The Hype of Physical and Financial Supply Chain Convergence – Part I

I have been hearing talk about the convergence around the physical and financial supply chains for over decade.  And for the most part, it has been talk by consultants, analysts, and others who have a superficial understanding of the complexity of the real world and how supply chains work.  But first, let’s clarify what we mean by these supply chains.

Defining the physical and financial supply chains

1)    The financial supply chain describes the activities involved in planning and executing payments between trading partners through various financial instruments, including Incoterms, exchange rates, credit and country risks. It involves cash management and working capital management and includes departments such as Treasury, Accounts Payable, Shared Services, Compliance, etc.

Financial supply chain services include functionality like purchase order processing, letter of credit processing, invoice presentment, dispute management, foreign currency management, Insurance Management, etc.  It is estimated that 4% of finished goods cost relates to financing.

2)     The physical supply chain describes the activities involved in planning and executing the movement of goods, including making, storing, and moving products and their related documents (e.g., purchase orders, bills of lading, and customs documents). It involves procurement, supply chain, and logistics.  The information around the physical move data, when merged, can give investors a better set of data to make underwriting decisions.

Companies have put a lot of effort into supply chain strategies to manage inventory costs -such as build-to-order, Just-in-Time, lean initiatives, and inventory velocity.

Where are we today?

Since the Great Recession, companies have emphasized working capital – and with it extending terms with suppliers, initiatives for faster collection of receivables and various new supply chain finance initiatives to manage balance sheet —because these all have a tremendous impact on cash-to-cash cycle time and working capital.

Banks foray into convergence has been expensive and to date has borne little fruit outside of open account technology (which has been more of a reaction to the decline of the Letter of Credit).  I can cite several examples over the years:

–       Standard Chartered spent a considerable amount developing their B2Bex portal. They eventually rolled the separate subsidiary created to market this portal, Exonomy, back into the corporate bank.

–       ABN AMRO’s MaxTrad portal, now part of RBS, was the first to offer HTS compliance and partly built by Nextlinx (now part of Management Dynamics).  They discovered that clients were not interested in paying click or transactional charges for compliance information.

–    JPMorgan Chase aggressively moved in this arena with their Vastera purchase, which was later sold to Logistics player Livingston.

With all the constant contact through mobile digital devices, GPS and RFID, tracking goods is becoming more ubiquitous.  Still, it has been hard to find concrete examples of the convergence of the physical and financial supply chains.  Up until recently, the market has little in available solutions to assist corporations with this goal.   As one banker pointed out, “with regards to cash management, trade, and foreign exchange, this is still quite elusive.”  Think about that, it’s 2014 and banks still cannot connect those important applications.  Banks like to claim their Approved Trade Payable product offers cash, payment and finance, and yes it does, but that is a product used by a select customer group (large investment grade clients) with a very small subset of their suppliers.

There are a few examples we will touch on in later posts from the likes of Bolero and GT Nexus, but by and large, these are outliers.  And then along came supplier networks, which we will discuss in Part II.

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