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Did you ever wonder why business-to-business transactions are typically settled in 30 days? Why not when goods or services are delivered? Ironically, the concept of trade terms were invented by the Greeks who needed a system to allow for transportation delays. In today’s economies, we have eliminated many of these delays — and drastically improved the information flows about trade. In fact, a new set of tools — Supply Chain Financing and Dynamic Discounting are rapidly changing the options around supplier payments.
Supply chain financing is demonstrating value in the weak economy as more organizations and suppliers learn how to use it, experts say. It’s most prevalent in retail and manufacturing, but ANY industry can take advantage of these tools due to the availability of new solutions. “Supply chain financing is still in the early stages”,” says Henry Ijams, managing director of PayStream Advisors research and consulting firm in Charlotte, N.C. “However, this intriguing concept is gaining lots of interest in 2009 due to the ability to extend early payments to suppliers based on the strength and credibility of the payer.”
Accelerated payments for a discount are not new. In fact, tools such as asset based lending and factoring have been in use for many years. In a factoring relationship, early payment is based largely on the credit of the vendor who’s trying to discount the receivable. With supply chain financing, whether the customer is Electrolux or Joe’s plumbing they get the same discount rate for accelerated payments. Moreover, a new internet based marketplace, called The Receivables Exchange, is now making it much easier for suppliers to access early payments from a variety of lenders.
The Receivables Exchange
This new twist to supply chain financing, Ijams says, is the concept of a non-bank third party lending the money for the supplier. For example, The Receivables Exchange www.receivablesxchange.com in New Orleans bills itself as “the world’s first electronic marketplace for trading accounts receivable.” Online, lenders that might include private individuals or hedge funds can compete to buy the invoice a major corporation has guaranteed to pay a vendor. Ijams describes the Receivables Exchange as a supplier friendly marketplace for selling receivables to investors and other lenders. “This is a brand new capital source that utilizes the Internet to facilitate transactional transparency fostered by buyer and seller ratings. Think eBay for receivables financing.”
“What we like about the Receivables Exchanges is its powerful ability to allow more people to participate in the financing of trade payables,” he says. “Our analysts think this has some powerful dynamics in 2009. While the credit markets have been disrupted, those who still have cash, like hedge funds, are looking for places to invest money.”
“Supply chain financing is becoming more significant as invoices are approved faster with automated matching and workflow,” he says. So far, the concept seems to be a win-win for everyone involved. “With SCF, once AP has approved a payable, and know they’re going to make payment, the buyers shouldn’t care if someone else is using a promise to pay to swap that for early payment. In fact, buyers should promote the use of SCF because it means someone else can potentially lend that supplier money at lower risk and zero cost to us, the payer.”
Future trends
Finance professionals need to stay up to date with the trends happening in supply chain financing – including its “cousin,” dynamic discount management, says Ijams. The concept involves paying suppliers early in exchange for an attractive discount, which lowers the cost to the organization. It goes against the old adage “Collect early and pay late.”
Staying ahead
The changes in trade payables present a major opportunity for AR, Billing Managers and AP departments to shine, Ijams says. “Innovative billing and treasury managers must continue to insert themselves into finance opportunities to help their companies find ways to speed up the invoice approval and cash receipt processes. Effective collection strategies will be based on a continued contraction of the invoice-to-approval time.”
Research by PayStream Advisors shows the average approval time for invoices (from Invoice Date to posting or approval date) for F1000 businesses is 20 days. That leaves only 10 days of potential early payment time for a supplier, minimizing the opportunity for early payment, he says.
Many organizations will not realize how supply chain financing can serve them until innovative finance professionals bring it to the forefront, Ijams says. “It’s a way for finance and treasury managers to heighten their credibility and improve their importance in the organization. … in order to be a value-added players, today’s finance managers have to be the eyes and ears of an organization by looking for new opportunities to focus billing and collections organizations on continuous improvement.
