International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 222

ISSN 2229-5518

FINANCIAL SUPPLY CHAIN

MANAGEMENT
Dr. Mohamed Baymout, Assistant Professor, OPIM Department,
College of Business, Effat University, E-mail : mbaymout@effatuniversity.edu.sa
Jeddah, Kingdom of Saudi Arabia

Abstract - Financial supply chain management consists of the holistic and comprehensive activities of planning and
controlling all the financial processes both within a company and with the external parties. In contrast to physical
supply chain, financial supply chain focuses on the flow of cash and other related financial transaction rather than the
flow of physical goods. There are parallels in physical supply chain, information supply chain and financial supply
chain. From the moment a purchase order is created, the information need to be transferred to the next parties. After
the physical goods were received from suppliers, payment will be sent. The whole purchasing process consists of all
three supply chains; effectively managing the supply chains can increase efficiency and accuracy. The traditional
financial supply chain consists of many paper based document and paper forms, especially when international trade
happens. Paper based purchase orders, invoices, checks and letter of credits are heavily involved; human mistakes
and error inputs are common; as a result, there is decrease the efficiency of the company’s working capital
management. The current financial supply chain management aims at eliminating the paper based documents, and

IJSER
improving the integrity of parties being involved, such as financial institutions, logistics, and suppliers. The two main
cycles involve in the financial supply chain management are P2P (Purchase-to-pay) and O2C (order-to-cash). These
two sets of processes and the relationship between them create the company’s working capital requirement. Treasurer
should manage and integrate both cycles seamlessly in order to maximize the cash on hand during the operating
cycle. Integrating ERP system with financial supply chain management helps the information flows to internal parties
and external parties easily, and improves the integrity and quality of the financial information being transmitted. In this
report, a case study using SAP ERP system in managing financial supply chain will be discussed in detail.

Index Terms— Supply Chain Management (SCM), Financial Supply Chain Management (FSCM), Purchase to Pay
(P2P), Order to Cash (O2C), Enterprise Resources Planning (ERP).

——————————  ——————————

that have different priorities. For example, supply-

1.0 INTRODUCTION TO FINANCIAL SUPPLY chain teams focus on reducing the total cost of
CHAIN MANAGEMENT fulfillment whereas the buyer focuses on the unit
price reduction. Therefore, the organizations start
1.1 Financial Supply Chain Management shifting to the FSCM.
Defined
According to Euro money Publications plc, "FSCM
Before we start describing the concept of financial is a set of cross-functional disciplines that manage
supply chain management, we have to understand key processes around risk, working capital and
the concept of supply chain management. information. The emphasis is on end-to-end
Traditionally, SCM is used to monitor the move of process flows” (Fallon, Sergeant, & Ensor, The 2007
the physical goods in both directions: purchase to guide to Financial Supply-Chain Management P.9,
pay (P2P) for the buyer or order to cash (O2C) for 2007). They also describe FSCM as "the
the supplier. SCM is now widely used in most management of the cash flowing between parties
organizations due to its competitive advantage in within the supply chain, whether in the form of a
decreasing the cost of the goods and improving payment or short-term finance."
customer service. SCM involves different functions

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 223
ISSN 2229-5518

IJSER
It is important for each company to setup a cross- improved network technology that leads to
functional team to work together to exploit the improved visibility through the physical supply
right opportunity to improve their performance. chain. The other reason is the deep understanding
of the end-to-end processes and the cooperation
1.2 Importance of Financial Supply Chain inside and outside the organization. The real
Management challenge for finance, treasury and banks is to
The cost of finance, insurance and transactions convince businesses that improvements in financial
usually account for approximately 5% of the cost of supply-chain processes will result in a lower cost
the unit price. Therefore, the organizations have to of goods sold, higher productivity and better
improve their managing of the end-to-end financial management information (Fallon, Sergeant, &
supply chain. Ensor, The 2007 guide to Financial Supply-Chain
Management P.11, 2007).
There are two reasons that create receptive climate
for FSCM in organizations. The first reason is the

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 224
ISSN 2229-5518

IJSER
2.0 TRADITIONAL FINANCIAL SUPPLY CHAIN MANAGEMENT
For decades, organizations have been depending
on paper-based processes for international trades,
which may lead to human mistakes. Organizations
have depended on risk management instruments
such as letters of credit and collections. In the
paper-based method, for example to manage
•

