By New York Institute of Finance
Supply chain is a critical part of many organizations as it is the process by which goods and services are delivered to consumers. In order to stay ahead of the competition, organizations need to embrace technology and optimize the supply chain. Electronics organizations in particular, continually strive for high levels of refinement through the four phases of supply chain optimization.
Phase One: Optimizing Logistics
The first step is about streamlining the logistics of complex, global supply chains. With the growth of industrial companies over the last sixty years, the pace of globalization has been steadily increasing. The growth of international trade has created fierce competition across the world forcing companies to evaluate their value chain. At the same time, it has added complexities that require additional focus on supply chain management.
Phase Two: Improved Quality
While globalization has opened the door to cost savings, companies need to ensure that quality does not suffer. Working capital finance makes supply chains possible, enabling the flow of goods and services between buyers and suppliers. Companies need to understand where to execute which activities, taking into consideration the cost and quality differences around the world.
The broader reach to find cheaper goods and services creates a need for increased scrutiny across the entire supply chain to assure that quality does not suffer. There is a host of challenges that come with globalization, including varying regulations, communication breakdowns, and delays. Organizations must be committed to managing costs and performance to assure quality output.
Phase Three: Innovation
The financial crisis of 2008 has forced optimization and innovation in supply chain management. As the physical supply chain becomes more sophisticated and expands in global reach, it increases the demands on the financial supply chain. This has driven the need for financial solutions that reduce working capital costs.
Supply chain costs represent a significant portion of the total cost of a product or service. When companies are open to innovation in the supply chain, any reduction in cost helps to increase the bottom line. There are many opportunities to reduce working capital costs, but it is important to assess their impacts on the supply chain as a whole to prevent increasing costs elsewhere.
Phase Four: Financial Optimization
In a world of trapped liquidity, companies must evaluate their working capital needs to avoid depleting their cash reserves. Often, alternative lines of finance are necessary when buyers are paying later, and suppliers are collecting earlier.
Optimizing supply chain finance can mitigate these tensions, benefiting both the buyer and the supplier. Outstanding debt from large buyer organizations can be used as collateral to create cash flow advantages for suppliers in the supply chain. This frees up suppressed liquidity, lowers financing costs, and optimizes working capital in the supply chain.
Benefits for the Buyer
As key suppliers become more financially stable, buyers find that their financial supply chain is more resilient. Financial optimization lowers the cost of processing and the number of supplier queries, reducing payment fees. When relationships with suppliers are improved, there is the added potential for negotiating better commercial terms. Ultimately, buyers gain from decreased operational risk through the improved financial health of their strategic partners.
Benefits for the Supplier
The main benefit for the suppliers is a more predictable cash flow that reduces working capital requirements. This gives suppliers the ability to offer more competitive terms, helping to build better relationships with buyers.
An additional benefit to suppliers is an alternative means of financing with early payment options. This financing is not affected by the supplier’s financial standing and does not require pre-approval.
Mutual Benefits of Financial Optimization
Electronics organizations have been pioneering the optimization of supply chain for years. As they have moved through the phases, they were leaders in the development of supply chain finance and soon realized the benefits for both sides of the trade equation. There are few financial structures that offer truly mutual benefits for both parties, but supply chain finance is clearly advantageous for both buyers and sellers.