REPORT: Eight Building Blocks of Invoice Automation, Supply Chain Finance & Discount Management
AP Automation including Invoice Automation and Discount Management (IADM) initiatives need a framework to ensure that programs are approached on a strategic basis which bridges both the Supply Chain and Finance organizations. PayStream’s analysts have introduced such a framework to help enterprises implement integrated IADM and maximize benefits.
To achieve the long-term value of Invoice Automation & Discount Management (IADM), organizations need to adopt a strategy involving both Procurement and Finance and therefore initiatives should be approached at an enterprise level. So far, only a limited number of enterprises have stepped up to this challenge and are implementing what PayStream Advisors calls integrated IADM optimization. This number is steadily rising, as corporate enterprises begin to achieve benefits in their first attempts at IADM and realize what really needs to be done. Our most recent research survey that many enterprises are still implementing electronic invoicing or stand alone Discount Management or Supply Chain Finance programs, not truly integrated projects.
When companies focus on planning, as opposed to implementation, PayStream estimates that:
Nearly 30 percent of surveyed enterprises have plans that would fit the integrated IADM description.
Approximately 50 percent of those are planning a Level I approach (not integrated)
Less than 20 percent are planning an integrated approach which brings together buyer/supplier collaboration with electronic invoicing.
More than 15 percent are considering global initiatives to inject third party financing into their supply chains
Integrating Invoice Automation and Advanced Finance Tools such as Dynamic Discount Management or Supply Chain Finance is not easy. It requires a multi-disciplinary vision and leadership to drive a focus on unleashing working capital from the trade Invoice and receivables, otherwise it will remain fragmented. It involves difficult changes to processes, and external organization that can make implementation difficult. Organizational and cultural barriers exist between Supply Chain/Procurement and Finance managers making clear thinking on IADM difficult.
The technology support seems easy but it isn’t. Technology staff must grapple with the challenges of getting invoices approved faster, multichannel alignment, and systems integration. Even if the CFO accepts the need for enterprise-level IADM, the quarterly demands of procurement and working capital targets, especially in delicate economic conditions, make IADM one of the the most important challenge facing the finance organization, but not the most urgent for the CFO. This typically results in a focus on tactical quick wins until conditions are better.The main reason enterprises are not implementing integrated IADM is an inability to see the big picture and understand what is involved.
Just as a map helps you understand the context of your journey (the roads you need to navigate and alternative routes), so the PayStream IADM framework helps enterprises make decisions about the best route and objectives for their situation.
Following an analysis of several larger corporate enterprises, PayStream Advisors has created a IADM framework, or map, called “The Eight Building Blocks of Invoice Automation and Discount Management (see Figure 1) to help enterprises see the big picture, make their business cases and plan their implementation. The framework can be used for internal education and debate in developing the IADM vision and IADM strategies. It can then be the basis of an assessment of the enterprise’s current and required IADM capabilities, to help understand its current position and future strategy.
Using this framework, PayStream Advisors is currently profiling several enterprises that are great examples of IADM at work.
Core Topic
Supply Chain Financing: Optimizing Working Capital through the strategic use of financing and discounting in the supply chain
Key Issues
During the next five years, how will cash management strategies, processes and technologies evolve to enable enterprises to improve the use of working capital tied up in trade Invoice and receivables?
What is IADM, how will it evolve, and what drivers are emerging to force its adoption?
What is the senior finance executives in successful IADM initiatives?
Strategic Planning Assumptions
Through 2008, 90 percent of successful IADM initiatives will balance the needs of improved supplier relationships with working capital improvements Enterprises that have a wide differential between their and their suppliers cost of capital are twice as likely to achieve adopt IADM and Discount Management goals.PayStream’s Building Blocks research and report will be released at the September 10-12th PayStream Summit, in Orlando, FL. Those finance and supply chain managers whom desire the latest information, tools and techniques in Invoice Automation and Discount Management should reserve their delegate representation at the conference
Supply Chain Finance and Payables Discount Management (SCF/DM) initiatives need a framework to ensure that programs are approached on a strategic basis that bridges both the Supply Chain and Finance organizations. PayStream’s analysts are working on such a framework to help enterprises implement an “integrated” Supply Chain Program, and have created the Eight Building Blocks of SCF/DM framework to get our clients started. Just as a map helps you understand the context of your journey (the roads you need to navigate and alternative routes), so the SCF/DM framework helps enterprises make decisions about the best route and objectives for their situation.
