease in the Days of
outstanding receivables of a company, and is an				Working Capital (DWC). It has been estimated that
important metric for debtors concentrating on their				increased visibility into A/R can reduce working
efforts to optimize the purchase-to-pay cycle.				Capital needs by as much as 20-25 percent.7 One
- Days sales outstanding: This is the length of time				way to estimate the impact of better visibility is to
between the sale of the goods and the invoice to				draw a parallel between managing Working Capital
the customer, and the actual payment date of the				and managing inventories. Safety stock in inventory
customer. This metric measures the average number				systems is proportional to the standard deviation of
of days companies need to collect revenue after a				the demand forecast error. Improvements in supply
sale has been made. A high DSO number means that				chains can often lower the effective standard
an enterprise is selling to its customers on credit and				deviation of forecast error by 10-20 percent. Applying
taking longer to collect money. The figure is an				this logic to Working Capital, one would expect that
important figure for creditors, to optimize the				improved visibility on both A/P and A/R could
order-to-cash cycle				translate to reductions of 10-20 percent. One industry
- Days in receivables: This is the length of time				source forecasts that sophisticated cash-flow
between the sale of the goods and the invoice to				optimization tools will appear by 2006-07, adding
the customer, and the expected payment date. This				significant enhancements to current innovative
key p performance indicator is similar to DSO, and				payment capabilities
indicates the average time, in days, that receivables				Strengthened Partner Relationships
are outstanding. Days in receivables can also be called				Closer, Responsive Customer Connection
best possible DSO, since the company would collect				Automated systems to submit invoices and receive
all receivables before the due date				payments make it easier for customers to reconcile
Within the cash flow cycle there is potential to				and pay invoices. The ability to send Advance
reduce both days in inventory and days sales				Shipping Notices (ASNs) and to track customer
outstanding. Days in payables can be increased but				orders (dynamic order status information) can further
should be monitored carefully to avoid putting				cement the relationship between a company and its
supplies at risk. Days in receivables can be reduced				customers. Differentiate by Adding Services (e.g.,
by optimizing cash collection. Another important				EIPP) When a company provides a product that is
indicator for an efficient financial supply chain				not easily differentiated (e.g., a commodity), it can
management is working capital, which is a balance				use financial services to differentiate itself from
sheet metric and part of the liquid assets. working				competitors. If acompany uses EIPP, it is much easier
capital is calculated as current assets less				for customers to do business with that company
current				because EIPP benefits accrue to both parties in the
liabilitites, and is				supply chain. If a buyer is considering two alternative
a measure of the liquid reserve and short-term				sources of product, the company offering the EIPP
solvency of an enterprise, available to satisfy				benefi ts could be in a better position to win the
contingencies and uncertainties. One of the key				business.
objectives of financial supply chain management is to				What's Happening in
optimize the working capital by reducing, for instance,				Financial Flow Management
outstanding receivables.				Several trends and best practices are emerging for
Supply Chain Flows				financial flows that will help to streamline and create
A supply chain is a network of partners that				end-to-end electronic payments. These include:
produces raw materials, subassemblies, and finished				Purchasing Cards and Distribution Cards
products, then distributes them via various sales				More and more companies are installing Purchasing
channels to customers.				Cards (P-Cards) as a way of making purchasing more
Along this chain, there are three major flows:material,				efficient and cost-effective. P-Card systems also
information, and financial				enable companies to aggregate spend data quickly
Financial Flows in the Supply Chain				and frequently, and to maintain compliance with
Invoices and Payments				company spend policies They also increase financial
The financial flow in a typical supply chain includes				transparency and help companies adhere to
thousands of invoices and payments in a given year.				regulations. The Distribution Card is designed to
The scale of this problem is challenging corporations				re-engineer Distributors' and wholesalers' accounts
to find ways of streamlining their processing. There				receivable (A/R) process through the replacement of
are also considerable savings to be obtained in other				cash, customer credit and promissory notes. By
categories besides processing improvements. Any				shifting the manual-driven process and burden of
single organization in the supply chain has both				invoicing and collections from the Distributor to the
Accounts Payable (A/P) and Accounts Receivable (A				Bank, the Distribution Card transforms the collection
R) activities. Each invoice is an A/P from the				process into a quick paperless electronic payment,
downstream buyer's perspective and an A/R from				reducing accounts receivable (A/R) costs substantially.
