Rebooting Financial Supply Chain In New World Order
Summary: The strain on the supply chain has brought to the fore the importance of a stable financial supply chain for a business. Fashion brands can no longer afford to neglect the financial aspect of the supply chain. If unmanaged, this can create a working capital and cash flow crisis for the company.
The fashion industry is still coping with the curveball thrown by the pandemic. There are many things that brands are still trying to come to grips with — supply chain disruptions, unsold inventory, and unrealized payments, just to name a few bottlenecks. All this continues to impact operating margins, working capital, and eventually share prices of the company in financial markets.
To paint a grim picture, if a fashion retailer closes shop or down-scales operation in New York, it means that a worker in Bangladesh goes without wages for months. The impact shows how connected and fragile the financial supply chain in the fashion industry is. It also underscores the need to look at Financial Supply Chain Management (FSCM) through a new lens to meet these emerging challenges.
Re-imagining the FSCM
The only silver lining about the pandemic was that it awakened finance executives from years of slumber and compelled them to take a fresh look at the entire financial supply chain management, rather than treating its components in silos. FSCM is the end-to-end process that involves the procure-to-pay cycle, working capital management, and order-to-cash cycle business processes.
Taking risk factors into consideration
The crisis triggered by the pandemic has routed the finance heads to not just confine themselves to reporting financial data and controlling receivables and payouts. Today it stands for long-term robust strategy formulation and execution that keeps a close watch on world events that are capable of disrupting the supply chain.
In a hyper-connected global supply chain, a company must also take into consideration geopolitical risk factors and their influence on the supply chain, and prepare for a short-term contingency as well as plan for long-term risks.
The finance team must work very closely with the sales, marketing, operations teams, and the network of suppliers for an end-to-end solution to drive greater synchronization in the system. Something as routine as inventory optimization should have a multi-department involvement for lasting outcomes.
The digital supply chain for visibility
The increased interaction with suppliers also underlines the importance of a digital supply chain that offers transparency and makes it easier to drive value through greater insights using digital tools.
For the company to truly improve its financial supply chain management, it needs a greater degree of transparency in the complex network of the digital supply chain. Finance has to be closely integrated into the system to ensure that the entire supply chain from sourcing to delivery works seamlessly.
Inventory and warehousing management
With the pile of unsold stock everywhere during the last two years, inventory management and warehousing came into sharp focus. A company has to ensure that these elements are flexible enough to not lock capital for too long. Just-in-time inventory that worked seamlessly for many years no longer holds good. Similarly, holding on to raw material inventory is a strict no-no.
Supply chain financing (SCF)
A brand’s supply chain resilience requires greater engagement with the vendors to help meet its working capital needs. In a May 2020 McKinsey survey, 93 percent of business leaders shared plans to increase supply chain stability, with as many as 44 percent willing to do so at the cost of short-term savings.
Legacy banks have been slow in responding to supply chain finance needs. New-age fin-tech companies offering transaction-based solutions are getting into the fold. For instance, a US-based C2FO is offering a $1 million receivables financing facility, enabling buyers to make early payments to suppliers in return for a discount. It entered into a tie-up with a Los Angeles-based clothing major in June this year for the same
Sustainability in the balance sheet
Increasing the shareholders’ value is also now linked with the company’s performance in sustainability – reducing the carbon footprints and paying decent wages to workers across the value chain. Tracking and monitoring data provide companies with proof points for progress in the digital value chain.
In one such initiative, PVH group tied up with HSBC bank USA to provide suppliers with access to critical funding based on a set of science-based environmental targets and other social parameters.
HSBC and Boston Consulting Group (BCG) estimate global supply chains need $100 trillion in investment by 2050 to achieve net zero emissions targets. Almost half of this amount is required by small and medium enterprises (SMEs).
In evolving to be a better version of themselves, fashion companies need to adopt technology to bring traceability to the financial supply chain. Strong collaboration and partnership with channel partners along the supply chain have to be built on transparency, trust, and better communication.
As business conditions continue to sap cash flow, and energy and raw material prices are on the rise, managing working capital will be key to the continual growth of apparel companies. It means CFOs shall have their hands full in juggling the finances to keep the companies on a growth path.
1. In the wake of the pandemic phase, the entire FSCM has to be viewed in a new light.
2. Finance has to be closely integrated into the physical supply chain fabric.
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