Topics of Interest Archives: Supply Chain Finance

From Bottoms Up to Bottom Line: Ariba Live Returns to Vegas (Pt 2 of 2)

Ariba Live Wrap-Up Part 2: Bottom Line. Image Source: Pixabay.comLast week’s Ariba Live event at The Venetian and Palazzo in Las Vegas gave us a lot to think about — and not just from a business process perspective. Cirque du Soleil‘s live acrobatics woke us up, and Candy Chang‘s fusion of art, public space, and community-based collaboration, got us engaged. It’s not always easy–or natural–to smoothly transition from non-business to business content and messages in these type of environments, but I think it’s fair to say that the non-practitioner content did its job in getting us to think a bit differently about what’s possible when we apply equal parts creativity, skill, and preparation. And that’s where I make the tie back to the wonderful world of procure-to-pay.

Looking back over the different sessions and conversations, there are four main things that I think are important to note, for current customers, prospects, and the market in general. These have to do with (1) network expansion, (2) user experience, (3) partner ecosystem, and (4) payment options. I discussed the first two in my previous post, and will wrap things up here with the final two pieces of the puzzle.

Opening the API
The attractive storyline here is that SAP and Ariba learned from Concur’s success in nurturing a developer network for their platform and are embracing the approach post-acquisition. That said, folks like Salesforce.com and NetSuite have been doing this very well for a while too, and their success has been quite visible in the marketplace. Regardless of whether any of those were the real genesis of Ariba’s Open API initiative, I think it has the opportunity to start something special.

Until now, Ariba has been running a pretty classic two-sided network of buyers and suppliers. An honest review has to point out that what has been missing is the two-sided benefit model that leads to true network effects. By that, I mean that the vast majority of development (and marketing) has been focused on buy-side benefits. That serves to attract buyers, and they bring suppliers with them – but there isn’t an independent value source attracting new suppliers to the system.  That’s where we get into the realm of the telephone model of value: new buyers make the system more attractive to sellers, leading to new sellers who make the system more attractive to buyers. And B-school professors everywhere go wild…

With an Open API, the model changes a bit: there’s a third community that can participate, adding value that can attract new buyers (and perhaps sellers too). The number of participants already on the network attracts developers to add functionality on a completely separate development track than Ariba’s own roadmap. The cool thing is that, as we’ve seen with the Force.com/Salesforce1 platform approach (1), this adds new features but maintains the connection to the data that runs the show. That’s the big difference between API-based platform developers and third-party solutions that communicate with, but live apart from, the main system.

Since that was all quite general, let’s get specific. I think new apps will focus, at first, on the buy-side. That’s where the focus has been, and that’s probably who will benefit first. That said, I think there’s a real opportunity to show some love to the sell-side community as well. Ariba’s started doing this on their own. One subtle point that a sell-side attendee pointed out to me is that they’ve started referring to sellers as “customers” as well, and not keeping that label just for buyers. The same sentiment was there when I chatted with folks who were entirely focused on supplier satisfaction and retention.

I think this could be a real inflection point for the network, depending on how it all shakes out. If someone—either Ariba or the developer community—builds out functionality that provides enough value to suppliers to get them signing up without needing their buyers to invite them, the equation starts to get really interesting. New suppliers and broader participation from existing suppliers are two things that could (if we trust models… and professors) catch the attention of new buyers. I thought Discovery might have had a chance to play this catalyst role, but that hasn’t been the case. Who knows, though – perhaps the Open API will lead to development of functionality that makes Discovery more attractive, and everything will come into alignment.

Building the Payment Alternative
Last but not least, something directly related to finance. As I mentioned previously, I had the chance to sit on a panel discussing B2B payment options. For Ariba, that means their continued development of AribaPay. From conversations with buy-side and sell-side folks at the show, Ariba and Discover seem to be on to something here. They’re discussing it as an ACH replacement, removing the need/ burden for you to store and manage all of your suppliers’ bank account information. When compared to ACH, the settlement time is the same (two days, generally) but the transaction cost is a bit higher. You’ll need to see if that is offset by savings in other areas (IT support, security infrastructure, supplier information management reduction). One very interesting value point they’ve highlighted is AribaPay’s ability to improve on-boarding rates for procurement programs. If you can drive greater procurement savings by using AribaPay as an incentive, the per-transaction costs may not be an issue at all.

If we look at the roadmap, I think the some significant buy-side value will come when AribaPay does something that ACH/EFT cannot (at least outside of SEPA): go cross-border. When we talk international, we’re in wire territory – with the costs that go along with that channel. True, wires are a small portion of most companies’ payment mix, but if a lower-cost (and almost as fast) option exists—and is acceptable to suppliers who may value the non-recourse/certain nature of wires—that could be a fairly easy swap.

On the sell-side, AribaPay is more attractive as a card replacement. Ariba hasn’t published the exact pricing, but different conversations at Live point to rates a few decimal places away from the 150-350 basis points suppliers currently incur on card-based payments. In addition, there’s a hard-dollar cap on that transaction fee that makes it an absolute no-brainer for suppliers when compared to currently-uncapped card fees.  The flipside, of course, is that the buyer loses the rebate income. The suppliers I spoke with say that they end up pricing those rebates into the sales anyway, so the rebate income may actually be illusory in the end.