the upstream seller's viewpoint. Multiple invoices,				Sales proceeds can be immediately transferred into
however, are often paid by a single payment. This				working capital for faster turnover.
requires information as to which specific invoices are				EIPP (Electronic Invoice
covered by a remittance. Also, when invoices are				Presentment & Payment)
reconciled prior to payment, the three-way match of				Gradually, companies are moving toward Electronic
purchase order (P.O.), shipping receipt, and invoice				Invoice Presentment (EIP) and Electronic Invoice
may fail if all documents are not precisely consistent.				Presentment and Payment (EIPP). In a recent survey,
Both of these potential failures can often be dealt				78 percent of respondents said they were either
with by innovative payment solutions with				"very likely" or "somewhat likely" to transition from
pre-established tolerances for automated processing				paper checks to electronic payments for their B2B
Information Transfer				payments within the next three years.2 Today's new
				EIPP tools provide an excellent opportunity to
Financial flows also include information transfer via				perform financial flow and information flow tasks at
Electronic Invoice Presentment (EIP) and electronic				the same time. The ability to send detailed
payments. This combination constitutes the Electronic				invoice-level information (SKU numbers, quantities, PO
Invoice Presentment and Payment (EIPP), an				numbers, etc.) along with remittances enables the
advanced payment application that automates				supply chain to transfer this information quickly and
specific financial tasks, as well as provides the				without errors often found inmanual procedures.
opportunity to collect, aggregate, and share valuable				Invoice Imaging
information across the supply chain. Until recently,				Some companies are creating soft copy images of
information and financial flows were treated				paper invoices so that all payments can proceed
separately. However, innovative payment solutions				along an electronic, paperless pathway. Others are
can now include detailed transaction information such				creating data warehouses to maintain line item detail,
as date and time of receipt, supplier name, quantity				with information from a P-Card solution or other
received, P.O. number, etc. Having both financial and				sources.
detailed product information available electronically can				Supplier Web Portals for Invoice Inquiries
minimize human errors, reduce reconciliation time, and				Another signifi cant trend is to develop Web-based
create a more tightly integrated supply chain.				automated inquiry systems for suppliers. Instead of
Importantly, banks can aid customers in ensuring that				accessing a call center to make a simple inquiry,
reconciliation and posting to General Ledger (GL) is				suppliers can access a Web portal for their company
integrated automatically				and perform self-service inquiry regarding the
Supply Chain Management Challenges				statusof their invoices (received, in payables queue, in
Despite the fact that companies have made a large				reconciliation queue, scheduled to be paid as of a
number of significant supply chain management				certain date, etc.).
improvements over the past decade, there are still
some unique challenges affecting operational				Web-based Financial Reporting
efficiencies and service. The challenges listed here are				To reduce costs, significantly improve spend
those most closely related to what is commonly				management, and make more informed business
known as the "bullwhip effect," a term that refers to				decisions, many companies are finding that it's critical
amplifications of end-consumer demand as one				to electronically capture financial transaction and
moves up the supply chain. How a company mitigates				invoice-level data and then review it through a
the bullwhip effect depends on the cause				Web-based reporting tool. This transaction and
CHALLENGE: Information Distortion				invoice-level data may be easily integrated
SOLUTION: Ensure rapid information exchange along				withexisting back office financial systems. Research
the chain				indicates that this integration capability can save 1-4
One cause of the Bullwhip Effect deals with				days per month on manual data synthesis and
information distortion. If consumer sales increase by				reconciliation activities
5 percent in a given week, a retailer could end up				KPIs for Supply Chains
ordering 7 percent more product in response to the				Product Supply Chain metrics have three key
increase and a feeling that demand will continue. The				dimensions:
next link in the chain, observing what appears to be a				• Customer service is usually measured by
7 percent increase in demand, then orders a larger				percent Fill Rate or percent Complete Order Rate in a
increase on his supplier. Eventually the factory may				build-to stock situation, or by percent On-time
observe an inflated 20 percent increase in orders				Delivery in a build-to-order case. Increasingly for
Delays in transmitting changes regarding demand or				build-to-stock situations, companies are also
supply can amplify problems. A good way to deal				measuring Product
with this situation is to share point-of-sales (POS)				Availability (percent time in stock) at retailers' shelves
informationwith all partners in the chain. Emerging				as a metric for customer service.
electronic payment (e.g. card-based solutions) and				• Inventory (an Asset) is measured by value, by
information management tools provide a new way of				time supply (Days of Inventory), or by Inventory
sharing information.				Turns (Turns = Cost of Goods Sold (COGS)
				Inventory Value). All three metrics are closely related.
