Your Supply Chain Doesn’t End Where You Think It Does

Editor's Note: Take a look at our featured best practice, 4 Stage Model Supply Chain Assessment (Excel workbook). The purpose of the 4 Stage Model is to provide a high-level qualitative assessment of an organizations practices and processes. The model aligns with the Supply Chain Council's SCOR model and is broken down into Plan, Source, Make and Deliver. Within each of these major processes are a series of [read more]

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The physical supply chain is made up of thousands of moving parts, literally. Before it’s a laptop, your computer may have started as a screen from South Korea, a CPU from the United States, a processor from Japan, combined in China in a case from Taiwan, and shipped to a retailer in the United States.

Each step in this process takes time and resources, and any delay can have major financial implications. In the last few decades, as supply chain demands have become increasingly complex and consumer expectations require quicker than ever turnarounds, the systems for managing them have become faster, more precise, and more flexible. Businesses have learned that optimizing the supply chain drives profit.

But most companies act as though the supply chain ends at the delivery of goods. And that is a big mistake. After all, there’s an obvious and crucial next step after the product is delivered: companies need to get paid. So why shouldn’t we think of the payment cycle as a key component of the supply chain?

While the physical supply chain has increased its efficiency in the face of mounting pressure, the financial supply chain often remains disjointed and riddled with inefficiencies. In my previous post, I touched on how the payments cycle has become more complex. However, a lot of back offices still look like they did fifteen years ago! Failure to update them creates lags in the financial supply chain that negatively impact the physical supply chain and, ultimately, a company’s bottom line.

Invoices and payments travel through a multi-stage process of issuing, identifying, matching, and reconciling that has many crucial steps. This entire process, Payment Cycle Management, is similar to physical supply chain management, so why not apply some of the important lessons we’ve learned from the folks who have made it so efficient?

Here are five takeaways from the optimization of the physical supply chain that can make a huge difference in payment cycle management:

1. Be Precise
   Know what you’re getting and when you’re getting it. When someone receives a physical shipment, they usually receive an accompanying description of the package’s contents. When you receive electronic payments, that’s rarely the case. Remittance usually comes separately via email, PDF, EDI, or web portal and the electronic payment goes directly to your bank. In the industry, this is often called decoupled payments and is a huge challenge for businesses to manage.A majority of companies lack integration between electronic payments and their accounting systems. Manually matching and keying these decoupled remittances to the correct payment is expensive, error prone, and causes collection challenges when cash is misapplied.

2. Speed Matters in Processing
   Suppliers will tell you that until a package is logged and properly stored, it doesn’t exist. The same goes for your invoices. Many companies are still facing long lags between receipt of payments and the application of that payment to the correct invoices. The time and effort it takes to match payments to invoices delays your ability to quickly (and accurately) recognize revenue – a direct impact to your bottom line.

3. Cut the Slack
   Supply chain professionals are constantly thinking about driving efficiency and shortening the time and distance between them and the next leg of the chain, but many invoice and payments professionals have the mentality that as long as they process all the invoices they need to by the end of the day, they’re done. In reality, many back-offices often consist of compartmentalized teams that waste a lot of time visiting a myriad of portals, emails, and other locations to reach remittance information. This structure create nodes on the supply chain that aren’t necessary. Wasted time adds up. Centralize your invoices to trim the fat.

4. Be Flexible
   Suppliers know that the supply chain can change: designs can be revised, delivery schedules can be pushed up, storms can cause delays, and supplier demands can diverge from each other. Most back offices, however, say that they don’t have the IT resources to process the different kinds of electronic payments requested by their customers. When you cannot accept payment from your vendors in the way they want to pay, you’re potentially extending the time it takes for them to send you payment, putting pressure on their back offices and increasing their cost of business. Which is bad because in the end…

5. Business is about Relationships
   For just about any business a satisfied customer can mean continued use of your product or services in the future. A dissatisfied customer is likely to mean the opposite! When dealing with back offices, customer satisfaction is an important but often overlooked part of the business strategy. Optimizing the payment cycle management process and reducing days sales outstanding (DSO) leads to better business connections. Those who implement electronic solutions for their invoice-to-cash cycle generally have more pleased customers and experience a major reduction in call center inquiries within weeks of implementation.

Tools for electronically automating your invoice-to-cash cycle are more powerful and easier to integrate than ever before. Don’t leave your business on the docks. Optimizing your Accounts Receivable process isn’t just logistics, it’s logic!

Want to Achieve Excellence in Supply Chain Management (SCM)?

Gain the knowledge and develop the expertise to become an expert in Supply Chain Management (SCM). Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. Click here for full details.

Supply Chain Management (SCM) is the design, planning, execution, control, and monitoring of Supply Chain activities. It also captures the management of the flow of goods and services.

In February of 2020, COVID-19 disrupted—and in many cases halted—global Supply Chains, revealing just how fragile they have become. By April, many countries experienced declines of over 40% in domestic and international trade.

COVID-19 has likewise changed how Supply Chain Executives approach and think about SCM. In the pre-COVID-19 era of globalization, the objective was to be Lean and Cost-effective. In the post-COVID-19 world, companies must now focus on making their Supply Chains Resilient, Agile, and Smart. Additional trends include Digitization, Sustainability, and Manufacturing Reshoring.

Learn about our Supply Chain Management (SCM) Best Practice Frameworks here.