•
The buyer enters data onto the screen of a
purchasing system to create the PO, prints
and mails it
After several days, the vendor receives the
PO and manually enters it into the sales
order system
accounts payable in the supply chain, the following • The vendor prints an invoice and encloses
process typically occurs: it with the shipment and/or sends it
separately by mail
• The inventory system automatically
• The buyer manually enters the invoice
notifies the buyer to place an order, or, into the Accounts Payable system
after querying the inventory system, the
• The exchange of paper documents can add
buyer determines that an order needs to
a week to the process. If there are errors
be created
caused by manual data entry, the time can
be greatly increased.
technology has a great effect on the way the
3.0 CURRENT FINANCIAL SUPPLY CHAIN companies manage their international trades and
MANAGEMENT supply chain. It also allows the treasurer to
Many organizations are using technology to effectively manage the risk and the financial flows.
improve their processes. Now there is tendency
towards reducing the use of papers and shifting to • EDI technology allows transactions
electronic data and documents. The networked between different system and data format

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 225
ISSN 2229-5518

to automatically complete the accounts means that the company has an excess of inventory

payable and accounts receivable or that managers don’t know how to invest their
cash properly.
processes.

• System monitors the working capital/cash Four primary aspects of working capital
management are cash management, inventory
flow inside the supply chain in real time.
management, debtors management and short term
financing.

4.0 FSCM ELEMENT – WORKING CAPITAL • Cash management

MANAGEMENT It refers to a wide range of finance that
There are two main concepts of working capital includes assessing market liquidity, cash
management: Gross and Net. Gross working flow, and investments. What companies
capital means the total assets a company has such try to do is to reduce cash holding costs,
as cash, checking and savings account balances, on the other hand to meet expenses every
accounts receivable, short-term investments, day.
inventory and marketable securities. Net working • Inventory management
capital, as known as working capital, means the It is related to overseeing and controlling

IJSER
difference between current assets and current of the ordering, storage and use of
liabilities. So working capital management is components that a company will use in
defined as “the management of current assets and the production of the items it will sell as
the entire current liabilities, as also a portion of well as the overseeing and controlling of
long-term or deferred liabilities, which go to meet quantities of finished products for sale.
the financial requirements of working capital” and Successful inventory management allows
“Working capital management is the part that sits for uninterrupted production but avoid
between the purchase-to-pay and order-to- cash inventory glut and shortage.
cycles” (Kristofik, Kok, & Vries, FINANCIAL • Debtors management
SUPPLY CHAIN MANAGEMENT – Debtor's management is to minimize the
CHALLENGES AND OBSTACLES P.134). loss of risk due to bad debts. One of the
most important debtor's management
Working capital management aims to keep the elements is credit policy that guides
company able to continue its businesses and management the methods about
operations, to meet the obligations of the firm, and controlling debtors and balancing liberal
to satisfy short-term debt without excessive and strict credit. So it’s vital to identify
expenses. some appropriate credit policies for a
company such as credit terms attracting
Companies will benefit from managing cash flows
customers.
wherever they are required. In other words, a
• Short-term financing
company will have trouble paying back creditors
Short-term financing is one of the most
in the short term, or even will go bankrupt in a
important parts of working capital
long term run, if its current assets are less than
management. By identifying the
current liabilities. On the other hand, having too
appropriate source of finance,
much working capital is not always a good thing
organizations are able to receive financing
for the operations of a company，because it may

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 226
ISSN 2229-5518

to optimize cash flow and investment to Financing”, known as “Factoring”, which means
support company’s strategies supplier can get 70-85% of the accounts receivables
amount in advance from a third the factor based on
4.1 Financing (Supply Chain Financing) selling his invoices. Moreover, another supply
The Aberdeen Group defines Supply Chain chain finance variant is called “Reverse Factoring”.
Financing as: “A combination of trade financing It’s a kind of buyer-led financing instead of
provided by a financial institution, a third-party suppliers-led financing. As to the main difference
vendor, or a corporation itself and a technology between these two financing means is the
platform that unites trading partners and financial guarantee object. In the factoring process, financial
institutions electronically and provides the insititutions concentrate on one supplier and many
financing triggers based on the occurrence of one buyers, while they focuse on buyer when they offer
or several supply chain events.” (Kristofik, Kok, & financial servies,
Vries, FINANCIAL SUPPLY CHAIN
MANAGEMENT – CHALLENGES AND The benefits across the supply chain are huge. In
OBSTACLES p.135) the perspective of buyers, lower prices and greater
cash flexibility due to longer payment terms; in
The goal of supply chain finance is to enhance other words, buyers can get extension of the Days
financial efficiency of the supply chain, thus to Payables Outstanding (DPO). In the mean time,

IJSER
reduce working capital to a optimistic level supply chain finance enables sellers to receive
through factroing or reverse factoring products. financing with lower rate from bank depending on
Some supply chain finance products have been the high credit rating of buyers, which will result
provided by banks for awhile. There is a traditional in lowering the Days Sales Outsanding (DSO).
form of supply chain finance “Asset-Based