SOLUTION: Vendor-Managed Inventory (VMI)				By knowing a firm's annual COGS, one can derive
Another way to deal with information distortion				anyinventory metric from either of the others.
involves giving the supplier "decision rights" regarding				• Speed is often measured by the Cash-to-Cash
the timing and quantity of replenishments. While				(C2C) cycle (C2C = Inventory + A/R – A/P), all
many buyers may have concerns about turning these				measured in days of supply.
decisions over to suppliers, there have been				A negative C2C cycle is attractive for growth.
numeroussuccessful pilots and full-scale applications of				However, taking the entire supply chain perspective,
this concept, called Vendor-Managed Inventory (VMI).				one's suppliers presumably become accustomed to
CHALLENGE: Miscommunication				delayed payment terms and find other ways to
SOLUTION: Collaboration and Integration				manage profitability. Furthermore, one company's
Companies along the supply chain are more				payables are another company's receivables, and in
collaborative compared to the past. They are sharing				the supply chain view, these "cancel out" with
forecasts and attempting to operate in a highly				oneanother. However, the integration of automated
integrated fashion so that the end customer				payment solutions can lead to a significant reduction
perceives the entire supply chain as fully integrated.				in the uncertainty of A/P and A/R flows, which can
Collaboration can takeseveral forms. A simple sharing				ultimately be quite valuable to the entire chain
of forecasts between supply chain partners can
often avoid miscommunication about special				KPIs for Financial Flows
promotions or other events that will affect demand.				Key Performance Indicators (KPIs) for financial flows
More complex integration can take the form of VMI				include the following:
Information Transfer				• Days of Working Capital (DWC) =
				(Working Capital/Annual Revenue) x 365
Financial flows also include information transfer via				• Days Sales Outstanding (DSO) =
Electronic Invoice Presentment (EIP) and electronic				(Accounts Receivable/Annual Revenue) x 365
payments. This combination constitutes the Electronic				• Days of Inventory (DIO) =
Invoice Presentment and Payment (EIPP), an				(Inventory Value/COGS) x 365
advanced payment application that automates				• Days Payables Outstanding (DPO) =
specific financial tasks, as well as provides the				(Accounts Payable/Annual Revenue) x 365
opportunity to collect, aggregate, and share valuable				Days of Working Capital can be easily converted into
information across the supply chain. Until recently,				an equivalent metric, Working Capital as percent of
information and financial flows were treated				Annual Sales. (For example, if a company's DWC is 50
separately. However, innovative payment solutions				days, then Working Capital as a percent of Annual
can now include detailed transaction information such				Sales = 50/365 = 13.7 percent.)
as date and time of receipt, supplier name, quantity				Other important characteristics of financial flows are:
received, P.O. number, etc. Having both financial and				• Reliability of payment methods
detailed product information available electronically can				• Predictability of payment inflows and
minimize human errors, reduce reconciliation time, and				outflows;improving cash flow
create a more tightly integrated supply chain.				• Information Management (invoice-level data
Importantly, banks can aid customers in ensuring that				withfinancial data)
reconciliation and posting to General Ledger (GL) is				Key How Supply Chain & Financial Flow KPIs
integrated automatically				Connect for Greater Efficiencies
Financial Flow Management Challenges				In many cases, financial flow KPIs can have a direct,
				positive impact on supply chain management
Most companies require significant amounts of				performance.
