Basically, the solution is the proverbial win-win for all participants, and it has to be. One of the biggest challenges to achieving efficient financial supply chain management is the fact that it requires several different companies to sign onto one solution, which presumably must represent a plus to all the participants' bottom lines–or at least not threaten any negative impact. While certain companies can impose such "solutions" on their chains by virtue of their marketplace clout, most must usually cajole their vendors, and that requires a system that is in fact mutually beneficial.

These days, thanks to the emphasis on cash flow and corporate governance compliance, there is another major hurdle: There are many more elements to address to attain any semblance of what really constitutes a seamless, accessible and somewhat transparent system. For CFOs and treasurers, the optimal financial supply chain requires not only automating the process between a transaction and a payment but also enabling the information from those transactions and payments to flow automatically into a company's accounts receivable (A/R) or accounts payable (A/P) and then ultimately into its final calculations for working capital requirements and cash flow forecasts. What's more, this process has to be relatively transparent and able to be documented for people inside and outside of the company.

With this as the ideal, it is fair to say that nearly every company's–if not every company's–financial supply chain is a work in progress. But with the continuing emphasis on reduction of working capital and cash flow forecasting, working towards that ideal is the focus of finance departments across the globe. "We have seen the big push to cut expenses and working capital by automating and improving internal processes," says Eric Wright, president for the Americas region at the REL Consultancy Group, "but once that is done, the logical place to turn is to the larger supply chain."

To be on the cutting edge today, finance must be focused on ways to unite both the physical and financial supply chain operations and to share information up and down the supply chain. "We're starting to see them converge," reports Todd Burwell, a JPMorgan Chase vice president who heads a global logistics unit within trade services. "They're getting together in the same room, often with their bankers, to look for ways to cooperate to optimize working capital. The glue is data–getting a common set of information in front of everyone."

This means that financial supply chain management ends up involving an alphabet soup of technologies that link suppliers and companies, including electronic invoice presentment and payment (EIPP), electronic data interchange (EDI), electronic funds transfer (EFT), business process automation (BPA) and straight-through processing (STP). No one system will ultimately be the answer.

Banks would like to position themselves as keepers of the financial supply chain infrastructure. The key to taking financial automation beyond the corporation's walls and systems and into the broader supply chain is to have a bank "disintermediate" the transactions: understand what each party needs and how they need it, then pass data through conversion filters so that it's ready for the machines on each side of the transaction.

Working in the Trenches

For instance, Wells Fargo Bank now employs five ethnographic researchers who spend a full week at a customer site, watching the workers in their "natural habitat," not just in treasury but in all areas that are part of the financial supply chain, reports Sanjiv Sanghvi, executive vice president in its treasury management unit. "We want to see what they do, not what they say they do," Sanghvi says. The researchers are not there as consultants to propose radical changes in those processes but to see ways bank services can fit more efficiently into how the company works, he explains.

Wells is just now implementing a supply chain solution for A/P with its first customer. Called Invoice Manager, it works like a reverse lockbox, Sanghvi explains. The company has all its suppliers send their invoices to a bank post office box (paper) or Web site (electronic). Then, the bank images the paper documents, makes them accessible online and creates an electronic file of invoice data that it exports to the company's A/P system.

The bank will do a three-way match with purchase orders and shipping documents if a customer chooses. The bank and the company settle on business rules that let the bank essentially approve invoices and pay them when a satisfactory match is found and the invoice is below a certain amount. Those the bank is not cleared to approve and pay are routed through the company's approval and dispute-resolution channels, Sanghvi explains.

It can be the long-awaited full A/P outsourcing if that's what the company wants. The only thing the bank won't do is fight with the supplier if it looks like the company has been overcharged. "Our job is to be a third-party router of transactions, to see that they move when they're supposed to be in the designated format," Sanghvi observes.

The lack of standards for financial information outside of EDI still poses a real challenge, concedes Kathleen Nugent, head of product development for Bank One's global treasury services. To take the waste out of the financial supply chain, all parties need to adopt standard ways of communicating. XML standards are helping, but so far, most efforts to standardize data are happening in certain vertical industries where a limited number of players do a lot of business with each other, she says.

The most advanced financial supply chains belong to big retailers like Wal-Mart and their suppliers, REL's Wright notes. Vendors often manage inventory through linked systems that monitor sales of their products. When stocks run low, they ship a new order. Since suppliers originate the orders, all of the documents that normally would have to be reconciled from two systems are created by one system, eliminating reconciliation. Suppliers can invoice quickly and accurately once an order is received, and retailers can shrink their A/P staffs. While this makes the invoicing easier, it doesn't necessarily reduce vendor DSO (days sales outstanding) since big retailers are notorious for their long payment terms.

Big Guys Win Again

Then again, it's no revelation that having marketplace leverage often determines who profits most from the new emphasis on financial supply chain management. For instance, among the biggest winners in the online dispute resolution services offered by EIPP providers are the large consumer products companies that offer a plethora of promotions, coupons, pricing discounts and deductions, Wright asserts. "A modest investment in technology can have a big impact on working capital," he observes. "The untapped potential is huge." Other big beneficiaries include the pharmaceuticals and financial services industries.