 

 And that’s a wrap. If you missed the first part of the series, you can find it here. It will be interesting to see how these developments are received by the market as the solutions, partnerships, and design approaches are put through their paces in live enterprise environments.

 

-Scott

 

1. Let’s not undersell what’s possible with that open platform approach. Salesforce.com began as a CRM/SFA application, but it’s creation of a development platform for others to build from has led to the creation of FinancialForce.com — an entire ERP on-top of Salesforce1. True, they weren’t starting from scratch. It was a joint venture between Salesforce and Unit4 (FinancialForce began its life as Coda). Even still, that’s a heck of a lot more than a simple plug-in.

Posted in Blog, Executive Management, Finance & Accounting, Financial Operations, General Industry, General Management, Procurement, Research | Tagged , , , | 1 Comment

My Perspective on B2B Payments

My Perspective on B2B Payments

Next Wednesday, I’ll be part of a panel discussion at Ariba Live 2015 on the topic of B2B Payments in the Networked Age.1  Alongside T-Mobile’s Ashley Bartels and Ariba’s own Jerry Bernard, we’re going to dig into the current state of business payments, and highlight where there are opportunities to do things a bit better. I won’t speak for my fellow panelists, but there are a few key points that I plan to touch on in my piece of the presentation. This blog is a bit of a sneak preview.

It’s a bit of a “chicken and egg” question as to what came first, the analyst or the analytical framework. I’m biased towards the former, but in the end, we get to the same place: a five-element breakdown of the way that I like to look at the topic of B2B payments. At the high level, I like to divvy things up into five areas: Speed, Cost, Geography, Benefits, and Security. To maintain some balance, I try to view each of those from both the buyer’s and seller’s perspective. Let’s take a quick look at how that works out.

5-Part B2B Payments Framework

Blue Hill - Framework for B2B Payments

Speed. On the buy-side, this is mainly the time it takes to get a payment reviewed, approved, and out the door. Whether actual time required to push it through, or an artificial delay until the next check run, the real impact is on how long it takes for our supplier to receive the payment. That’s the big sell-side issue: how long it takes to transmit, receive, review, settle, and reconcile. The longer that process takes, the longer it is until the funds hit the balance sheet and are able to be redeployed elsewhere. That delay can be felt through both DSO levels and cash-flow sensitivity.

Cost. For buyers, we’re focused on the labor required to move payments through coupled with the transaction costs we accumulate along the way. That can be in the form of things like check stock, transaction fees for ACH and wire, or for security-related services like bank fees for Positive Pay. For sellers, the costs break out along the same lines: labor costs for the time it takes staff to process incoming payments, and transaction fees (e.g. card interchange fees) levied on sellers. When payments are slow to be received, there’s also the opportunity cost (what return could have been achieved in the interim) and financing cost (if cash is so tight that outside sources are needed).

Geography. This category can pose some interesting challenges. In the Eurozone, SEPA allows for EFT across national borders, but cross-border ACH is still a work in progress in North America. That mean we’re back to checks or wires, with the speed and/or cost concerns discussed previously. With checks, there can be even longer clearance delays with banks, on top of basic transit time. That’s great for the buy-side, who keep the cash in their accounts longer – to the detriment of sellers looking to bring money in the door. Depending on the length of the overall timeline, and the volatility of the currency chosen, there can be added difficulties in terms of ensuring the availability of local funds in the required currency, additional fees for conversion, or even required hedging to protect against fluctuations between local and contract currencies.

Benefits. It’s not all doom and gloom, of course. Payments offer buyers opportunities for discount capture, for card rebates, and even in the absence of those two, for greater control over their disbursements. In that last case, the benefit may be in paying later (i.e. maintaining DPO) rather than paying less. When we think of faster payment methods like wires, EFT, or cards, the sell-side can benefit too: they can get their money more quickly, and—with the big qualification of “depending on payment method chosen”—can even get more detailed information to make their cash application process easier.

Security. Although it’s comes last on this list, Security is really central to everything mentioned above. It’s the counterbalance to keep in mind when looking at the positives and negatives in the other category. Checks may be slower, but with positive pay there’s less potential for fraud. Wire is faster, but if you don’t triple-check the recipient’s information, you will likely not see your funds again if you’ve sent them in error. There’s data security concerns on both sides, most acute with sellers looking to store their buyers’ credit card information – and thus needing to ensure ongoing PCI-DSS compliance. In essence, this is the category that brings all of the others together and helps answer the question of “is it worth it?”

 

And that’s my starting point.

 

Walking through those five categories is how I make sense of the different payment-related technologies and services available in the market. I’m fairly confident that next week’s panel will probably include a discussion of AribaPay.  Stranger things have happened. If that’s the case, this is the framework I’ll use to structure my views. For example, since AribaPay executes transactions over the Discover Network,2 it’s got speed on its side. Since it uses tokenization, sellers don’t handle buyers’ account information – so security gets a check-mark.  That’s the beginnings of the discussion, at least. I’d take the same approach when evaluating other options, like ACH, virtual cards, and other alternative payment methods. And as we get farther into the year, I will be doing just that. But there’s no need to give everything away just yet.

So, if you’ll be in Vegas next week, drop on by the session. If not, I’ll look to post a follow-up blog after the show with some key points from this panel and other sessions over the course of the event. There’s no lack of content on the agenda, so it should provide some good highlights.

