Supply chain gains from integration: by combining the physical and financial supply chains, companies can facilitate trading, improve the information flow around their products and boost the overall cash conversion cycle.

• Author: Bernabucci, Robert J.
• Position: FINANCING

Financing the supply chain was once relatively simple: Years ago, most U.S. companies manufactured and sold their goods domestically. Products were manufactured, warehoused, transported and sold within the U.S. Today, as evidenced by the mounting trade deficit, manufacturing continues to move offshore.

When trade remained U.S.-centric, financing was easy. Banks could lend against the value of the inventory and, if necessary, repossess it if a customer went into default. Simultaneously, U.S. banks had the protection of strict domestic lending laws.

That was then. With so many goods being manufactured outside of the U.S., companies are warehousing their inventory in foreign countries. Foreign inventories are not normally included in a company's borrowing base because U.S. banks have difficulties perfecting liens against that inventory. If foreign collateral is included in the borrowing base, it could result in increased risk for the lender, which may increase finance charges.

All of this is occurring against a backdrop of the globalization of the world's economy, evident in the high levels of trade and investment. Growth in world trade has exceeded the rate of output (gross domestic product) every year since 1950. That's more than half a century of solid, consistent growth.

Globalization has become a powerful stimulus of long-term corporate growth. It continues to drive monumental changes and place ever-increasing pressure on today's supply chains.

In The World is Flat: A Brief History of the Twenty-first Century, journalist and author Thomas Friedman details how globalization has leveled the international playing fields of commerce and competition. He cites the increasing trend in which companies manufacture and/or source goods from international suppliers, and then import those products for sale to customers into their home country.

Friedman notes that this globalization trend offers opportunities for businesses of all sizes--especially those in Asia that are manufacturing the goods on behalf of U.S. companies. But this trend also elongates the supply chain and can result in cash flow constraints.

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This domestic supply chain of generations ago is, for all purposes, history. Lower-cost countries are boons for moving manufacturing outside the U.S. As a result, industry experts estimate that supply chain costs approach 75 percent of an organization's total operating budget. The Supply Chain Council's Supply Chain...