I interviewed Johan A.H. Dillerop who discussed Why Fusing the Physical and Financial Supply Chain is a Strategic Enabler for Future Growth and Supply Chain Agility.
It’s nice to speak with you today, Johan. I’m looking forward to hearing your views on the topic of why the fusing of the physical and financial supply chains is both a strategic enabler for growth and also for supply chain agility. Can you first provide a brief background of yourself?
Yes, I can, Dustin. Thank you for having me on your blog. I am based in the Netherlands, and I work for a company called GT Nexus. I’ve been working in strategic communications for the past 20 years as well as operational excellence in end-to-end supply chains.
Can you talk about the reason why the diffusing of physical and financial supply chains is good?
In many companies I talk to, there is a disconnect between movement of physical goods and the movement of the funds in their physical supply chain. Like in finance, it’s often seen as a thing to improve working capital or enable payment-term extensions. The bottom line is for not only the buyers but also for the suppliers.
Let me give you an example. If finance says, “I want to extend my payment terms from sixty to ninety or even a hundred twenty days,” that definitely will affect the finance KPIs from that supplier. He has to choose if he’ll buy my raw material or will I pay my employees?. The cost of that will be put in supply chain cost somewhere else. It’s not always a good idea to extend your payment terms. By choosing them, linking them to the physical product, you can offer new things. I feel new and improved ways of financing and injecting capital into your supply chain towards your suppliers.
Can you talk about how this is done in practice?
It requires a mind shift, and it typically requires people from finance, procurement, and supply chain to work together and to align their goals internally and to be sure that everybody’s on the same page and speed.
By choosing the supply chain as a strategic *enabler requires value chain and requires fundamental supply chain transformation. In most cases, supply chain finance processes express a single need. In some cases, that’s all it takes and they decide. Automation initiatives and invoice programs that addresses the challenge. That’s short-sighted. What if you provide your capital toward your suppliers and then get stronger and that will furthermore make them stronger instead of drive cost up.
What we do is we bring everybody together. People work from their same PO and can acknowledge that PO and can inform his buyer if he has the raw materials on hand or if he has to order them and the work in progress. He can share inventory management, factory management, work-in-progress management. Based on that data, those KPIs, he’s able to share data that is part of the initial PO. Let’s say 30 percent of the PO will be paid up front toward my supplier so he can act accordingly and he doesn’t have to go to his banks or financial institutions in his country; let’s say somewhere in Asia, where they’re farther than in Europe.
Do you have any examples of where this has been applied in practice or some success examples?
I think one of the most successful examples at this moment and being mentioned, for example, in the finance is the business strategy of an incorporation with part of the World Bank.
The * (6:25—unclear) capital toward their suppliers * (6:28—unclear) based on the technology transformation where * (6:39—unclear) toward their suppliers by * (6:43—unclear) their financial KPIs, the performance KPIs. Really good buyers see that, implement them, search and * (6:54—unclear), working hours, environmental issues, et cetera, and * (7:00—unclear) work relations by * (7:03—unclear). That’s one many * (7:10—unclear) industry. You use supply chain * (7:13—unclear).
They are self-funded through a supply chain finance program that makes them carry their supplies through approving the invoice. For the buyer, it’s beneficial because they get better interest rates on their money and their supplier gets better interest rates by receiving money up front and doesn’t have to manage for 10, 11, 12 percent , but he can lend at 5 percent . There are many missteps and initiatives within governance. There are ones who have supply chain finance programs. For small and medium enterprises, it’s always I believe that it always should be linked to a physical goods as well.
Thanks, Johan, for sharing today.
About Johan A.H. Dillerop
Johan A.H. Dillerop
Challenging the Status Quo by Transforming your Supply Chain Resulting in a Collaborative Value Chain @ GT Nexus