 

-Scott

 

1. The agenda has us planned for 1:30 – 2:45pm 10:45 am – 12:00 pm on Wednesday the 8th. If you’ll be at the show, we’re included in both the Sell and Manage Cash tracks (visible here). Drop on by for what should be a great conversation!

2. Even though the transactions go over the Discover Network, Ariba is pretty emphatic in pointing out that there are not card-based transactions. It’s all about the infrastructure.

Posted in Blog, Executive Management, Finance & Accounting, Financial Operations, General Industry, General Management, Research | Tagged , , | Leave a comment

FinOps 2014: Looking Back and Forging Ahead

Astronaut_640It’s been quite an eventful year. I’ve seen a lot of activity in the market, with acquisitions, partnerships, and new products. I’ve had more interesting and engaging conversations with practitioners and providers than I can count. Taking a step back and looking at a year’s worth of those discussions (and publications), I’ve put together a quick summary of what I see as the high points, broken out across four big categories: Procure-to-Pay, Discounting and Supply Chain Finance, Order-to-Cash, and Subscription Billing.

For each, there is far more to say than can be captured in a single paragraph. My hope is that these quick bites highlight some key themes, and provide a jumping off point for deeper dives into past research and further conversations about future projects. As always, I welcome your feedback and participation in this collaborative research process. And now, on with the show!

Procure-to-Pay

Early on, it looked like 2014 might be a repeat of what we’ve heard in years past when it comes to P2P: folks still looking to reduce paper, lower costs, and explore some degree of automation. I was prepared to keep advocating for a different mindset, but hadn’t seen much reason to expect change. I’m happy to report that I’ve been pleasantly surprised. I’ve seen pieces like The Rockstar Controller and Financial vs. Operational Savings strike a chord with their discussions of how AP’s potential to provide strategic working capital benefits can catch the eye of peers who traditionally viewed it as a tactical function. I won’t say that we’re quite “there” yet, but I’m more optimistic today than I have been in years that AP’s true potential will be more broadly recognized than just among its champions in the analyst world.

What’s Next?

Even though I sing AP’s praises, I recognize that the biggest threat to progress is an inability to provide a realistic business case for automation. Building on my earlier framework for analyzing AP costs, I’ll be taking an honest look at the ROI of P2P solutions. This means being mindful of different stages of maturity, identifying the different choices available, and getting a handle on how those choices impact both benefits gained and costs incurred.

Discounting and Supply Chain Finance

One of the biggest boons for P2P this year was the publicity (and the message, of course) of the White House’s SupplierPay initiative. To me, it served three very important purposes: (1) it brought wider attention to the P2P world; (2) it underscored the strategic importance P2P can have both for the companies themselves and the wider economy; and (3) it sought to bolster small businesses, a group that is not normally given priority in discussions of payments and invoicing. With the goal of accelerating payments to SMB suppliers, SupplierPay also put the focus on efficient invoice processing, programs that provide incentives for earlier payment, and the provision of access to alternative financing solutions when companies do not want to fund accelerated payments from their own working capital. In other words, it put a big spotlight on AP automation, discounting programs, and supply chain finance. Awesome.

What’s Next?

The biggest thing on the horizon here is sharedserviceslink’s upcoming Dynamic Discounting and Supply Chain Finance Summit in Scottsdale, AZ at the end of February.  For my part, I’ll be presenting on “SupplierPay Decoded,” continuing the discussion of what it is, what it means, and what opportunities it holds for buyers and suppliers alike. Blue Hill and sharedserviceslink are partnering on a pre-event survey, which will both inform the summit’s sessions and fuel additional research publishing in the New Year.

See Related Research

Order-to-Cash

I’ve said it many times, but it bears repeating: I think the AR side of financial operations is a sadly underserved area. It’s in a bit of a different position than AP, however. AR has to work harder to demonstrate the benefits of automation, as it doesn’t have the same discount/rebate-based savings card up its sleeve that AP boasts. Perhaps ironically, it’s AP that I think is giving AR a bit more exposure. As buyers look to push out payment terms to improve their own working capital positions, discussions of how to accelerate those payments and mitigate those terms extensions get more attention. This goes beyond offering discount-based incentives. It means a focus on collaboration and data sharing to ensure bills are accurate and disputes are resolved efficiently. This also means looking outside of DSO when gauging “success,” by including factors like customer satisfaction and renewal rates in the evaluation of AR’s impact.

What’s Next?

Since I think the business case for O2C technologies is there, but has yet to be properly set out, that’s first up on my AR agenda. There are some very interesting use cases for billing and payments technologies, eInvoicing from the supplier perspective, and the application of analytics to sell-side data. I’ll be working through a maturity framework to detail what those options are, what impact they can have, and for which companies/environments they might be good fits.

Subscription Billing

Last, but certainly not least, subscription billing really has had a banner year. I say that for two reasons: (1) “as a service” offerings are expanding today in both the B2C and B2B worlds, and (2) this flavor of billing is at the heart of the monetization of future technologies. In the more traditional context, service-based offerings are helping to hammer home the importance of customer satisfaction on future revenues. I think everyone can learn from that. When we look out to the future, we see very interesting developments with the Internet of (Billable) Things, and we’ve already seen some market activity hinting that the preparations are well underway. In contrast to the AP and AR topics discussed above, this is about as cutting-edge as topics in financial operations get. When we move beyond some of the hype, there is still some work to be done in providing a complete and frank assessment of what this model means, what choices businesses have in tackling it, and what outcomes they can realistically expect.