Working Capital to deal with variable and somewhat				Impact on C2C
unpredictable financial inflows and outflows. When				The financial flow KPIs of DIO, DSO, and DPO have
viewed collectively, the financial flow management				a direct correlation to the C2C cycle supply chain
challenges such as slow processing, unreliable and				metric. Improvements in supply chain design and
unpredictable cash flows, costly processes, high Days				operation may pay off in reduced inventory levels,
Sales Outstanding (DSO), and suboptimal credit				thereby improving this metric. Additionally,
decisions require higher Working Capital than				modernpayment systems such as EIPP may pay off
necessary.				in reductions in both A/R and A/P for companies
If these challenges were removed, the money saved				along the supply chain. Here, the benefit would be in
could be shifted to more valuable uses. In order to				reduced Working Capital needs.
strategically address and minimize financial flow				Impact on Service
challenges and take appropriate action, one must first				Expedited financial flows support a smooth-running
identify and evaluate the common causes.				supply chain. Conversely, if a delay in financial flows
				causes delays in material receipt, then customer
				service (fill rates, availability, on-time delivery) can be
Manual Processes				unexpectedly degraded.
Manual processes tend to be slow, unreliable,				Impact on Inventory
unpredictable, and in the final analysis, often more				Financial flow processes associated with A/R can also
costly than automated solutions.				affect the supply chain. There may be instances
Lack of Timely Information				where unexpected delays in cash receipts force a
In many situations, financial flows do not contain				company to delay ordering of incoming materials, due
sufficient detailed information for either manual or				to Working Capital constraints. This could result in
automated systems to accomplish their jobs. As a				reduced customer service later on, when the
result, additional time and effort is required to obtain				absence of the missing materials is felt; it could result
missing information (e.g., invoice-level				in higher stock outs, lower on-time deliveries, and
detailedinformation such as SKU numbers, item				decreased revenues.
quantities, and P.O. numbers).
Lack of Employee Empowerment and				Improvement opportunity for finance flows
Spend Policy Compliance				Adopting automation solution for financial clows
If purchasing by individuals isn't carefully monitored				such as Purchase card and distribution card and EIPP
and controlled, inappropriate spending may occur,				systems creates improvement opportunities and cost
undermining the company's initiatives to control				saving in several areas.
expenses and improve strategic sourcing. Strategic
sourcing requires companies to know how much they				More Efficient Purchase & Sales Processes
are purchasing from various suppliers for different				P-Cards have provided significant reductions in
categories of product. Performing periodic analyses to				purchasing processing costs. Studies show a 50 to 60
create reports to help monitor spending and				percent reduction in A/P invoice processing from
negotiate strategic sourcing with key vendors may				electronic systems.6 Another advantage of P-Cards is
be time-consuming and costly if this data is not				that they can be easily synchronized with
captured electronically.				companyexpenditure policies. Merchant Category
Delays in Invoice Reconciliation				Codes can be used to direct purchases to vendors
Delays in invoice reconciliation are a particular cause				on a company's Approved Vendor List (AVL). There
of additional Working Capital; they delay receipt of				may be dollarspending limits set on any single
payments and increase Days Sales Outstanding				purchase, which can vary by individual. To improve
(DSO) of receivables. When there is a three-way				sales and collections processes a seller may receive
mismatch of invoice, P.O., and shipping receipt, there				settlement of funds as soon as the next day by
is an inevitable delay while the mismatch is				accepting a P-Card and and/or a Distribution Card as
investigated. These investigations typically take time,				a payment method.
as well as add cost.				Faster Reconciliation through Electronic
Processes for Setting Optimal Limits				Invoice Presentment (EIP) and Payment (EIPP)
Companies often maintain their own departments to				Electronic Reconciliation – A/P
set customer credit limits. However, the ability to set				Matching shipping receipts, invoices, and
optimal credit limits may require sophisticated				corresponding purchase orders has been a manual
algorithms that are often inaccessible to non-financial				process for A/P in many companies. It is not
companies.				uncommon to have mismatch rates between 10
What's happening in				percent and 25 percent of all invoices received. The
Supply Chain Management				buyer typically informsthe seller about the mismatch
Several trends and innovative best practices in supply				and may not make any partial payment on the
chain management are now being observed in				invoice until the discrepancy is resolved. It may seem
forward-looking companies. These include				that the buyer is gaining "fl oat"or the use of
Shared Services, Group Procurement				Working Capital until resolution occurs, but since the
Companies that formerly had independent purchasing				cause is a document mismatch, there is no way the
and payment operations at multiple sites are moving				buyer can plan on that fl oat systematically.
