Why you should care about "supply chain convergence"

The idea of physical and financial supply chain convergence used to be the province analysts and academics rather than those who focus on the day-to-day in finance. That is no longer the case. This previously esoteric concept has real implications for current enterprise operations. Nowhere is this more visible than in the dual perspectives of Coordination and Creation.

Coordination
This category encompasses the coordinated monitoring and management of parallel flows of documents and information. Buy-side processes of procurement, receiving, and payment are visible alongside sell-side processes of order management, fulfillment, and invoicing.

As a first step, fulfillment progress steps trigger the release of funds to suppliers: advance payments to support manufacturing, incremental payments upon shipment release, another after clearing customs, etc. More interestingly, those stages can trigger dynamic financing events. Each stage represents another requirement met and one less potential roadblock to successful delivery. As rates are tied to risk, each stage also enables securing rates preferable to what could have been secured from the outset.

This perspective honors the heritage of traditional trade finance, with customs clearance, letters of credit, and all the paperwork that they entail. It also helps expand its breadth beyond pre-manufacturing and pre-shipment finance to include in-transit and post-approval financing as well. In short, ‘convergence’ enables a continuum incremental supplier financing opportunities.

This is a welcome development, but is relatively modest in relation to the next perspective.

Creation
There is an interesting thing happening in traditionally product-oriented companies: they’re beginning to embrace connectivity and the Internet of Things. First, they identify existing products which already collect some amount of information that can be harvested. If those products don’t already have built-in communications capabilities to share that data, they can be retrofitted. Next, and far more interestingly, they begin incorporating this line of thinking upstream into the product design process.

Think of this as design for second-order monetization. Here, the challenge is not in making products that accomplish their intended functions well; it is in designing them from the outset to collect and report data that can, when aggregated, prove valuable enough to sell as a new source of revenue. And this is another area where the physical and financial worlds converge: collaborating in the upstream design process to envision and facilitate downstream revenue generation through altogether new data-based lines of business.

Wrapping Up
If nothing else, the opportunities presented by supply chain convergence should be a call to arms against functional silos. When finance, supply chain, product design, and manufacturing work together, we create enormous potential for both top line and bottom line growth. It will take some work, but the potential for incremental financing and data-based monetization both highlight what’s possible when we embrace the concept of convergence and get started bringing it into reality.

About Scott Pezza

As principal analyst with Blue Hill, Scott’s research addresses the main challenges facing the Office of Finance and the functions it manages. Key topics concern Payables and Receivables Management, Subscription Billing, Supply Chain Finance and Enterprise Performance Management.

About Blue Hill Research

Blue Hill Research is a research and advisory firm focused on educating businesses to make more informed technology purchasing decisions. We profile end-user organisations, discussing the challenges they face, sharing what has worked for them and helping peers better understand what options may work for them when tackling similar issues.