What’s Next?

I’m doing some work now on a model for analyzing the different flavors of subscription billing solutions, seeing how they impact operations, and working through their potential benefits. The goal is to embrace what is different in an as-a-service model, while being mindful of the lessons learned from the more traditional, individual purchase approach. As this market continues to gain exposure and attract new entrants with new solutions, it will be important to have a solid foundation to evaluate which option might be a good fit for a particular billing environment. Not every solution is right for every business, and we’ll kick off 2015 looking to provide a bit of guidance to help folks navigate their way through.

Were there other developments that caught your attention this past year? Anything you’re keeping your eye on in the months ahead? Let’s talk.

-Scott

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Operational vs. Financial Savings (Video)

When looking to improve accounts payable performance, there’s potential for savings from both operational and financial sources. In this video, Principal Analyst Scott Pezza provides a brief overview of these categories and compares the scale of savings that can be gained from each.

Scott Pezza will also be presenting a webinar on this topic Thursday, November 13, 1 pm EST/10 am PST; register now.

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Taulia Connect: A Bit of P2P Swagger

Image courtesy of Taulia and the artistic skills of Dania Mallette (@thechalkchica)This week, I spent some time in San Francisco learning a bit more about Taulia during their Taulia Connect event.1 Between the attendees and announcements, I got the perspectives of a few different groups that help provide a well-rounded assessment of what Taulia is doing. I look at it as somewhat like a 360 degree performance review for employees: getting the full picture requires speaking with folks who see the subject from different perspectives. Ignoring my own view (for a few minutes, at least), I heard/saw good things from three important groups: customers, financial backers, and technology partners.

Let’s take a look at each, in turn, before I bring my own opinion back into the mix.

Customer Success
I’ll start with customers because that’s where the rubber really meets the road: if they’re happy and profitable, then funding and partners will follow. From all accounts, they certainly seem satisfied. There were strong testimonials, for sure. And while I can’t deny that some of the reported results (hello, PG&E’s $164m discount-based savings over the past 4 years), what may have been more impressive was simply the collection of notable companies on stage and in the audience. I’d expect that at SAP Sapphire, of course – but at a five-year-old company still in the venture funding stage? I’m not one to succumb to group-think, but counting that many folks seeing value from the customer perspective is a good sign that there’s something to what Taulia’s doing.

Funding
So, if a company is doing something right, and is approaching their business in a smart way, you’d expect to see others stepping up to help them grow. With the recent announcement of a $13m injection of Series D funding (on top of the $27m Series D announced in July), that piece of the puzzle is filled in as well. The identities of these latest backers are interesting as well: BBVA Ventures and Singapore’s Economic Development Board. With their continued push into alternative financing (via Taulia Enhanced Discounting) and geographic expansion, further relationships with banking and economic development partners seem to point things in the right direction. Again, taken on its own, additional funding says something – but isn’t the whole picture.

Partnerships
One more piece of the puzzle. ”One of Europe’s largest banks, which will be named in the coming days”2 is in. Scan One is in. They’ve already announced relationships with Coupa, Dolphin, Esker, and others. With these relationships, Taulia expands the reach of a combined solution – rather than trying to do everything in-house. Looking at these pieces, we have procurement, invoice capture, invoice approval, payment, and alternative payment financing – and we see a collection of scalable SaaS-based solutions (or services) in that list. In the past, I would have stacked Taulia up against someone like Pollenware (now C2FO). Today, they’re more akin to Tungsten Network following their acquisitions of FIBI and DocuSphere. Tomorrow (metaphorically, I mean), it’s looking more and more like I’d match them up against the likes of Ariba. Those partner relationships are a big part of that, and look to be one more vote of confidence to round out the survey.

See Related Research

 

And now back to our regularly-scheduled analyst soap-boxing…

 

SupplierPay, Ethical SCF, and TED (or, Bertram Meyer Answers the Cynical Optimist)
As I’ve written before, I’m conflicted when it comes to the White House’s recent SupplierPay initiative. On the one hand, I absolutely and unequivocally want it to work, and for SMB suppliers to gain access to much needed working capital. On the other hand, I have difficulty working out the economic case for large buyers to offer those options without tying their availability to an extension of payment terms (a core tenet of the Pledge). In a session hosted by Taulia’s Chief Sales Officer, Cedric Bru, I (somewhat reluctantly) expressed my hopeful-yet-skeptical concerns. In response, Taulia’s CEO, Bertram Meyer, gave what I think is the best-reasoned response I’ve heard to date. In a nutshell, he views SCF programs as somewhat of a risk management tool, in that they provide a foundation for liquidity access now that would be impossible to create in response to an acute economic crisis. In other words, if it’s not already in place at the time of a systemic event, everyone (large buyers included) will suffer. That’s precisely the sort of rational self-interest I thought was missing from the discussion. From that perspective, it’s no longer about altruism – it’s about longer-term self-protection. And that’s something I can see businesses getting behind (even if their PR departments prefer the other explanation!)

