Integrating a SCF Platform with SAP/ERP

Supply chain finance (SCF) is a concept to improve working capital management, which can be used in several areas along the supply chain. This article describes integration for one of the most commonly used solutions – reverse factoring, in this context known as SCF.

A short description of the SCF-cycle:

The participants may involve three or four parties, including: a buyer (with a high credit rating); seller; financial institution(s); and a platform provider (independent or provided by the financial institution).

A short description of a SCF cycle consists of:

  • The seller sends an invoice to the buyer for goods/services delivered.
  • When the buyer approves the invoice for payment, it is uploaded to the SCF-platform and visible to the seller.
  • The seller can opt for either immediate cash (which means the cash is transferred to the seller by a financial institution, minus a fee) or wait for full payment when the invoice is due.
  • The fees are lower than traditional factoring because the buyer (with a high credit rating) guarantees the payment, which means a lower risk for the financial institution.

The benefits of a SCF programme is five-fold:

  1. The seller gains access to attractive financing based on the buyer’s credit rating, achieves a reduction in days sales outstanding (DSO) and improved visibility, and can therefore make better cash-in forecasts.
  2. The buyer can extend payment terms without negatively affecting the seller’s (thus increasing days payable outstanding (DPO)).
  3. The financial institution gains new business and is more involved in clients’ supply chain activities, which may create other new business opportunities.
  4. The better the financial health of the seller, the lower risk of stoppages in supply flows for the buyer.
  5. For both buyer and seller, there is less cash tied up in the supply chain and hence working capital management improves.

ERP Integration

Enterprise resource planning (ERP) integration, for example where the ERP is SAP, is not just a matter of up- and downloading files to/from a SCF platform using a specific file format.

The idea is to harmonise already existing processes in SAP/ERP with the SCF platform in order to fulfil requirements for automation/straight-through processing (STP), reliability and possibility to track and monitor activity. To review/improve already existing procedures for handling supplier invoices is also very important, since delays in internal handling on the buyer’s side will be ‘visible’ to the seller in the form of absent invoices on the SCF platform.

Small and medium-sized enterprises (SMEs) may technically only require manual file up- and downloads to the SCF platform via a secure (VPN) connection. However, large enterprises and corporates need to approach SCF platform integration differently because of:

  • Large invoice volumes.
  • Many independent subsidiaries, different payment routines and calendars.
  • Operating in different markets, countries and time zones.
  • Different industries.
  • Different currencies.
  • Invoice and payment processing in shared service centres (SSCs) with streamlined/standardised processes and STP requirements.
  • Governance – e.g. SOX-compliance, separation of duties, etc.

Outbound Flow

An invoice receipt is updated in the logistics and/or financial module in SAP – creating an open item in accounts payable (A/P).

(Even if not a requirement for SCF, receiving invoices electronically, e.g. via EDI, makes the SCF solution more ‘attractive’ because it minimises the internal lead time before the invoice can be made available for the seller on the SCF platform. In addition this reduces risk of typing errors during registration.)

When the invoice is released for payment, the document should be transferred as soon as possible and uploaded to the SCF platform and made available to the seller. What is the best way to do this?

The payment processing part in the SAP financial module contains almost the entire ‘infrastructure’ needed for integration with the SCF platform on the outbound side.

The SCF platform can be considered as a ‘virtual’ bank where invoice data is to be transferred. Usage of payment orders does not create any financial postings – only blocking – to avoid the invoice from being included in further payment runs. (Some minor development needed to distinguish transfer to SCF platform from normal payment runs.)

Usage of payment orders (POs) enables the possibility to easily track the individual documents throughout the entire SCF cycle.

Using the already existing ‘payment infrastructure’ in SAP on the outbound side makes the solution familiar to the users responsible for daily operation.

Output media can be chosen. If the SCF platform provider requires a specific file layout, then the output format logic may need to be programmed. However, personally I prefer to use the inhouse format already available in SAP IDoc (Intermediate Document). By using this format, you benefit from monitoring and tracking functionality already existing in SAP-standard.

When the invoice (payment) data is extracted to the IDoc, preferably this format is sent, without translation, to the SCF platform. IDoc-formatted data can either be generated as ASCII, or eventually XML-formatted with IDoc segment/field names as tags.

However, if a complete payment infrastructure to the house bank (for regular payments) is in place, e.g. EDIFACT-based, another option is to use and benefit from this infrastructure as much as possible by sending EDIFACT-messages (subsets) to the SCF platform provider.

Large enterprises normally send/receive data via a central gateways or communication hubs (e.g. SAP-PI, Seeburger, etc) which translates, forwards data and handles security, transmission protocols, etc, such as FTP,VAN and AS2.

The receipt of the transactions by the SCF platform should generate receipt messages back to the sender. The messages can easily be uploaded into SAP to be used for monitoring purposes.

Also, the upload onto the SCF platform should generate receipt messages back to SAP (if there are exceptions, then proper error messages should be included). If exceptions occur during upload, the sender can react immediately, correct and re-send the transaction.

At the SCF Platform

When invoices are uploaded to the SCF platform, they are mainly for use by the seller to decide whether to request cash immediately or wait for full payment when the invoice is due.

Credit note(s) appliance to invoice(s) is an important issue; in addition, handling has to be synchronised with handling in the SAP/ERP system.

The buyer may be able to monitor daily activities via a web-browser. However, by using, for example, web-service based queries then regular consolidation between SAP/ERP system and activity on SCF platform can be done.

Return Trip

When invoices are close to the payment due date, return messages are sent from the SCF platform to the SAP/ERP system, passing the same technical infrastructure as the outbound flow. Return messages basically need to identify the invoices/credit notes (e.g. payment order number).

Uploading the return messages into the SAP/ERP system should put the invoices/credit notes back into the regular payment process. The documents will be included in the next regular payment run to the enterprise house bank and funds will be transferred to financier (or financiers if multiple).

(Automatic handling of the return messages from SCF platform may involve some local developments.)

Figure 1: SAP/ERP Integration – Buyer-oriented SCF Cycle

 

Conclusion

Monitoring/tracking SCF invoices

Either create a cross-reference database with query functionality, which is updated regularly with SCF-related transactions and their status in the SCF cycle, or extract relevant data from the ERP system to the business warehouse for further analysis. In addition to monitoring and tracking, the data can be used to measure success of the SCF concept.

Synchronisation

Data flows in both directions have to be synchronised with the up- and download schedules of the SCF platform.

Regular monitoring

As mentioned in the beginning of this article, the solution should be as close to STP as possible (possible in SAP).

However, even a fully-automated solution has to be regularly monitored and exceptions have to be resolved before they turn into real problems. To clearly dedicate the responsibility for monitoring and problem resolution is extremely important.

252 views

Related reading