To build on this theme, PayStream will host an educational conference “Supply Chain Finance - Discount Management Summit” in June 2008 to bring together supply chain and finance executives to explore the future opportunities in working capital. The theme of this year’s SCF conference is Uncovering Working Capital in your Supply Chain. PayStream has also created the Supply Chain Finance Excellence Awards to recognize those companies which show leadership in their working capital optimization programs.
SCF/DM is a business strategy that optimizes working capital and supply chain collaboration for both buyer and supplier relationships by seeking tailored payment terms for services and materials. As an example, a Paystream Client, a multi-national services company with over a billion in annual domestic spend approached us to help them define the opportunity for a FSC-DM program. With less than $400,000 in set up costs, our client will generate over a million dollars per year in hard dollars benefit from working capital improvement AND the project will turn a positive ROI in only 8 months. SCF/DM/DM includes both structured financing programs and early payment discounting for supply chain payments, fostering working capital centric processes.
SCF/DM programs enable:
Greater payables and receivables visibility
Increased access to payment scheduling
More effective supply chain interactions
Integration throughout all supply channels and back-office billing and invoice functions.
To achieve the long-term value of Supply Chain Finance and Payables Discount Management (SCF/DM), organizations must adopt a strategy that integrates both Procurement and Finance. Therefore initiatives should be approached at an enterprise level. Recent research shows that many enterprises are still implementing SCF or DM programs, but not truly integrated projects.
A cohesive and integrated vision starts with an overall Supply Chain Finance value proposition. The responsibility for creating the SCF/DM vision clearly lies in the CFO & Treasury Suite. The most fertile environment is one in which the chief finance officers understand what SCF/DM means and is receptive to new ideas and ways of working. The SCF/DM vision must be well-known and accepted throughout the enterprise and the supplier base. With this in mind, it is useful to have a meaningful, company-specific definition of Working Capital goals.
Following an analysis of several enterprises, PayStream Advisors has created a SCF/DM framework, or map, called “The Eight Building Blocks of SCF/DM” to help enterprises see the big picture, to make their business cases and to plan their implementation.
The framework can be used for internal education and debate in developing the SCF/DM vision and SCF/DM strategies. It can then be the basis of an assessment of the enterprise’s current and required SCF/DM capabilities, to help understand its current position and future strategy. Using this framework, PayStream Advisors is currently profiling several enterprises that are great examples of SCF/DM at work. The eight building blocks in the model are the fundamental components for effective integrated SCF/DM. Beneath each component are a variety of interlinked capabilities. A key feature of the framework is to emphasize the need to create a balance between the requirements of the company and the working capital.
Integrated SCF/DM is an enterprise-wide initiative, where the enterprise knows how it wants to manage working capital and supplier interactions and puts all relevant capabilities in place to achieve those goals.
A solid SCF/DM vision and strategy Supportive set of integrated initiatives in the areas of,
Supply chain and finance collaboration
Working capital compression goals
Invoice visibility processes
Automated payments
Supporting technology
Measurement & improvement metrics
The eight building blocks in the model are the fundamental components for effective integrated SCF/DM. A key feature of the framework is to emphasize the need to create a balance between the requirements of the supply chain and working capital – a task that is easier than many think.
Just this past week, Henry Ijams and I were talking about how, despite the rapid gains in the ePayables world, financing and integration continue to be problematic. Case in point: A client mentioned that early payment discounting is very inticing, yet currently out of thier reach due to lack of liquidity to invest in paying suppliers early. Henry and I went on to conclude that, until a solution came along to offer easy access to supply chain financing in the order of magnitude of, say, a p-card solution for larger ticket purchases, many discounts would continue to be lost even as technology for capturing became evermore sophisticated.