I do think there’s still some work to be done on teasing out all of the nuances of the SCF market. Enrico Camerinelli of Aite Group gave a great presentation on Ethical Supply Chain Finance3, which brought this to the fore. Using an illustration of two interrelated automotive-style supply chains (OEM, Tier 1, Tier 2, etc.) to argue that the overlap between the two led to competition between supply networks, the important interdependencies were between strategic suppliers—those that already had some degree of negotiating power by virtue of their unique contribution to each OEM’s business. These aren’t the small, non-strategic suppliers of indirect materials. Those are the commoditized folks that you can put out to bid in order to temper their efforts to push through price increases (or to resist your year-over-year cost-cutting goals). In this respect, SCF initiatives are arguably less focused on small supplier liquidity than they are on expanding the scope of which suppliers are considered strategic for purposes of long-term supply chain health.

Credit Where Credit Is Due (No Pun Intended)
There was another piece of Enrico’s presentation that I really liked as well: his belief that this type of program, currently confined to financing based on approved invoices, will move farther back in the process to the accepted-PO stage. I find this possibility both fascinating and absolutely realistic. Right now, everything before the approved-invoice stage is within the realm of traditional trade finance, which is normally the province of banks. But that doesn’t have to be the case. The main question to answer is: who is in a proper position to judge the buyer’s repayment risk at that stage? It doesn’t necessarily have to be a credit question. A network over which POs, invoices, and payments are sent has a vast store of information about on-time payments, average payment times, etc., upon which to base what is in essence a pre-export (or pre-production, or at very least pre-fulfillment) finance decision. The other piece of the puzzle is supplier fulfillment or non-delivery risk. Still, with full visibility into invoice disputes and adjustments, these same networks could build fulfillment performance profiles over time as well. In that event, they’d have adequate information to judge the repayment risk of the buyer and equally adequate information to judge the fulfillment risk of the supplier. Putting them both together, that’s a solid basis for PO-stage financing.

Goodbye, San Francisco (and also the Conclusion)
Putting all of this together, I’d say it was a successful event for Taulia. Their events team did a masterful job. They showcased clients from top-tier organizations who could share some impressive post-implementation results. They featured a management team that was equal parts evangelic and pragmatic. With clients like Coca-Cola, PG&E, Home Depot, and Zappos leading the charge, and financial partners like Citibank, BBVA, and the previously hinted-at large European bank, it would be difficult to claim that Taulia is flash without substance. For competitors in the marketplace, if that’s the view you hold, it is probably a good time to update your assessment – or risk underestimating an increasingly-formidable opponent.

 

-Scott

 

1. Full disclosure: Taulia picked up the cost of my travel and attendance. There’s no other agreement or understanding beyond that, but I think it’s important to mention nonetheless.

2. I’ve borrowed this phrasing from Taulia, being mindful that the partner has not yet been made public officially.

3. This phrase, while catchy, is likely to be revised. “Effective” or “Efficient” or even “Smart” were mentioned as more accurate adjectives for the purpose. Ethical does have a certain panache that’ll be hard to improve upon, however.

Posted in Blog, Executive Management, Finance & Accounting, Financial Operations, General Industry, General Management, Procurement, Research | Tagged , | Leave a comment

Tungsten Network and DocuSphere: A Worthy Acquisition

On September 2nd, Tungsten Network announced its planned acquisition of AP automation and document management solution provider DocuSphere. While there is work to be done, it appears to be quite a good fit, and a development that could bode well for those interested in leveraging AP as a strategic working capital driver. After exploring the possibilities this acquisitions offers—and examining some challenges it will need to overcome—it seems likely that this will be a positive development both for the companies involved and for the market in general. This report takes a closer look at the acquisition and provides some thoughts on how things might play out.

 

Please use the form on the right to download this report.
BHR - Tungsten DocuSphere - Preview

Posted in Executive Management, Finance & Accounting, Financial Operations, General Industry, General Management, Procurement, Research | Tagged , , | Leave a comment

AP, Working Capital, and Tungsten Network: Fitting Everything Together (Video)

Accounts Payable is often regarded as a tactical function. In this video, Principal Analyst Scott Pezza discusses how the efficiencies that come with procure-to-pay automation can help AP make a more strategic contribution to the enterprise. To provide some additional context, he also discusses how Tungsten Network helps illustrate how all of the pieces can fit together in this endeavor.

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Finance and the Demand-Driven Supply Chain

Picture of a waterfall with multiple flows. Source: pixabay.comWhen I’ve thought about overlap between supply chain management and finance in the past, it’s usually been in the context of integrated business planning: that is, giving finance an active seat at the table for sales and operations planning. In that case, they’re technically together, but that isn’t what anyone really means when they talk about the convergence of physical and financial supply chains. For that, we’re looking at the transactional level, where downstream product flows are matched against upstream financial documents. What’s interesting is that when networks get involved, SCM-oriented planning and execution solutions have the potential to bridge the gap and help achieve that more elusive goal.

First, a little background. From the 50,000-ft view, traditional S&OP-related forecasting takes historical sales information, projects forward based on current trends, adjusts for planned promotions, and then fills in production and sourcing details to deliver the forecasted numbers of each SKU to each necessary location to meet projected demand. In other words, you make an educated guess at how much you’ll need, plan and execute based on those numbers, and push product downstream. Sometimes guesses are wrong.