to a "shared services" model that centralizes these				Furthermore, from a supply chain viewpoint, the
functions. The major benefits of shared services				uncertainty associated with the delay in invoice
include economies of scale and increased quantity				payment until resolution may create difficulties for
discounts from suppliers. availability on the store shelf				the seller. Electronic means of improving the
for the end consumer They may also measure their				three-way matching process are emerging.
average response time to special orders, as well as				Companies that have movedin this direction will
their worst-case response time.				typically perform the three-way match much earlier in
Supplier Web Portals for Inventory Data				the process. It is no longer necessary to wait until
Many companies are instituting Web portals where				the invoice is due; the match can be performed
suppliers can view inventory levels at the customer's				immediately after the material has been received and
site and POS or consumption data on materials. In				a count performed. (Quality checkscan be done in
order to implement Vendor-Managed Inventory				parallel.) If a discrepancy is found, then there is ample
(VMI), it is necessary that the supplier gain access				time to correct it without delaying payment beyond
tothe customer's inventory and consumption data.				normal terms, since the reconciliation has been
Such portals can also contain status information				initiated much earlier in the process. Furthermore,
regarding the supplier's invoices.				modern EIPP systems can provide sufficient
Sophisticated Supply Chain Planning Systems				invoice-level detail so that many mismatches can be
Modern supply chains have multiple levels, and it is				quickly diagnosed with the information provided
often inefficient to manage each level independently.				electronically. This speeds up the reconciliation
Various companies have installed sophisticated supply				processsignificantly and accomplishes it at much lower
chain planning systems to replace separate layers of				cost. Electronic Reconciliation – A/R
independent decisions.
Extended Performance Measures				Electronic Reconciliation – A/R
Progressive companies today work as part of an
integrated supply chain and measure product				The same three-way match discussed above is also
Collaboration Along the Chain; VMI				present on the A/R side. Companies can easily have
Leading companies are working closely with partners				three-way match discrepancies on the A/R side of
along their supply chain to try to implement VMI. The				between 10 percent and 40 percent of invoices sent.
evidence speaks loud and clear that VMI generally				It may take up to 40 days to resolve the
lowers inventories across the supply chain, increases				discrepancies. The company may receive only a
higher product availability, and improves revenues.				partial payment on their invoice during this period, and
Expanded Service Offerings				sometimes no payment at all, until the discrepancy is
Often, a company may be asked to perform a new				resolved With automated systems, reconciliation can
service by one of its customers. Enlightened				be accomplished earlier, more easily, and faster.
companies are studying such opportunities to				Modern e-payment systems can include detailed
determine if theywill lead to improved profitability. If				information such as P.O. number, Invoice number,and
so, they may decide to offer the expanded service				sufficient invoice and P.O. line item details to resolve
to all of their customers, thereby increasing				many mismatches without further manual effort. The
profitability and also providing a closer attachment				result is significantly faster cash inflows (e.g., a better
with current customers				Cash-to-Cash cycle) and reduced Days Sales
				Outstanding (DSO). Furthermore, automated
What's Happening in financial cial Flow Management				A/R processing can improve customer relationships
Several trends and best practices are emerging for
financial flows that will help to streamline and create				Improved Flow of Information
end-to-end electronic payments. These include:				Data Integration
Purchasing Cards and Distribution Cards				Use of P-Cards allows companies to obtain detailed
More and more companies are installing Purchasing				data that is very helpful in the reconciliation process
Cards (P-Cards) as a way of making purchasing more				and could also be useful in the product supply chain.
efficient and cost-effective. P-Card systems also				While all card transactions contain "Level One"
enable companies to aggregate spend data quickly				information (the minimum needed to clear and settle
and frequently, and to maintain compliance with				the financial transaction), modern systems allow for
company spend policies They also increase financial				"Level Two" and "Level Three" data capture and
transparency and help companies adhere to				transaction reporting. In particular, Level Three
regulations. The Distribution Card is designed to				datamay include invoice-level details such as discount
re-engineer Distributors' and wholesalers' accounts				amount, freight/ship amount, order date, account
receivable (A/R) process through the replacement of				number, item commodity code, item description,
cash, customer credit and promissory notes. By				quantity, unit of measure, and unit cost.