Supply chain financial efficiency is also getting a boost from large retailers that have stopped buying letters of credit (LC) for their imports, reports Bill Jenner, senior vice president for e-commerce product development in the global treasury services department of Bank of America. (See page 45.) These retailers have persuaded their suppliers to sell on open account but still use traditional LC banks to receive documents, perform matching, and, in many cases, debit the retailer's account and credit the suppliers' accounts electronically on designated settlement dates. Then these banks feed the data to the retailer's A/P systems, he explains.

Essentially, it's the LC process without the LC credit backup. "In the Internet age, trading partners have gotten to know each other better and are ready to dispense with the third-party credit guarantee and the cost of that safety net, but they still want an experienced third party to make the process work," Jenner explains. It's making cross-border transactions almost as efficient as domestic ones, he adds.

As part of the new fixation on supply chain efficiency, new uses might be considered for old products. Observes Scott Peterson, senior vice president for payment strategy and commercial products in the SunTrust Bank's treasury management practice, "Look for initiatives that use the p-card infrastructure for corporate trade settlements without necessarily advancing funds and incurring the fairly high interchange rate that goes with it."

Financial settlement, however, is lagging the efficiency at the front end. According to Chris Jenkins, head of European operations for Equitant, the weakness of most supply chain systems is that they're built around selling product and getting it out the door, but not the follow-up. "They're good at tracking orders and analyzing buying habits, but finance all too often has little visibility into what is happening," he says. "This defect shows up in the form of deductions and unpaid invoices, and finance often has to start from scratch to find out what the problem is."

Unfortunately, invoice problems affect a significant chunk of transactions. "Our research shows that 30% to 35% of outgoing invoices contain discrepancies," declares Sanjay Srivastava, chief operating officer of San Mateo, Calif.-based Aceva Technologies Inc. "They have to be manually researched, which takes time. DSO rises."

Aceva works with companies like Intel, Applied Materials and Honeywell to prevent invoice errors by going into the underlying systems and extracting relevant trade documents like purchase orders, invoices, price quotes and shipping documents, Srivastava says. Honeywell has cut its costs, primarily by reducing working capital, by $15 million a year, he reports.

Equitant also has a slick solution for A/R and collections that has been embraced by the likes of Microsoft, Hewlett-Packard, Lucent Technologies and Cisco Systems. Its system captures the results of collection efforts, turning reasons for disputes or short payments into reason codes that computers can process. Then, it spots reasons that recur frequently and works back up the chain to fix them, so that they don't keep happening.

Equitant also links the reason codes to the stakeholder responsible for resolving the dispute–to sales for pricing disagreements, for example. When the stakeholder fails to act to resolve the dispute, the system tattles, escalating reports based on dollar value and the time disputes are held up by inaction. At the top of this visibility and accountability system is an executive dashboard that lets a CFO track not just aggregate DSO but drill down to find out which specific invoices are not being paid on time and which individual has not succeeded in resolving the dispute. There's no room to hide.

Focusing on the Core

But Equitant's is essentially a silo solution: It works within the corporation's firewalls but doesn't reach beyond, into systems of suppliers and customers. Outsourcing, especially A/R, is growing as a way to streamline supply chain finance. "Companies are focused on what is core, and cash application is not core," notes Tom Meiman, vice president for collections and disbursements in the global cash management area of Mellon Bank. Companies are also moving their A/P and A/R processes to shared services centers and consolidating them across multiple divisions or subsidiaries. Bank One offers another A/R solution: Companies can send Bank One and a few other treasury services banks an open receivables file, and the bank will do the matching and send the company a file that is ready to post, with only the mismatches left to resolve, Nugent says.

Whether in-house or outsourced, the move to link up the financial supply chain is forcing companies to work off single platforms, so data can be shared. One multi-billion-dollar California electronics manufacturer uses software, produced by Santa Clara, Calif.-based Emagia Corp., to link a California collections staff to a worldwide sales staff, a customer service center in Ireland, hundreds of major customers and logistics providers like FedEx and UPS. Through a common Internet portal, all parties can track the status of shipments and payments, see images of all relevant documents and communicate with each other to resolve problems. The result: millions of dollars of costs removed, a 25% reduction in DSO and disputes that are resolved in half the time it used to take, according to Emagia's CEO Veena Gundavelli.

High-end ERP systems are good at capturing receipt-of-order documents and matching them with purchase orders. Once a match is made, the invoice can be approved and forwarded to a bank, which can notify suppliers that their invoice has been approved and tell them the payment date. And ERP providers such as Oracle are also busy developing interfaces to dozens of the most popular standards to help bring the much needed standardization of data to the ever more voluminous chains.

At this stage, however, anything approaching straight-through processing in the financial supply chain is the exception, not the rule. But as Darwinian pressures grow on supply chains to find new ways to cut costs, this area is certain to be high on CFOs' and treasurers' agendas for the coming decade.