In contrast, demand-driven supply chains operate on a simple (though that does not mean easy) premise: to have all supply chain participants operate from the same plan, and to have that plan driven by end-user consumption. This is the vision outlined by Andre Martin, Mike Doherty, and Jeff Harrop in 2006’s Flowcasting the Retail Supply Chain.1 Concepts like flowcasting, demand-driven supply chains, and demand sensing reverse the traditional process. They emphasize gathering information from the downstream (consumption) end of the supply chain, and then conducting all planning backwards from that point upstream to accommodate.

View the Related Research

An easy example is to think of collecting data from a retailer’s point of sale (POS) system, then feeding that backwards through the supply chain to inform replenishment from DCs, production from manufacturers, and materials sourcing from upstream suppliers. Factor in related logistics activities like warehousing and transportation, and you’ve got a fully-connected, collaborative, multi-party, multi-echelon demand-driven supply chain. Bam.

What does this have to do with invoices and payments?
Well, the easy but not incredibly interesting answer is that for every unit sold in the scenario above there’s a corresponding transaction between retailer and distributor, distributor and manufacturer, manufacturer and raw materials supplier – and between all of those parties, a good chance for a service-based transaction with a logistics service provider. All of those transactions have dollar values, agreed-upon terms for pricing, delivery time and location, governing contracts, agreements on shipping terms and charges, etc. They also produce invoices to be processed and line-items to be matched. In short, every transaction in the physical supply chain has a corresponding transaction (or portion of one) in the financial supply chain. But that’s not the fun part.

In the scenario above, we glossed over the part about who makes the decisions. Traditionally, that’s teams of folks – sometimes they agree on a consensus forecast, sometimes they all have their own take (especially if they operate in silos and work to maximize their own function’s performance). In those cases, there’s some group that gets together, makes a decision, and authorizes the execution of a plan that entails purchasing, which then entails invoice processing and payment.

But what if a computer is making those decisions? That’s something I’ve thought about a bit in the context of the Internet of Billable Things™ where in a high-volume, automated environment, autonomous non-human actors can trigger billable events. To a degree this can already happen in traditional Materials Requirements Planning (MRP) processes if some inaccurate data isn’t caught in time: the system “decides” what is necessary to meet specified production demands and creates planned orders to keep everything on track.

Some recent discussions about physical and financial supply chains have brought the topic up again. Here, it has to do with autonomous decision-making in the supply chain context. As you might imagine from the intro, it also has to do with this demand-driven approach. Specifically, I’m thinking of how One Network Enterprises2 approaches the market.3

In One Network’s case, they feature the Real Time Value Network (RTVN). Simply put, this connects up every partner from the extreme downstream to the extreme upstream ends of the supply chain on a common network to enable demand-driven supply chain management. Yes, that’s pretty cool. I’ll admit that. It gets more interesting though. One Network is quick to point out that these connections aren’t simply for information sharing and visibility. That’s one of the critiques they have for supply chain “control towers”4: great for decision support; not so great for decision-making. This is where my interest is piqued. Their approach is to enable these connections over a shared network, and embed within that network business rules to automate responses to exceptions. In other words, the network keeps an eye on everything going on, identifies problems, and actively makes decisions to address them without getting a human involved (unless it is an extreme situation that goes beyond the limits of predefined rules).

That’s the tie-in: another situation where decision-making processes are automated, and the decisions made have direct financial impacts. These aren’t alerts; they’re orders. That places a lot of emphasis on the care taken when crafting the underlying rule-sets. It also places importance on the creation of governing contracts. Unless pricing agreements exist (or in an ideal case, agreements with multiple potential suppliers that can be intelligently chosen to minimize total landed costs) then the system will require a human hand-off for purchasing. Not only is that not as fun as what we’ve been discussing, it’s also a barrier in the way of pervasive automation.

This also leads to another question, which I’ve brought up before when discussing folks like GT Nexus: isn’t this a great opportunity to realistically bring physical and financial supply chains together? In the network environment, everyone is already connected to a common, central hub. They’re already exchanging information and documents. They’re already using a browser and connecting to cloud-based information via a cloud-based interface. It’s not as easy as that, of course, but the more these systems evolve, the closer we get to being able to have a practical discussion of how this can really work.

 

-Scott

 

1. The book’s title shares the name of a product from Martin’s former company, RedPrairie: the E2e Collaborative Flowcasting product, now branded as JDA Flowcasting.

2. Three cheers for recursion! In this case, it may not be, since they really do emphasize providing a single network. There are many others to choose from, if you’re looking for some certainty here.

3. The overlap here shouldn’t be surprising, as One Network’s co-founders—along with other executives—share a common background from i2 Technologies, which was acquired by JDA in 2010.

4. Put simply, a supply chain control tower is an application that integrates information from numerous, disparate sources to provide management with a real-time view of the status of their extended supply chain operations. The critique mentioned here is that presenting the information is less helpful when it is not accompanied by a seamless way to act on it.

