As companies transact more business outside their home
country's borders, linking their financial and physical supply
chains has become a priority, says Greg Johnsen, executive
vice president with GT Nexus, a global trade and logistics
portal. "Just as your supply chain changes when you
go offshore, there's also an impact on payment and how you
handle cash." Any number of events, such as shipping
a product, can trigger payment authorization. However, determining
when a specific event has happened can be difficult when
suppliers and shipping partners are scattered across the
globe. Moreover, as supply chains become global, more parties
usually are involved in moving goods from the supplier to
the buyer, increasing the complexity.
UnderArmour, Inc., the producer of higher-end athletic
apparel, has grown over the past several years like an athlete
prepping for a championship game. Sales jumped nearly tenfold
between 2002 and 2006, from $50 to $431 million. At the same
time, the company expanded the number of countries from which
it sourced materials, from about eight to 16, says Brad Dickerson,
vice president of accounting and finance. "The sourcing
base was changing significantly."
These twin shifts created several challenges. First, there
was no central tool through which Dickerson and his colleagues
could communicate with suppliers. So, if an invoice was held
up due to a discrepancy between its total and the numbers
on the packing slip, the employees in the supply chain functions
might know about this, but not accounting.
In addition, because UnderArmour was transacting business
with partners spread across multiple countries and time zones,
and speaking different languages, it was difficult to get
purchase orders to suppliers and pay the invoices on a timely
basis. "It was a dysfunctional process," combining
email, faxes, and phone calls, Dickerson says.
So, Dickerson and his colleagues in UnderArmour's sourcing
group began working to better align their business processes
with their suppliers, recognizing that their suppliers' financial
stability benefited UnderArmour as well. The key, says Dickerson,
was sharing information and gaining visibility into the supply
chain.
He decided to start with the procure-to-pay process. The
company began working with TradeCard, a provider of solutions
to integrate sourcing, finance, and logistics. In May 2005,
UnderArmour moved its first supplier onto the TradeCard portal;
five months later, the suppliers that accounted for 90 percent
of UnderArmour's supply chain volume were on the system.
As part of this initiative, UnderArmour developed a standard
purchase order form that is electronically submitted to all
suppliers via the TradeCard portal. UnderArmour can see when
the suppliers have received and approved the PO. If the supplier
approves the invoice, but alters it -- say, by planning to
send some products at a later date -- they use TradeCard
to let UnderArmour know.
Now that UnderArmour has improved visibility into both
the purchase order process at the front end of the cycle
and the payment at the back end of the financial supply chain,
they're tackling the steps in between by integrating functions
and information with the physical supply chain. For example,
the company is using a software solution that obtains the
packing slip and other information from the freight forwarder.
It connects with the TradeCard platform to complete a three-way
match of the PO, invoice, and packing slip. Any discrepancies
trigger an alert, so that an UnderArmour employee can research
the problem.
Eventually, Dickerson and his colleagues would like to
get all the information concerning the movement of the company's
goods from a supplier to a store shelf, and the resulting
implications for the company's finances, into the TradeCard
system. "We're looking at ways to get more visibility
into the window of time between the purchase order and payment,"
he says.
Like UnderArmour, a growing number of companies are now
looking at their physical and financial supply chains as
a single process, says Viktoriya Sadlovska, research analyst
with Aberdeen. "They understand that each financial
transaction is tied to a physical event in the supply chain."
At this point, experts say that few firms truly have integrated
their supply chains. However, companies in the retail or
consumer goods sector, like UnderArmour, tend to be further
ahead, Sadlovska notes.
Companies whose systems aren't integrated are exposed
to greater risk. They may find themselves paying for materials
or goods that are located on the other side of the globe
and on which they have little information. Not surprisingly,
few lenders involved in trade finance are lining up to take
on this risk, either -- at least not without upping their
fees.
Conversely, buyers and suppliers benefit when they can
document the location and status of their goods as they're
in production and transit. For instance, a lender may agree
to extend credit to a supplier based on its relationship
with a larger customer and the vendor's ability to monitor
the flow of goods and determine when payment is coming, says
Ken Stratton, head of transaction banking with Standard Chartered
Bank, New York. If the customer is stronger and more established
than the vendor, the vendor may end up with a lower cost
of capital. This may translate to better prices for its customers.
While the task of integrating the physical and financial
supply chains is challenging, the Internet and increasingly
ubiquitous communications systems make it doable, Johnsen
says. "Companies can get the visibility and control
that they would expect from a local trade scenario."
Linking supply chains requires using technology and work
processes to let the relevant parties in the financial supply
chain know, as quickly as possible, which physical goods
moved and when, and their cost.
Here's how an integrated system might work, Johnsen says:
A company in the U.S. issues a purchase order for 100 widgets
from a manufacturer in Shanghai. The manufacturer electronically
receives and accepts the PO. The manufacturer begins producing
and packing the widgets. When they're ready to leave the
factory, an employee schedules a pickup with customer's freight
forwarder. The forwarder moves the goods to a consolidation
center in Beijing.
As the goods are in production, the vendor electronically
creates the invoice and packing list from the information
in the purchase order. At the same time, the forwarder or
third-party logistics (3PL) provider creates documents that
identify the contents of a shipment, such as the cargo receipt
and bill of lading.
At some point in the process, the bank has to be notified
that an event, such as the goods leaving the factory, has
occurred and that the supplier should be paid. This could
happen in a variety of ways, such as the buyer's system sending
an alert to the bank, or via a link between the bank's and
buyer's systems.
Case study: UnderArmour Is a
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