Enter JPMorgan Chase. They walked us through their newest ePayables solution on Friday, and Henry and I were not just impressed - we were blown away that the new Xign owners have responded so quickly to this giant market opportunity. AP Trac is being marketed as an integrated solution, a sort of “killer app,” so to speak, for the electronic payables market.
AP Trac, along with ExacTrac(SM) and pre-built adapters of the Xign Order-to-Pay solution, looks to give finance and AP managers the control they need to move to ePayments , while making financing and discount capture a reality in a way it had not been before. AP Trac uses the same ExacTrac single-use card functionality to pay suppliers electronically via a consolidated interface with their ERP System. In instances where the buyer doesn’t have the funds for early payment, JP Morgan can advance funds on behalf of the payer and settle with them up to 30 days later. Of course, you have to be credit approved by JP Morgan.
AP Trac leverages an enormous amount of technology in its Purchase to Pay integrated approach. JPM Xign calls this their Order to Pay product. A web-based environment provides a variety of tools for PO authorization, buyer initiated financing, fast invoice reconciliation, and dynamic payables discount capture.
Perhaps the most exciting feature of the system, however, is its ability to inject supply chain financing on a large scale. Common wisdom is that 80% of business-to-business transactions are settled with checks - In the AP automation world, we’re constantly made aware of the inefficiency of standard B2B payment processes. But even for those companies that have begun to take full advantage of electronic payment solutions, the promise of on-demand supply chain financing on the scale that JPMorgan Chase is offering is very exciting. More payers will be able to offer dynamic discounts for their suppliers.
The AP Trac mechanism is a sort of virtual account which settles the payment via the card network or ACH. Regardless of the settlement mechanism, the seller gets a postable ePayment together with full remittance details. According to our latest research report on P-Cards titled Purchasing Card Management: Technology is a Savings Tool, the average p-card transaction is $270; Paul Simons of JP Morgan Chase’s Global Treasury Services says that virtual account transactions are on average five times larger. In effect, JP Morgan Chase’s AP Trac system allows its clients not just for a highly efficient ePayables solution, but also for the financing required to consistently take advantage of dynamic discounts.
This is an exciting turn of events - Needless to say, it is rare to see solutions that take into account such a wide scope of business payment transactions. I’m sure that we will continue to be discussing AP Trac here at Paystream Voices.
Since my entry into EIPP space 3 years ago, I have collected a vast number of documents on EIPP and related subjects (one reason for edocr). Among these were white papers and analyst reports produced by Paystream Advisors, which I found very informative especially with respect to understanding the US market. Over the years, I have come to respect Henry Ijams and his fellow analysts over their deep understanding of the Electronic Invoice Presentment and Payment (EIPP) and Supply Chain Finance (SCF). So can you imagine how delighted I was when Mitch Baxter of Transcepta asked whether I would like a personal introduction to Henry Ijams?
My first encounter with Henry took place less than 2 months ago and it became very clear to both of us that it made sense for us to work together. Henry was very interested in my blogging activities and the result is what you now know as paystreamvoices. Blogging allows Paystream to move from traditional analysis environment to new territory, not so much in terms of extending the services offered or markets and industries covered, but giving interactivity to what they do best. This should result in extending the loyal readership Paystream already has. I am a great believer that every corporate marketing strategy must include blogging as a mandatory component. If your’s does not, talk to me. A great example is Sun Microsystems.
I must thank William Donavan for his superb introduction, most of which I do not deserve. Will and I correspond on regular basis these days. Blogging helped me to establish myself as someone who has an understanding of the EIPP and SCF, as well as an entrepreneur. It also resulted in establishment of number of partnerships in early days for ebdex, notably with Pegasus. Blogging breaks corporate barriers - make it easy to do business. Bloggers also need to understand the impact their work has on others, both at corporate level and individual level (will address this through a separate post either here or at my place).
I see my role here as bringing awareness of the European EIPP and SCF to Paystream readership. I think you will also find my style of writing is different from Paystream, less structured and more opinionated. I hope you can forgive me for being less professional, after all I am a blogger trying to become an analyst. In conclusion, I am delighted to be part of the Paystream blogging family.