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The Evolution of Supply Chain Finance

There was a time when supply chain finance and trade finance (or supply chain financing) were synonymous. There’s still an active debate over exactly what we should call third-party financing based on buyers’ approved invoices. Outside of those debates, the market has generally come to equate that scenario with the term Supply Chain Finance (SCF) – but we shouldn’t get so comfortable. New approaches to funding sources and addressable buyers are continuing to drive evolution in this area. This report aims to provide a brief introduction for those new to the SCF discussion and then explain some of the latest advances – and what they could mean for the future.

Please use the form on the right to download this report.
The Evolution of Supply Chain Finance

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SupplierPay and the Cynical Optimist

A picture of a briefcase with dollar bills flying out of it. This past Friday, the White House announced that 26 companies1 had signed onto the SupplierPay Pledge, expressing their intent to help their small suppliers by either paying them faster or facilitating their access to lower cost sources of working capital. Glancing at some of the comments on the Wall Street Journal site, the announcement was greeted with a mix of cynicism and optimism. I agree wholeheartedly that small businesses are in a precarious position and that they can get the short end of the stick when it comes to larger enterprises’ working capital decisions. My struggle is with whether this news should provide a ray of hope that things may turn in their favor. There are aspects of the Pledge that provide support for both positions.

If this initiative takes hold, everyone wins: small businesses get some working capital relief; large businesses strengthen their supply chains; and the vendors who facilitate dynamic discounting and supply chain finance see an uptick in adoption. Folks like Ariba, GT Nexus, PrimeRevenue, Taulia, Tungsten Network, and others offering buyer-funded, bank-specific, and multi-bank solutions should certainly have their interest piqued.2 But that’s getting a bit ahead of ourselves. There are a few things to discuss before kicking off the celebrations.

The Cynic
First and foremost, the Pledge isn’t a binding contract – these companies didn’t actually promise to do anything, and they didn’t receive anything in exchange. Moving past that, the Pledge itself is short on detail, aside from aspirational statements that sound a lot like what large companies are already doing when it comes to supply chain finance (i.e. offering smaller suppliers access to alternative capital sources at good rates). The basic framework is made up of three parts: (1) speeding payment or offering competitive financing; (2) sharing best practices; and (3) accomplishing point number one without extending payment terms as part of the deal.

I won’t harp on the negative, but there are a few nuggets in the existing text for cynics to latch onto. First, the promise isn’t to get small suppliers access to low cost capital – it is couched as making it available at a “lower cost.” But the word ‘lower’ is relative, and begs the question: lower than what? Being charitable, that would mean lower than the small business’s own borrowing cost, which could be quite high. That said, if larger suppliers weren’t extending terms (or paying later than already agreed-upon) there wouldn’t be the need for a financing cost above 0%.

See Related Research

There’s similar nitpicking to be done due to the Pledge leaving it up to the buyer to define what “small supplier means” (i.e. they can define it around the subset of companies they already intended to work with). The prohibition on using the Pledge as part of a program to also extend terms applies only to current suppliers as well, so it may provide more of an incentive to seek out new suppliers than to stick with existing ones. Alternatively, these large buyers may have already extended terms with their small suppliers, so this would only prevent them (if they choose to be prevented, that is) from doing so further. If nothing else, that maintains the status quo with their existing base and may even provide a silver lining if the original extension did not go hand-in-hand with a supply chain finance offer.

The Optimist
With the negativity out of the way, the last sentence of the last paragraph of the Pledge does give me some reason for positivity: We will not use our pledge to offer financing solutions as a means of extending payment terms with our current small business supplier base. If heeded, that qualification would alleviate the cynic’s concern about the true motivation for supporting this approach. No, it doesn’t change things for suppliers who have already accepted extended terms, but it is a good starting point for future dealings.

The optimist in me is hopeful that the first option in Pledge section 1 (paying small suppliers faster) is a true possibility, and not just a stopping point on the way to the second piece, offering alternative financing. If that is the case, then small businesses really will benefit, as their cash flow situation improves. Further, any improvement here is helpful – we don’t need exact details, and we don’t need to fix a specific time-span for payment (e.g. everything paid within 30 days). If they currently receive payment in 60 days, then 55 is still something, especially if it comes with no strings attached.

When it comes to “lower cost” financing, there are some attractive options. Traditional discounting, as I’ve discussed, doesn’t work out so well.3 Vendors I’ve spoken with have said they can facilitate financing (based on the credit of very large buyers, of course) at a rate of 1-3% per annum.4 If that’s on the table, then the optimists can rejoice. It will be interesting to see how things play out, but that’s a rate at which discounting or supply chain finance can become a desired working capital lever for the small businesses too.

The Realist
I know that the cynic and the optimist represent the extremes, and reality is likely somewhere in between, so let’s try to work through the problem. It is easy to see the business justification (read: brand perception) of making the Pledge, but is much more difficult to see the justification for actually following through on it. When large companies warmed to the Green-oriented messaging of optimizing their transportation strategies, it worked because the external messaging (being more environmentally friendly) was backed up with a compelling internal justification: reducing miles traveled, along with the attendant labor, fuel, and maintenance costs. Lean is Green and Green is Lean. That secondary piece isn’t present here.

If a supplier is truly important (i.e. does not provide a commodity or near-commodity product that can be easily sourced from one or more competitors) then they’re already a strategic partner that isn’t being squeezed. If they are being squeezed and you need a pledge to stop you from putting your strategic partners out of business, you’re not long for this world anyway. So that just leaves non-strategic suppliers.

