When the Deepwater Horizon oil spill hit the headlines the blame game began. It remains to be seen what actually went wrong, if and how it could have been avoided, what can be learnt from this, and whether the moving finger will eventually come to rest on one or more of the organisations in BP’s vast, extended, multi-tier supply base. But despite the myriad analysis and reports all of this will generate, and regardless of the eventual verdict, the disaster serves as a salutary reminder that any supply chain is only as strong as its weakest link, and that when this fails, there can be serious repercussions, says FSN contributing editor, Lesley Meall.
Most organisations are more fortunate than BP, because a failure in their supply chain (no matter how extended) is unlikely to have such dire and headline-grabbing consequences for wildlife, habitats, or the livelihoods of millions of people, and few organisations need fear financial costs running into hundreds of billions of dollars. But the consequences of supply chain failure can be life-threatening for any business, and some risks are easier to minimise than others, so during the downturn, businesses have been exploring new ways of reducing the financial risks in their supply chains – with software and systems playing an increasing role.
These technology-based initiatives have taken a variety of forms, as Ariba and the American Productivity and Quality Centre (APQC) found in April 2010 when they surveyed finance professionals. Some organisations are making the processes in their financial supply chains more efficient; some are exploring innovative approaches to corporate payments, such as non-traditional financing sources; some are being more proactive about evaluating the financial health of customers and suppliers; and some are taking a more collaborative approach to working with customers and suppliers, even going so far as to leverage their own financial strength to help those less strong.
“Some CFOs and treasurers broke the mould by collaborating with suppliers and customers who could not survive another squeeze,” reports Mary Driscoll, senior research director for financial management, with APQC, (on which more, later). During the recent recession and the associated credit crisis, many organisations have been forced to pay increased attention to the unpalatable question of whether or not their customers and suppliers had the financial strength, stability and liquidity to survive. This is something they have chosen to monitor (and analyse) using a variety of approaches, and are reacting to with varying degrees of flexibility.
In common with many businesses, Crown Oil is big on credit checks. “We want to minimise our risks so we run repeated credit checks,” reports group accountant Adrian Greenhalgh, “and we also credit insure our debts.” As many as possible of the credit checking and management processes at Crown have been automated and streamlined, with the support of a financial system (from Advanced Computer Software), which includes an accounts payable/creditors module for invoice management, an accounts receivable/debtors module for debt collection, and tools for credit (and cash) management, and which links to an online system provided by the credit insurer.
“We autocheck whether or not a company is in the credit insurer’s system,” says Greenhalgh, and the insurer’s system then recommends a credit limit for Crown Oil to apply. “The credit insurer has access to much more background information than we have, and they know what they are doing,” he says, so although there may be scenarios where the recommendation is over-ridden, these are very few and far between. “If you buy credit insurance, it’s important to use it the way that it is meant to be used,’ says the group accountant, adding: “We are paying them for a service and they know what they are doing.”
Increased use of the eXtensible Business Reporting Language (XRBL) in financial reporting will eventually enable organisations to do their own ‘automated’ financial checks on customers and suppliers, as John Leese, the chief financial officer (CFO) with Star Technology Services explains. “At the moment, we use Dun & Bradstreet for credit checks, but four or five years from now, I expect to be able to access XBRL tagged information on other companies, and quickly and easily run the analysis myself,” he says.
Meanwhile, many organisations have neither the inclination or the financial resources to buy credit insurance, but this doesn’t have to stop them from exploiting the expertise of credit referencing agencies, and then using this to inform their decision-making processes. Callcredit, Equifax, Experian, and Graydon are among specialists offering various types of services for commercial organisations. Staff training can also have a significant impact. As FSN highlighted earlier in 2010, one of the ways that Coca Cola Enterprises reduced the financial risk in its supply chain and put “more rigour into assessing the financial health of its suppliers and their customers,” was by enhancing the knowledge of key credit and risk management staff.
But it is worth noting, that both the 2009 research from Aberdeen (featured previously on FSN), and the more recent research by Ariba/APQC, found that the increased automation of the processes associated with credit management can play a very significant role in risk reduction. At Regal Beloit, for example, the maker of mechanical motion control and power generation products added an advanced collections module to its Oracle enterprise resource planning (ERP) system, so that it could (among other things) automate an aspect of the collections process that would reduce financial risks in its supply chain, by prioritising work more effectively.
“I think the credit crisis of 2008 taught us that some of our internal processes weren’t as predictive as they needed to be,” says David Barta, vice president (VP) and CFO at Regal Beloit. “In the past, staff collections activity was predicated either on a calendar basis or by scanning through a list of receivables,” he adds, but expanding the ERP system means that financial metrics now determine priorities on the basis of factors such as time or disputed balances. “When our people come to work and turn on their computer a ‘to-do’ list pops up on screen for that day,” he explains, which also means that less time is wasted trying to decide who to call.
The Ariba/APQC research also unearthed some much more innovative approaches to reducing risk in the supply chain. “CFOs and treasurers found ways to cooperate without sufferings ugly consequences,” says Driscoll. Take the glassmaker Owens Illinois: “When the recession hit we went into strategic mode,” recalls Edward White, senior VP and CFO, which must have come as welcome news for some of the organisations it does business with. “We were able to selectively protect or assist our more valuable customers or vendors [with favourable terms], because we thought there was a long-term financial return there,’ he explains.
The global nature of the downturn and the increasingly global nature of business combined with the constraints of the credit crunch, to highlight how interconnected the economic health of individual countries and disparate businesses have become, so the move towards supporting other members of the supply chain has increased availability and use of ‘reverse factoring’ services, also known as Buyer-Driven Receivables Programmes (BDRPs), which can enable financially robust organisations to support their weaker suppliers, and help to protect the supply chain.
BDRPs are similar to supplier-led receivable programmes: the supplier still sells its invoice, but the funder looks to the credit worthiness of the buyer. As a result, the buyer can reduce the risk of financial failure further down the supply chain, the BDRP provider (most often a bank) can de-risk the transaction by only financing invoices that the buying organisation has approved for payment, and the supplier benefits (if they have a weaker credit rating) because they can gain access to finance at a lower rate than might otherwise be possible – which looks a lot like a win-win-win situation.
The Association of Corporate Treasurers (ACT) seems to think it is. When its supply chain finance working group (SCFWG) recently published a report on improving liquidity with the support of supply chain finance, it looked at approaches such as purchasing cards, buyer driven payables, supplier driven receivables and inventory financing (which all depend to varying degrees on the support of appropriate software and systems) – and it found merit in all of them. But it singled out BDRPs for their “growing support from finance institutions” and their potential to “ease the funding problems” of small and medium businesses.
According to the ACT report, BDRPs can help to “promote standardisation and increase transparency” in supply chain finance, ease the constraints on access to finance for small and medium businesses, and “be good for the wider economy”. As Stuart Siddall, chief executive of the ACT observes: “Companies with good credit standing can play a significant role in improving the liquidity for the supply chain,” and while this may not have a direct impact on the likelihood of another Deepwater Horizon-style oil spill, it will help to remove some of the unnecessary and avoidable risks in the supply chain – and that just might.
