Michael Fillié, ASYX International - Anita Gerrits, Consultant - Roel Elshout, ASYX International - 9 Jul 2012

This article examines business-to-business (BSB) finance, and particularly why the benefits of order to payment (O2P) processes have largely been limited to buyers, while excluding suppliers. It suggests that treasurers should be driving a more integrated approach to supply chain finance (SCF).

The trend of buyers and suppliers to automate their order to payment (O2P) processes in order to improve the efficiency, visibility and transparency of O2P transactions is something seen around the world, as is the scarcity of funding on the capital markets and the search for alternative methods of funding by buyers and suppliers. This is where supply chain finance (SCF) can play a role. Combining both the physical and the financial supply chain it offers a winning concept, but one that can be realised only when the physical and financial supply chain is integrated throughout an entire organisation. This is where the treasurer can play a role. An earlier gtnews article, entitled 'how the physical and financial supply chain meet each other' examined the rapid integration between these two worlds.

Over the last couple of years O2P and e-invoicing parties have worked hard to digitalise the delivery of documents that support the physical supply chain. It is a tough sell, although the benefits would seem clear to everyone. Or is the reality different from what vendors want us to believe? There are clear reasons for buyers to roll out their O2P programmes. First and foremost, buyers are looking for quick cost reductions, followed by an increase in efficiency and a better supplier relationship.

But why should suppliers be happy when a buyer approaches and asks them to participate in their O2P programme? It will initially mean an investment from the supplier in order to adopt the new way of working. On top of that buyers try to make suppliers pay for this initiative, by charging them a fee for using the service. How does that match with the idea of the buyer for improving the buyer-supplier relationship? Generally, there is little evidence that suppliers are really benefitting from these initiatives and this largely explains why initiatives like electronic invoicing (e-invoicing) have, so far, failed to deliver.

Yet there is good news for the many suppliers who are tired of being forced into O2P programmes that only benefit the buyers. The increased demand for working capital has pushed buyers, suppliers and banks to join forces in providing more integrated solutions that unlock the cash currently hidden in the supply chain. This is where SCF comes in; it gives banks an opportunity to meet the liquidity needs of both buyers and suppliers and simultaneously strengthens the relationship with their corporate clients. SCF is one of those rare examples where banks, buyers and suppliers can set up a tripartite value proposition that is a win-win-win situation for all parties involved.

What does all this actually mean for the role of a treasurer? Let us first examine the role. The main focus of the treasurer’s role is managing the cash and debt position of the corporation. As far as working capital is concerned, the treasurer is solely responsible for cash. Managing accounts payable (A/P) and accounts receivable (A/R) is the responsibility of the respective A/P and A/R manager, while relationships with suppliers and distributors are the responsibility of procurement and supply chain management (SCM). However, cross-functional involvement between treasury, procurement and SCM is not self-evident. There is not even much internal collaboration between the various financial disciplines, so involving other departments is challenging. This lack of collaboration between the different departments can sometimes mean that treasury has limited involvement in improving operational efficiency and effectiveness. On the other hand, awareness about the financial aspects of the supply chain of procurement and SCM staff is limited. These conditions do not encourage collaboration.

Meanwhile, today's treasurers are faced with a very challenging cash and liquidity management environment. The global downturn is still very much evident, the eurozone crisis rumbles on with Spain's debt crisis the latest chapter, while new regulations such as the Basel III capital adequacy rules will create tighter credit conditions for small businesses and corporates are growing more and more concerned about remaining liquid.

Tighter credit conditions for small businesses impacts their liquidity and increases the risk of supplier bankruptcy. This can have a major impact on the continuity of the supply chain. Improving supply chain reliability and reducing counterparty risk are therefore high on the agenda of many corporates. This means liquidity management is the biggest challenge on the treasurer's crowded agenda. It drives the need for more detailed information on supply chain risk and the visibility of cash and liquidity across the chain.

To summarise, today's treasurer has many tasks to contend with and is facing new challenges in order to secure the company's liquidity and the stability of its supply chain. That is where an integrated O2P and SCF platform can play a vital role. A higher level of transparency and data synchronisation between trading partners can be achieved by handling trade transactions electronically across the supply chain. Linking the physical and financial supply chain provides more reliable and accurate information from daily operations. It enables the treasurer to provide quicker and better forecasts, resulting in higher effectiveness of cash management and the ability to provide real-time statements on the corporation's liquidity position. Ultimately, this results in a much more consistent liquidity position and lessens the need to hold unnecessary, non-yielding, buffers of cash. At the same time leveraging automated platforms for SCF provides suppliers with access to liquidity at more favourable conditions, further reduces disruptions in the supply chain and improves the liquidity of the overall supply chain.

Impediments

So what is holding corporates back from integrating the physical and financial supply chain? Again, the lack of internal cross-functional cooperation hides the benefits of automated SCF platforms and the treasury can find it difficult to pull the strings together. A holistic view is required by the corporation in order to reap the benefits of an automated SCF platform. Alignment on objectives and targets between treasury, A/P, A/R, procurement and operations is required to create a holistic view of the physical and financial supply chain. Top management plays a vital role here and should provide a clear vision, display strong commitment and take responsibility in aligning all functions internally and across the supply chain.

It is clear that treasurers cannot manage liquidity and supply chain risk effectively, when hindered by internal Chinese walls, or without implementing end-to-end automated processes. They can take a leading role in addressing strategic corporate issues with top management. Liquidity and supply chain risk impact on the core business of the corporate and can therefore be considered a strategic issue. As mentioned earlier, top management plays a vital role in aligning all functions internally and across the supply chain. The treasurer is in a position to drive understanding and also the necessary change at top management level in order to implement an automated SCF platform.

Treasurers Need to Take Responsibility

Treasurers need to build a strong business case by doing a thorough analysis of both the physical and financial supply chain with the involvement of key stakeholders such as procurement, SCM, A/P and A/R departments (if separate) and key partners in the supply chain. The analysis should focus on identifying the current issues and possible solutions for areas such as cash conversion cycles, working capital needs of suppliers and distributors, access to liquidity and any others that impact the supply chain.

Based on the analysis, a viable business case can be presented to top management that identifies the need for change and a clear road map towards the implementation of an SCF platform. Top management can use this business case to define aligned objectives and governance across all functions to support both the implementation phase and continued alignment after implementation.

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