Engineering Efficiency in the Global Supply Chain Ecosystem
By Gerald Sun, Vice President, Business Development, Trade and Industry, Asia Pacific, Mastercard
In our contemporary, hyper-globalized world of trade and commerce, being digital could well be assumed to be the default. But that assumption would not necessarily be an accurate one.
Most business-to-business transactions today are comprised of distinct yet interwoven processes, spanning a range of departments, both within and without an organization. Typically, procurement sources, treasury funds operations, logistics arranges for physical goods movements and finance arranges and reconciles payments. Partners and suppliers feed into this central nervous system, contributing to a company’s entire supply chain.
It is completely intuitive therefore, that integration sits at the core of creating a single, end-to-end supply chain. The advent of Enterprise Resource Planning (ERP) – while undoubtedly transformational in many ways – was only the tip of the iceberg. Much remains to be done in the quest for a seamless, tightly integrated, and interoperable global supply chain ecosystem, especially in the area of financing. With financial transactions being embedded into the core of all businesses, driving efficiencies in this area would have ripple effects across the entire system.
Straight Through Processing (STP) – the complete automation of financial transactions from their initiation through to their settlement –would allow companies to dramatically lower time/cost inefficiencies, eliminate manual handling and reduce errors and fraud compromise points. However, there are a few imperatives the industry needs to collectively tackle, before the vision of STP can be fully realized.
The STP Conundrum: Mission Critical, yet Elusive
Unfortunately, STP continues to be largely elusive. Counter-intuitive as this is, it can be attributed to the complex web of supply chains today - the majority of discrete processes in a supply chain require various internal departments to rely on and interact with service providers of their own and their business counterparties. Although ERP implementations are the norm across most industries, the points of hand-off between various links in the supply chain are still often paper-based and/or analog, rather than digitally synchronized.
For most companies, high volumes of paper-based interoperation is still a reality
STP therefore becomes an impossibility to implement; this significantly and adversely impacts system efficiency.
A Sea of Digital Islands
For most companies, high volumes of paper-based interoperation is still a reality, preventing them from enjoying the full benefits of the end-to-end digitization of their supply chains. This dissonance has spawned a sea of Digital Islands, disconnected from each other and therefore limited in their overall impact. For example, many fast-moving consumer goods (FMCG) companies continue to rely on paper delivery orders and invoices with their clients. These FMCGs have ERP systems, as do many of their customers. Yet these Digital Islands continue to interoperate on paper-based documents. This inefficient analog-digital environment increases Days Sales Outstanding (DSO), lowers demand visibility and makes forecast more difficult, which in turn results in lost sales opportunities; a ‘lose-lose’ across the ecosystem.
Cross-border trade in particular is most impacted by paper-based hand offs between Digital Islands. Consequently, this leads to both escalating operating and capital costs, as well as an increased exposure to errors, potential fraud, and a lack of real-time visibility over the supply chain.
Joining the Digital Dots
Navigating through this sea of Digital Islands is fraught with many pitfalls. Perhaps the most treacherous of which is the loss of sales opportunities and potential competitive advantage. There is an urgent need to connect these digital siloes, via unifying standards of interoperability. While this may seem like a complicated effort, the benefits of interoperation far outweigh the risks of remaining isolated.
Unified standards for interoperation create an opportunity to streamline the entire procure-to-pay process, and reduce operational, technical and financial costs across the chain. The establishment of such standards has been tried and tested before, but largely within just one or two industries (the automotive and aviation manufacturing sectors are prime examples). What is now needed is the widespread adoption of standards, such that they are endemic across the global supply chain ecosystem.
Analogous to the development of the electrical socket, the ubiquitous USB or even the humble shipping container are the move to a unified interoperable standard proved transformational for those respective industry sectors. From requisitioning to invoicing, and ordering to collecting, the entire process benefited from becoming faster, simpler, safer and more transparent – the perfect use case for STP.
The Final Mile
In any effort to drive standardization across the board, the role of an aggregator cannot be understated. Critically, such an aggregator needs support from anchor players and to address SME access, as SMEs represent the majority of businesses in any country. While there are many industry vertical bodies that advocate digital standards, there aren’t many that look at digital interoperation across verticals – an essential part of the effort to drive STP across global supply chains. The Digital Standards for Trade (DST) initiative is one such body driving the agenda actively. They are working in partnership with vertical bodies like the ICC Banking Commission and with local authorities to agree on joint standards.
Their efforts are a promising start to the journey towards STP – a destination well within our collective grasp and one worth striving to reach.