We look back at the 1970s and shake our heads with bemused embarrassment. Disco music. Lava lamps. Leisure suits. CB radios. Yet here we are, decades later, still struggling with essentially the same B2B payment and transaction processes that were in place in the ‘70s.
Despite massive technological innovation, seismic cultural and political change, and an increasingly interconnected global economy, financial flows in the global supply chain are still performing as they did decades ago.
The supply chain itself has evolved and improved rapidly. Look at how the convergence of technology, foreign policy, and events have enabled India, China, and so many other countries to become part of the global supply chain for services and manufacturing, driving tremendous strides in supply chain efficiencies.
In the supply chain, early adopters and first movers in the ERP movement were able to reduce inventories, be more responsive, increase their variety of offerings, become more collaborative with trading partners on materials planning and forecasting, and improve overall customer service. Not only did this create a massive opportunity for smaller companies to leapfrog so-called industry leaders, it also created significant economic value on a global scale –and an explosion of wealth in the middle classes of the world’s two biggest nations, giving them a huge new stake in the success of globalization.
We saw the same thing play out with the advent of the Internet in the ‘90s. The Internet brought the world to the doorstep of even the smallest company, and the Web radically reshaped business processes and the way companies capitalize on their core competencies. Companies were able to transform themselves from bricks-and-mortar to clicks-and-mortar and differentiate themselves in new ways. New winners emerged as a result—and those who refused to change went the way of the buggy whip manufacturer.
But look at financial flows in the supply chain. They are every bit as sluggish, unpredictable, and intractable as they were in the ‘70s, making it difficult for corporations to manage their cash flow, liquidity, and working capital efficiently.
Most companies are still dealing with variable and somewhat unpredictable financial inflows and outflows. When viewed collectively, the financial flow management challenges such as slow processing, unreliable and unpredictable cash flows, costly processes, high Days Sales Outstanding (DSO), and suboptimal credit decisions require higher working capital than necessary. If these challenges were removed, the money saved could be shifted to more valuable purposes. For example, a typical $1 billion company has $148 million invested in working capital. Increased visibility in cash flows could reduce working capital needs by 15 to 25 percent, equating to a $3.3 million savings per year (assuming WACC of 15%). $3.3 million extra will go a long way in helping companies bring new innovations to market and drive competitive advantages.
Bottom line: much of the efficiency to be gained from optimizing the physical supply chain have been taken off the table. It is time to focus on optimizing the financial flows in the supply chain.
My thesis is that tackling this financial frontier will present unprecedented new opportunities for businesses and will be one of the most significant economic and commercial developments in the decades ahead. And the companies that get in front of this change will become the new winners in the global business arena.
It is time to transform the “promise” and “potential” of optimized financial flows into reality. It is time to bring the B2B supply chain—kicking and screaming if necessary—from That 70’s Show into the modern era.
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