The Role of Finance in Supply Chain

Management

Lars Stemmler

Introduction ................................................................................................. 166

2 The Role of Finance in the Supply Chain ................................................... 166
3 Financial Cost Drivers in the Supply Chain ................................................ 167
4 Solutions for Supply Chain Finance ............................................................ 170
5 Supply Chain Finance: More than Supply Chain Management? ................ 174
6 Supply Chain Finance: Conclusion ............................................................. 175
7 References ................................................................................................... 176

Summary:
Traditional supply chain management focuses on both materials and information
flow. However. considerable cost reductions can also be achieved through
optimally designed financial flows within the chain. Savings due to minimized
stock levels may easily be offset by the costs to finance the remaining inventory.
Inventory carrying costs do not only comprise offinancing costs but also of costs
associated with taking credit risks upon sale and taking out insurance. Therefore.
it is the scope of supply chain management to integrate three flows: product.
information and financial. Integrating financial services into supply chain
management will not create a new (financial) product. It is however about
realizing unused opportunities for cost reductions.

Keywords:
Supply Chain Management. Supply Chain Finance. Inventory Management. Short Term
Asset Management

S. Seuring et al. (eds.), Cost Management in Supply Chains

© Springer-Verlag Berlin Heidelberg 2002
166 L. Stemmler

1 Introduction
Traditional supply chain management (SCM) focuses on eliminating waste in the
pipeline, i.e. minimizing mass and time. Savings can be achieved through an
integrated management of both the physical flow of materials and information
along the chain. However, considerable cost reductions can also be gained through
optimally designed financial flows associated with the physical movement of
goods. While companies tend to target the more tangible cost elements such as
handling and transport, the costs to fmance products moving through the supply
chain are prone to being forgotten. Cost savings due to minimized stock levels
may easily be set off by the costs to fmance the remaining inventory. Inventory
carrying costs do not only comprise of fmancing costs but also of those costs
associated with taking credit risks upon sale, supporting trade credit and taking out
insurance. Furthermore, the cash flow and revenue stream generated by successful
order fulfillment must be looked at closely. Identifying costs associated with
finance which are driven by logistical activities is not an isolated task of the
treasury department. On the contrary, it is the role of supply chain management to
integrate three flows: product, information and fmancial. After defining the role of
finance in a supply chain the drivers influencing finance related logistics costs are
identified. Based on this theoretical framework practical solutions adopted in the
logistics industry are explored answering the question of how to integrate financial
flows into logistics. This market review will be put back into the theoretical
context developed beforehand.

2 The Role of Finance in the Supply Chain

SCM can be defmed as a management concept aimed at managing the processes
along the supply chain. I This defmition implies a view limited to optimizing the
physical product flow and the information flow and is far too short-minded. By
definition, an integrated management concept cannot exclude fmancial processes
from the scope of SCM. Optimizing the finance flows can deliver a yet untapped
potential for cost reductions. The length of any supply chain is determined by its
cash-to-cash cycle. 2 As investors are interested in a decent return on their invested
capital, any supply chain is basically fmance related. Cash is turned into goods
that in turn are sold to generate more cash. This implies the integration of finance

See Weber, Dehler, Wertz (2000), p. 264.

2
See Chopra, Neher (2001), p. 8.