shifting the manual-driven process and burden of				Vendor Web Portals
invoicing and collections from the Distributor to the				A vendor Web portal allows vendors electronic
Bank, the Distribution Card transforms the collection				access to a company's information records pertaining
process into a quick paperless electronic payment,				to their company, such as invoice status. Modern
reducing accounts receivable (A/R) costs substantially.				e-payment systems can contain sufficient detail to
Sales proceeds can be immediately transferred into				allow many vendor inquiries to be handled by a self
working capital for faster turnover.				service vendor portal. This saves both buyer and
EIPP (Electronic Invoice				seller time and expense; it reduces telephone calls to
Presentment & Payment)				the buyer and provides a faster response to the
Gradually, companies are moving toward Electronic				seller.
Invoice Presentment (EIP) and Electronic Invoice				Outsourcing Credit and Collections
Presentment and Payment (EIPP). In a recent survey,				Credit Limit Optimization
78 percent of respondents said they were either				When setting appropriate credit limits for customers,
"very likely" or "somewhat likely" to transition from				a number of different factors come into play,
paper checks to electronic payments for their B2B				including account profitability and credit risk. Monitoring
payments within the next three years.2 Today's new				credit limits dynamically is difficult for companies to
EIPP tools provide an excellent opportunity to				accomplish by themselves. There are
perform financial flow and information flow tasks at				economicefficiencies in outsourcing the task of
the same time. The ability to send detailed				determining optimal credit limits and monitoring them
invoice-level information (SKU numbers, quantities, PO				dynamically. Not many companies can claim their core
numbers, etc.) along with remittances enables the				competence is optimizing credit limits. This business
supply chain to transfer this information quickly and				function is a natural candidate for outsourcing to a
without errors often found inmanual procedures.				financial institution. Such institutions have specialized
Invoice Imaging				staff to deal with assessment of credit risk, as well
Some companies are creating soft copy images of				as standardized collection procedures. Due to
paper invoices so that all payments can proceed				economies of scale, they may be able to provide this
along an electronic, paperless pathway. Others are				function in a more cost-effective manner.
creating data warehouses to maintain line item detail,				Receivables Financing
with information from a P-Card solution or other				If a company or an industry has traditionally had
sources.				lengthy payment terms (e.g., 90 days or more), the
Supplier Web Portals for Invoice Inquiries				suppliers will often want to have their receivables
Another signifi cant trend is to develop Web-based				financed. This is another opportunity for banks to
automated inquiry systems for suppliers. Instead of				provide value.
accessing a call center to make a simple inquiry,				Collections
suppliers can access a Web portal for their company				Companies are also using Distribution Card solutions
and perform self-service inquiry regarding the				to streamline their collections and reconciliation
statusof their invoices (received, in payables queue, in				tasks.Selling can be more effective when banks
reconciliation queue, scheduled to be paid as of a				manage collections duties.
certain date, etc.).				Lower Working Capital Needs
Web-based Financial Reporting				Improved financial flow processing can contribute to
To reduce costs, significantly improve spend				reduced Working Capital through better visibility. More
management, and make more informed business				effective financial processing can help remove
decisions, many companies are finding that it's critical				uncertainties in financial flows and thereby
to electronically capture financial transaction and				contribute to a significant decrease in the Days of
invoice-level data and then review it through a				Working Capital (DWC). It has been estimated that
Web-based reporting tool. This transaction and				increased visibility into A/R can reduce working
invoice-level data may be easily integrated				Capital needs by as much as 20-25 percent.7 One
withexisting back office financial systems. Research				way to estimate the impact of better visibility is to
indicates that this integration capability can save 1-4				draw a parallel between managing Working Capital
days per month on manual data synthesis and				and managing inventories. Safety stock in inventory
reconciliation activities				systems is proportional to the standard deviation of
KPIs for Supply Chains				the demand forecast error. Improvements in supply
Product Supply Chain metrics have three key				chains can often lower the effective standard
dimensions:				deviation of forecast error by 10-20 percent. Applying
• Customer service is usually measured by				this logic to Working Capital, one would expect that