Paying non-strategic suppliers earlier than you have to, and not doing everything in your power to push prices down (and/or terms out) is really just voluntarily agreeing to forego exercising your superior negotiating position. If you can get all of your competitors to sign the Pledge as well, I guess that’s some strange form of market-supporting collusion. Otherwise, you’re agreeing to pay more (directly or indirectly) for the things you need than your competitors will. Either the categories and volumes of purchases this applies to are immaterial, or they are material and you’re volunteering to occupy a weaker competitive position in the market. The offset, then, would be the expected top-line growth associated with more positive brand perception that will compensate for the slightly-larger-than-necessary expense and/or COGS line-items that chip away on the way from the top to the bottom line.5

Making SupplierPay Work
If the Pledge is non-binding and there is no true business justification for following through, what can be done to keep things moving forward? There are four main approaches that come to mind, though this list is certainly not exclusive. In rough order of their palatability (from least to most), they are: government mandate, tax incentives, repatriation benefits, and government influence via purchasing policies.

Government Mandate. When it comes to interstate commerce—in which large corporations can’t help but take part—the government has some pretty wide leeway to regulate. They could simply require compliance with terms that resemble those outlined in the Pledge. More accurately, they could require periodic reporting of compliance which would be subject to potential audit, much like current compulsory tax and securities filings. The downside, of course, is that this would either increase the regulatory workload of an existing agency or require the creation of another agency. Worse still, it may have the unintended consequence of hurting those it is meant to protect by effectively increasing the cost of doing business with a smaller company (since they underlying value proposition has not been addressed). That doesn’t seem like a desirable outcome.

Tax Incentives. This option addresses the value head on, by providing tax-based offsets for prompt payments made to smaller suppliers. At base, it is a simple transfer – less tax collected from compliant businesses means more tax revenue derived from individuals (and potentially the small businesses this is meant to help as well). We could avoid that consequence if the lower tax collections were matched with corresponding decreases in government expenditures, but regardless of your political leanings, that seems unlikely. I’m not a political pundit, but I would assume that a direct transfer from public to private (especially large enterprise) coffers would be inadvisable in the run-up to the 2016 elections.

Repatriation Offsets. I like this option, as it provides a valuable incentive without shifting tax burdens. Here, prompt payment to small suppliers would provide a credit against which repatriated international earnings could be offset. Yes, there’s some moral hazard here: it provides a benefit to companies who have shifted income abroad in order to avoid domestic taxation. On the other hand, in light of current laws, this is money that likely would not return to the domestic market (and be available for investment, distribution, etc.). There’s some risk: it trades tax revenue for small business support and the potential for greater domestic investment. That said, it’s also flexible, since fiscal policy experts can haggle over the best conversion rate, cut-offs, etc.

Government Influence. This one starts from a simple premise: the government is a fairly large buyer in its own right, and can use that clout to effect the desired change. There are two main avenues for this: (1) increasing the number of small businesses with which it transacts and (2) creating a policy to only transact with businesses that honor the Pledge. The first option would help small business directly with greater demand for their products and services, while also bringing them within the auspices of QuickPay, the government’s own program for prompt payment. The second option is an indirect mandate, at least for those companies who count the government as an important customer. This one appeals to me personally, since it honors and encourages the continuance of market dynamics. It accepts the role that leverage can play and simply asks one very large buyer to step up to the plate. A solution that bypasses adding complexity to an already complex tax code and avoids simple transfer mechanisms seems like a good start.

What do you think? Does this signal the beginnings of something truly positive for small businesses or is it too short on detail to justify excitement?

 

-Scott

 

1. Kudos to Apple, AT&T, Authentix, Cardinal Health, Coca-Cola, CVS, Ericcson, FedEx, Honda, IBM, Intuit, Johnson & Johnson, Kelly Services, Lockheed Martin, Milliken, Molina Healthcare, Nissan, PG&E, Philips, Rolls Royce, Rothschild North America, Salesforce, Textura, Toyota, Walgreens, and Westinghouse Electric Company for signing on.

2. As always, this caveat is to say that that the short list of vendors mentioned explicitly is not exhaustive. I’ve provided a longer list of providers in my Procure to Pay Technologies for an Extreme Complexity Environment, if you’re interested.

3. As a quick recap, with 2/10 net 30 terms, the supplier gives up 2% in order to get paid 20 days earlier. In order to break even and make that 2% back over the course of the next 20 days, they’d need to be able to invest it at an effective 36% rate. If they had access to an investment or line of business with a 36% return, they likely would not need to offer discounts to accelerate cash flow. That said, as the Net term moves farther out the effective rate gets lower and lower, and the decision makes much more sense.

4. More caveats! These rates were in the context of large buyers who extended terms at the same time. As stated above, as due dates get farther and farther away, the divisor in the Effective Rate calculation grows, and the resulting percentage shrinks. To get to a 2% effective rate, for example, you’d need to have a net due date of one year and receive advanced funds in 10 days.

5. It’s been a while since the last Psych quote, but here’s one that seems appropriate: “Improbable. Possible – but unlikely.” That could certainly describe basing a financial payments strategy on the possibility that it will improve the brand image (by being recognized and valued), and that the improvement will be strong enough to drive behavior in the form of net new purchases.

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