WHEREAS THE PRODUCT supply chain is achieving both visibility and velocity
in the New Economy, the money supply chain lags far behind, with most companies
still working under Old Economy, 60-day payment schedules.
But an emerging system that automates payments to suppliers along the
supply chain could free up trillions of dollars in working capital. Service
providers such as EDS and financial institutions including Bank of America
are partnering with marketplace platform providers such as Ariba and Commerce
One to launch these services.
The system will be triggered by matching a purchase order to a shipping
document, with the invoice sent to a financial institution for payment
rather than to a customer.
Here's how it will work.
In the commercial supply chain, company A sells products to company B,
which in turns sells products to company C. At every stage, everyone who
is a seller carries the buyer for 60 days with all of the suppliers driven
by a single order.
With the proposed system in place, the financial institution will be
able to pool the transactions and fund each company as it executes an
order. Financial institutions will match the financial engine -- accounts
receivable and accounts payable records -- to the supply chain so that
every company is paid immediately and electronically via a third-party
"For example, [General Motors] will issue a purchase order. The
order triggers the series. Then financing gets attached, and each participant
in the supply chain gets paid," said John Macauley, a consultant
at San Francisco-based A. T. Kearney (ATK).
The biggest challenge to the implementation of the proposed system is
the Old Economy culture that says companies should hold on to their money
as long as possible. In addition, some are unwilling to accept the discount
rate, according to John Hagerty, vice president of e-business applications
at AMR Research in Boston. "When somebody pays for you, [they are]
taking the risk, and risk doesn't come for free," Hagerty said.
Nonetheless, capital for these services will come from a major financial
institution, which will act as a utility to deliver payments across the
supply chain, just as a power utility delivers electricity to all of its
customers. "Banks desperately want to remain relevant in e-business
and are trying to figure out how to plug in with money, service, and credit
where it is needed," Hagerty said.
The technology required sits on top of and integrates with the same data
feeds that e-enable and manage the physical supply chain.
Companies such as Mountain View, Calif.-based Aceva, heavily financed
by Oracle, use a combination of Java Enterprise edition, XML APIs, and
"snippets" of HTML pages to serve into a customer's HTML page
to simplify the deployment process and to integrate with order-entry,
ERP (enterprise resource planning), and legacy financial systems, as well
as supply-chain and logistics packages, said David Pann, vice president
of product management at Aceva.
Aceva's Collaborative Financial Management (CFM) platform integrates
at the business level, Pann said. "You want to avoid plugging in
at the data level because you won't get all the intelligent business processes
triggered," Pann warned.
Meanwhile, ATK and parent company EDS are developing a joint service
offering to deliver an end-to-end capital management service that will
include processing services by a "multienterprise utility,"
ATK's Macauley said.
"We are working with major financial institutions to provision financing
at point of sale," Macauley said.
According to Macauley, the new ATK-EDS back-office services will be for
financial processing that is outsourced to a financial institution that
will aggregate volume across enterprises to achieve low-cost performance.
"It's like apps on tap," Macauley said.
Bank of America and Ariba are also partnering and headed toward delivering
these same financial services to Ariba's marketplace customers. In the
deal, set to launch by the end of the second quarter, Bank of America
will launch a "financial services engine" to offer a variety
of payment and finance options on Ariba's marketplace, according to Brad
Russell, a BofA spokesman. The system will integrate with EDI (electronic
data interchange) and XML and will use a variety of payment instruments.
The deal is not exclusive with Ariba and is only the first in a multistage
effort to finance the supply chain, he said.
Change is under way in how the capital market is rewarding companies
that can afford to invest in intangibles such as customers, channel, and
product, Macauley said. Company assets are often tied up on the balance
sheet, and there is limited opportunity to focus the few differential
assets they have on what really counts. "Companies want to invest
in things that have strategic differential value," he said.