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 227
ISSN 2229-5518

Benefits across the supply chain as follows (CGI Group Inc., 2007):

4.2 IJSER
Funds Management
Funds management, as a very important
component in SAP ERP solutions, also plays a vital
role in financial supply chain management,
financial supply chain by automating the business
processes between departments and external
parties like suppliers. But, this automatic process
requires all parties to integrate into one electronic
system to keep track with the invoices and
especially in working capital management. It payments. Therefore, if one of the external parties
provides all the functions for reproducing budget is still using the paper based invoicing, the
structure. financial supply chain cannot be efficiently
managed. The cost will be higher for the
What’s more, funds management is aimed to
companies, because they need to handle both the
budget all revenues and expenditures, monitor
electronic system and paper based system.
funds movements in the future, and to prevent
Moreover, with the use of paper processing, the
overspend.
payment can often cause huge delays, therefore,
worsen the business relationship between parties.
5.0 CHALLENGES OF FINANCIAL SUPPLY
Effectively manage the working capital allow
CHAIN MANAGEMENT
Many companies want to manage their financial company to achieve higher current ratio and better
supply chain effectively, however, implementing a cash management. Treasurers need to make sure

system and managing the external parties are often that the companies should always meet the
difficult and lead to many problems. Companies minimum liquidity level in order to ensure daily
want to make the collaboration smoother in the operations. Supply Chain Financing is the common

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 228
ISSN 2229-5518

method used by the companies. However, to and pays for the raw materials, semi-finished or
optimise the process of supply chain financing, finished products, or services in order to
banks would need to involve in the process. Banks accomplish its business operations (Kristofik, Kok,
need to check the credit of the companies in order & Vries, FINANCIAL SUPPLY CHAIN
to provide financing on the assets. Thus, banks MANAGEMENT – CHALLENGES AND
need to evaluate the risk of the companies by OBSTACLES P.136, 2012).
looking at the financial positions. Many SMEs do
From Purchaser side, the first step in P2P process is
not have structured financial statements, so it is
costly for companies to prepare audited financial to create purchase requisition. From financial
perspective, accounting assignment must be filled,
statements for banks.
such as GL Account, Cost Center, Fund, etc. Fund
or Cost Center or Both deal with working capital or
6.0 BUSINESS CASE - SAP FINANCIAL cash flow. At this step, from budgeting
SUPPLY CHAIN MANAGEMENT perspective, system is able to check out if there is
SAP Financial Supply Chain Management (FSCM) enough Fund to pay what to purchase. After
helps streamline and automate the whole financial approval, purchase requisition can be converted to
process. It integrates with other SAP components a legal purchase order (PO) with the same financial
such as Finance (cost and fund management), data. Also, payment term will be agreed in the PO.

IJSER
Logistics (Sales and distribution, production Once get the shipment, goods receipt (GR) will be
planning and material management), and BI created. Before an account payable occurs, there is
(reporting and analysis). a process called three-way match. It means that
finance has to make sure that PO, GR and
6.1 P2P Cycle – Accounts Payable
customer’s invoice are the same. Once confirmed,
In SAP system, the purchase-to-pay (P2P) cycle
an incoming invoice will be created to record an
(also named as material management) deals with
accounts payable. Finally, finance pays what
the accounts payable of an organization. During
agreed on payment term.
the P2P cycle, the Organization selects, receives

During the P2P process, the following elements are • Days Payables Outstanding (DPO) is used
under consideration: to measure the average number of days

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 229
ISSN 2229-5518

taken by an organization to pay its • Strategically managing payments to

creditors in a given period ensure that the organization is able to take
• Balance between short/over of inventory advantage of early payment

reconciled with the appropriate invoice (Kristofik,

6.2 O2C Cycle – Accounts Receivable Kok, & Vries, FINANCIAL SUPPLY CHAIN
In SAP system, the order-to-cash (O2C) cycle (also MANAGEMENT – CHALLENGES AND
named as sales and distribution) deals with the OBSTACLES P.137, 2012).
accounts receivable of an organization. During the
O2C cycle, from a supplier’s perspective, O2C From supplier side, financial recode will be based
begins when a quote is prepared for a customer on sales order, goods issue to customer, and
and ends when payment has been received and invoice to customer to confirm accounts receivable.