percent Fill Rate or percent Complete Order Rate in a				improved visibility on both A/P and A/R could
build-to stock situation, or by percent On-time				translate to reductions of 10-20 percent. One industry
Delivery in a build-to-order case. Increasingly for				source forecasts that sophisticated cash-flow
build-to-stock situations, companies are also				optimization tools will appear by 2006-07, adding
measuring Product				significant enhancements to current innovative
Availability (percent time in stock) at retailers' shelves				payment capabilities
as a metric for customer service.				Strengthened Partner Relationships
• Inventory (an Asset) is measured by value, by				Closer, Responsive Customer Connection
time supply (Days of Inventory), or by Inventory				Automated systems to submit invoices and receive
Turns (Turns = Cost of Goods Sold (COGS)				payments make it easier for customers to reconcile
Inventory Value). All three metrics are closely related.				and pay invoices. The ability to send Advance
By knowing a firm's annual COGS, one can derive				Shipping Notices (ASNs) and to track customer
anyinventory metric from either of the others.				orders (dynamic order status information) can further
• Speed is often measured by the Cash-to-Cash				cement the relationship between a company and its
(C2C) cycle (C2C = Inventory + A/R – A/P), all				customers. Differentiate by Adding Services (e.g.,
measured in days of supply.				EIPP) When a company provides a product that is
A negative C2C cycle is attractive for growth.				not easily differentiated (e.g., a commodity), it can
However, taking the entire supply chain perspective,				use financial services to differentiate itself from
one's suppliers presumably become accustomed to				competitors. If acompany uses EIPP, it is much easier
delayed payment terms and find other ways to				for customers to do business with that company
manage profitability. Furthermore, one company's				because EIPP benefits accrue to both parties in the
payables are another company's receivables, and in				supply chain. If a buyer is considering two alternative
the supply chain view, these "cancel out" with				sources of product, the company offering the EIPP
oneanother. However, the integration of automated				benefi ts could be in a better position to win the
payment solutions can lead to a significant reduction				business.
in the uncertainty of A/P and A/R flows, which can				Conclusions
ultimately be quite valuable to the entire chain				The supply chain financial flow is at a critical threshold
				of evolution. Current trends in supply chain and
KPIs for Financial Flows				financial flow management clearly favor the use of
Key Performance Indicators (KPIs) for financial flows				automated payment solutions. Continued expansion in
include the following:				this area offers high potential for:
• Days of Working Capital (DWC) =				• Reducing significantly purchasing processing
(Working Capital/Annual Revenue) x 365				costs • Accelerating payment and invoice
• Days Sales Outstanding (DSO) =				reconciliation • Reducing collections costs
(Accounts Receivable/Annual Revenue) x 365				significantly and minimizing the number Days Sales
• Days of Inventory (DIO) =				Outstanding (DSO)
(Inventory Value/COGS) x 365				• Creating greater processing efficiencies in the
• Days Payables Outstanding (DPO) =				procurement of goods
(Accounts Payable/Annual Revenue) x 365				• Enhancing visibility, which means less uncertainty
Days of Working Capital can be easily converted into				in accounts receivable (A/R) and accounts payable (A
an equivalent metric, Working Capital as percent of				P) and a reduction in Working Capital needs
Annual Sales. (For example, if a company's DWC is 50
days, then Working Capital as a percent of Annual				The various payment solutions presented in this
Sales = 50/365 = 13.7 percent.)				document offer companies a powerful automated
Other important characteristics of financial flows are:				system that can eliminate financial flow challenges in
• Reliability of payment methods				today's supply chain. Based on an analysis of available
• Predictability of payment inflows and				supply chain performance data and measures of
outflows;improving cash flow				impact (as defined in this Visa Commercial Solutions
• Information Management (invoice-level data				Industry Briefing), it is possible to draw some
withfinancial data)				generalizations about the economic efficiencies and
Key How Supply Chain & Financial Flow KPIs				benefits that can be gained by improving financial
Connect for Greater Efficiencies				flows with various innovative payment solutions.
In many cases, financial flow KPIs can have a direct,				Quantitatively speaking, a company with $1 billion
positive impact on supply chain management				annual revenue could obtain an annual savings of
performance.				nearly $10 million, or almost one percent of
Impact on C2C				revenues.10 This projected savings represents
The financial flow KPIs of DIO, DSO, and DPO have				more than 20 percent of typical annual profits for
a direct correlation to the C2C cycle supply chain				such a company.

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