Working Capital Improvement: How the Physical and Financial Supply Chain Meet Each Other

Unlike any other crisis that we have seen, the credit crunch of 2008 will have a lasting impact on our global economy. The crisis brought the end of cheap credit and diminished trust among trading partners. On the upside, it has also created new opportunities and accelerated the trend of increasing needs for supply chain finance (SCF) that could change the industry landscape. At the same time we see that buyers and suppliers are busy trying to automate the order-to-pay (O2P) process in order to improve efficiency, visibility and transparency of the O2P transactions.

At first glance you might think: “How are these two topics related to each other?” Probably more than you expect. Successful supply chain execution depends upon the efficient flow of information, product and payment. A growing opportunity for companies is to identify how to take advantage of data associated with the movement of physical products through the supply chain to drive the flow of payments across the financial supply chain.1 Automating the O2P process supports the physical supply chain while SCF supports the financial supply chain. The physical supply chain represents those business processes that make products, materials and services, flowing from supplier to buyer, whereas the financial supply chain represents business processes defining the cash flowing from buyer to supplier. The purchase order (PO), receiving advice and commercial invoice provide the administrative link between the processes of the physical and financial supply chains as it registers the conversion between product and cash and vice versa.2 Working capital improvement, by saving costs or getting access to liquidity, is the objective.

Managing Working Capital

Over the past few years, managing working capital has become even more important for companies. A recent study3 by Asyx International and Accenture shows that 78% of the surveyed chief financial officers (CFO) say that improving their working capital position is their top priority. The same study shows that almost 50% of the surveyed companies are interested in SCF. It is clear that SCF is gaining momentum. At the moment, SCF is dominated by a small number of global banks, but this is about to rapidly change. Almost every bank that we have met over the last 12 months is looking into the possibilities of offering SCF services.

The increased demand for SCF has pushed buyers, suppliers and banks to join forces to provide more integrated solutions. The change reflects a trend in working capital management that ties the finance and transaction activities of the involved parties together, leveraging the information exchanged when trade transactions are processed. SCF gives banks the opportunity to meet the liquidity needs of both buyers and suppliers, while on the other hand it strengthens their relationship with their corporate clients. SCF is one of those rare examples where banks, buyers and suppliers can set up a tripartite value proposition that is a win-win-win situation for all parties involved. The question is: “Which SCF model supports the interest of all parties in the best way?”

SCF Models: Programmes That Benefit the Total Supply Chain

There are many SCF models currently available. The most promising model, which is referred to as ‘the holy grail’ in a recent McKinsey4 article, is the model where the financial supply chain is integrated with the buyers O2P and the suppliers order-to-cash (O2C) cycles. It will deliver end-to-end management of the working capital cycle, from purchase order through to payment on the one side, to sales and collection on the other. This new level of integration will support event triggered financial services along the physical supply chain (e.g. purchase order financing, receiving advice financing, reverse factoring and distributor financing) and provide full transparency into each transaction.

So how does this work and where does a SCF programme start and where does it finish? Regardless, the definitions of SCF, Asyx looks at SCF programmes as programmes that can benefit the total supply chain.

Figure 1 illustrates how this SCF model works in reality.

Figure 1: The SCF Model

Source: ASYX

Consider that the buyer in the above scheme is a large beer brewer. The beer brewer is ordering bottles at his packaging supplier. The PO is sent automatically from the brewer to the bottle supplier. Accepting the PO creates the opportunity for the supplier to ask the bank for PO financing. In this example the supplier receives US$10 from the bank upfront. After the bottles are produced and delivered, the brewer will accept the bottles and confirms this via the receiving advice. The supplier can use this receiving advice to trigger another payment of US$10. The supplier will prepare and send the invoice to the brewer who will eventually accept the invoice the moment there is no dispute on the content of the invoice. The qualified invoice will give the supplier the opportunity to ask for early payment (reverse factoring) of the remaining amount of the invoice. The bank will pay out the remaining amount after deducting US$2 for its services. Now the beer brewer will sell its bottles of beer to its distributor, asking him to pay within 30 days. The distributor would like to stretch its days payables outstanding (DPO) and asks the bank to extend the payment terms to 60 days. This late payment (distributor financing) request is received by the bank, which will send back a late payment proposal.  After accepting the proposal, the brewer is paid US$100 by the bank at 30 days while the distributor pays the bank US$101 after 60 days. The bank can even use the late payment request (this request means automatically that the distributor accepts the invoice, which makes it a qualified invoice) of the distributor and offer the brewer to receive its money directly. This factoring solution makes sure that the brewer will receive US$99 immediately while the bank waits 60 days to receive its money from the distributor. This is one of the many different process flows that can exist and every SCF solution can be seen as a separate solution.

The above example shows how the processes of the physical and financial supply chain are integrated and how the different players within the SCF can benefit from it. Here is a win-win situation where buyer, supplier and distributor can improve their working capital and the bank has the opportunity to make money by offering multiple solutions that provide the necessary liquidity in the supply chain.  

To unlock the trapped working capital, there are some prerequisites for having a successful project. Let’s start with the IT component. Exchange of information between the different parties needs to take place online and can only be offered on a large scale, the moment that all the different steps in the process are fully automated by a platform that combines the O2P processes with the SCF processes. Most platforms that are currently in the market only support either the O2P process or the SCF process. There are only a limited number of platforms that offer the best of both worlds. Second, you need to have a well thought out deployment and support programme that results in quick and smooth on-boarding of all the involved parties and a user friendly helpdesk. And third, make sure that you have tackled the legal issues regarding the contracts between the involved parties and the fact that they are located in different jurisdictions.


It is clear that at this moment most banks are not well equipped to offer an integrated and automated solution in combination with a proven deployment and support organisation. Working platforms are already rare and corporates must ask themselves the question – how is your organisation dealing with supply chain collaboration and finance?

Integrating Financial and Physical Supply Chains: GTNexus.

2 SWIFT / Zanders: Working Capital Management.

Asyx / Accenture: Working Capital Survey, August 2010.

4 McKinsey / Nicolas Hurtrez / Massimo Gesua’sive Salvadori: Supply chain finance: from myth to reality, October 2010.



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