Physical and Financial Supply Chain Convergence: It’s Real But Harder Than It Looks

My Trade Financing Matters colleague David Gustin has been talking quite a bit about the convergence of financial and physical supply chains. But there’s both hype and reality, as he points out in his post The Hype of Physical and Financial Supply Chain Convergence. Still, the value of business networks that operate between companies in such scenarios is indisputable. And they’re becoming even more so as supply chains operate in a globalized context.

As David notes, “in the past, when supply chains were more domestic, companies could get away with little integration between the finance and the supply chain. With global supply chains and large companies acting more like system integrators … lead times are elongated, so information becomes extremely valuable. No longer can Treasury, Procurement, Logistics, and Supply Planning exist in a vacuum. The realization that excess inventory and downstream suppliers cost of money impact total supply chain costs should ensure supply chain and finance functions are more closely linked.”

Yet convergence isn’t easy, as he also notes bluntly. “So my warning to you is be careful about convergence talk.  It sounds sexy, compelling, and intuitive, but it’s damn hard.”

Indeed it’s hard. And vendor obfuscation in the matter complicates things as well. Ariba/SAP, for one, has been making hay of its direct materials business network strategy in recent quarters, but aside from Quadrem customers and regular network activity with the core network and b-process business lines, we’ve not seen new capability yet to support industry specific direct materials connectivity scenarios such as distributor/network financing, buy/sell capability in high-tech supply chains, support for just-in-time, or vendor managed inventory or logistics specifics scenarios.

Will the future rest with Ariba and SAP as they move to realize their statements on pursuing this market? Don’t count them out in our book (but don’t ever take what might be on the price sheet at face value, either). Or will other “disruptors” such as Crossflow Payments and Nipendo drive marketplace convergence success? And what of OpenText (GXS) and IBM (Sterling and Emptoris assets)?

Convergence is coming. But the game is daunting, and like the World Cup in in the past two decades, there could be some major surprises along the way as technology providers, business networks, and even banks step onto the field together.

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