Global supply chains have become increasingly complex and new financial infrastructures are developing to support these increasingly complex networks of firms. A set of financial service firms, including large banks and specialized financial institutions, have developed services to support suppliers that require liquidity and working capital. An executive at Citibank estimated that Citibank alone performs $2-3 trillion per day in trade finance transactions, which typically include loans to suppliers to buy raw materials, components and finished goods. Given that 2013 U.S. GDP was less than $17 trillion, this is a substantial amount of activity designed to primarily support procurement operations around the world. As large manufacturers have tightened their supply chains and extended payment terms, their suppliers have had difficulty financing their operations. This difficulty of obtaining funding has severe implications on cash flow, working capital, and profitability and can sometimes lead to bankruptcies and supply disruptions.
With Capital difficult to procure, firms must develop methods that organizations use to finance their diverse and increasingly underfunded supply base. While, factoring and reverse factoring inventories and receivables has often been called supply chain finance (SCF), the topic as we define it, goes far beyond those practices. Broadly speaking, SCF is about how firms are funded through their supply chains and how they fund their supply chains. We believe that SCF will have a great impact on all entities in the supply chain in the future. There is little published research on the topic of SCF in the supply chain literature, and we believe the topic is in the early stages of development.
SCF is larger than simply finance plus supply chain management. That is, there is a symbiotic effect of the combination of supply chain management and finance that makes the whole greater than the sum of the parts. As finance is related to funding, our definition of supply chain finance is:
Using the supply chain to fund the organization, and using the organization to fund the supply chain.
Supply chain finance involves utilizing the supply chain to develop savings, generate profits and efficiently manage assets to fund the firm. It includes both working on improving the Income Statement and the Balance Sheet for a firm and/or its suppliers. The supply chain can be a source of funds for the firm: a firm can use its supply base to generate funds and act as a source of funding for the organization. Additionally, helping one’s suppliers fund themselves is part of SCF. Supply Chain Finance enables a firm’s managers to optimize the balance sheet to fund the supply chain and by using financial instruments to mitigate risks in the supply chain. In addition, SCF complements standard Corporate Finance activities by reducing the firm’s reliance on other sources of funding reducing costs to ensure that profitability/ retained earnings is maximized.