Spotlight shifts to money in the supply chain.

• Author: Lugli, Peter
• Position: Procurement

While the spotlight of innovation has shone brightly for the past quarter-century on information automation between trading partners in the domestic and cross-border supply chain, money flows within that same supply chain have labored in the dark, relatively unchanged.

Supply chain automation initiatives--such as e-procurement, e-requisitioning, catalogue management, strategic sourcing and a host of other supply chain solutions--have reinvented interactions between trading partners. These have produced a stronger, more reliable and streamlined flow of goods and services worldwide. These innovations have crept out of the early-adopter phase to become mainstream.

Companies are now turning their attention to financial interactions in this new and improved supply chain and asking hard questions. Even a cursory glance at the state of affairs here reveals much cause for concern.

Consider the following. According to the Federal Reserve System, roughly $6 trillion is due at any one point in time in outstanding payables from buyer to supplier. Financing that cost is the responsibility of the supplier. In the case where the buyer is an investment-grade customer, the supplier is likely the one who can least afford to fund that financing cost.

Estimates indicate that that financing of trade credit, or the time from purchase order to cash, is equivalent to 4 percent of the supplier's cost of goods sold (COGS). For many industries, that is equivalent to freight and logistics costs. And while technology vendors have created entirely new markets around freight and logistics automation, the financial flows between buyer and suppliers have remained virtually untouched.

Worse, solutions such as electronic invoicing, payment and presentment that are focused solely on early payment discounts effectively metastasize noxious financial practices. These merely masquerade as financial solutions; truly, they make ill-considered financial behavior automatic. Reinventing financial flows to the benefit of supply chain ecosystems is a call for not making bad practices work more efficiently.

That dysfunction is costing businesses--and ultimately consumers--dearly. Credit Suisse says that "the value created by reducing the financing cost of goods moving through the supply chain by even a few basis points is far greater than any cost savings possible from traditional transportation and warehousing targets." And with supply chains expanding--the result of dynamics such as...