IJSER
During the O2C process, the following elements sometimes the largest or second largest
are under consideration: asset on balance sheets
• An organization usually does not know
• Day Sales Outstanding (DSO) is used to beforehand which receivables will become
measure the average number of days uncollectible, so receivables need to be
taken by an organization to collect
shown at net value
payment from completed sale in a given • If sales is decreasing, DSO would tend to
period
fall even if there is no change such as with
• Prioritising collections is more valuable
seasonal sales. Finance should avoid to be
than payments, because receivables are misled
lowers operating costs, enhances cash flow
6.3 Streamline FSCM by Integration of predictability, and increases automation and
Account Payable and Receivable standardization.
SAP FSCM integration helps streamline the O2C
and P2P processes. It results faster cash collections,

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 230
ISSN 2229-5518

6.3.1 Idea Model of Accounts Payable and period. For example, a retail store sells its products
Receivable and collects money from customers, and then uses
The idea model is that the collections of an the money to order products from suppliers and
organization can cover payment in any given sells to customers again. The working capital sits
between P2P and O2C cycle.

6.3.2 IJSER
Collections and Dispute Management
to Streamline the Idea Model
Collections and Dispute Management mainly
focuses on increasing the cash flow in the accounts
•
•
Increase working capital
Retain valuable customers

receivable area thereby increasing the working

capital. Because customer payments are highly
unstable and volatile in nature that it makes it
difficult to predict receivables, the Collections and
Dispute Management system helps to (SAP):

• Reduce DSO
• Resolve customer disputes quickly
• Gain insight into Customer Disputes
• Track and follow up receivables
• Increase payment on time
Some of the most important features of SAP Collections and Dispute Management

Collections Management Dispute Management

• Improving collection success rates by proactively • Controlling and streamlining dispute case

identifying, prioritizing and targeting the most processes

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 231
ISSN 2229-5518

critical past due accounts • Centralizing component for handling dispute

• Minimizing collections workload and resource cases

cost • Integrating to financial and logistical processes

• Monitoring collections • Detecting quality issues, controlling workload,

and tracking dispute cases

financing. In public sector, from cash flow

6.4 Streamline FSCM by Fund Management perspective, the funds management must be in
for Public Sector place for any transactions.
In many organizations, for example public sector,
revenue collection is centralized. Any department Finally, as “working capital management is the
expenses will be fund driven in SAP system. That part that sits between the P2P and O2C cycles”,
means if funds is not available, for example, the SAP case analysis provides detail explanation of
purchase will not happen because at the purchase how FSCM is working in an ERP system. P2P
requisition and purchase order stages, the represents accounts payable, and O2C represents
validation for fund will be automatically checked accounts receivable that has mainly been dealt by
Collections and Dispute Management.

IJSER
by system; if funds is available, P2P process will
help streamline the FSCM.

7.0 CONCLUSION
The paper defines FSCM as to manage key
processes around risk, working capital and
information between parties within the supply
chain. Traditionally, FSCM is paper-based and
managed in different functional departments.
Currently, due to advanced networking and EDI
technologies, FSCM breaks the functional silos by
crossing different functional departments to
complete end-to-end business processes in real
time.

To manage supply chain financially, the most

important element is working capital that
including cash management, inventory
management, debtors management and short term

REFERENCES

1- CGI Group Inc. (2007). SUPPLY CHAIN FINANCE : A new way for trade banks to strengthen customer
relationships . From http://www.cgi.com/files/white-papers/cgi_whpr_74_supply_chain_financec_e.pdf

IJSER © 2015
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 6, Issue 5, May-2015 232
ISSN 2229-5518

2- Fallon, P., Sergeant, P., & Ensor, R. (2007, Aprial). The 2007 guide to Financial Supply-Chain Management P.11.
(P. Robinson, Ed.) Retrieved January 2014 from
http://www.euromoney.com/images/502/51463/financial_supply_chain_management.pdf

3- Fallon, P., Sergeant, P., & Ensor, R. (2007, Aprial). The 2007 guide to Financial Supply-Chain Management P.9.
(P. Robinson, Ed.) Retrieved January 2014 from
http://www.euromoney.com/images/502/51463/financial_supply_chain_management.pdf

4- Kristofik, P., Kok, J., & Vries, S. (n.d.). FINANCIAL SUPPLY CHAIN MANAGEMENT – CHALLENGES AND
OBSTACLES P.134. Retrieved January 2014 from
http://www.acrn.eu/resources/Journals/Joe022012/201202h.pdf

5- Kristofik, P., Kok, J., & Vries, S. (n.d.). FINANCIAL SUPPLY CHAIN MANAGEMENT – CHALLENGES AND
OBSTACLES p.135. Retrieved January 2014 from http://www.acrn.eu/resources/Journals/Joe022012/201202h.pdf

6- Kristofik, P., Kok, J., & Vries, S. (2012, November). FINANCIAL SUPPLY CHAIN MANAGEMENT –
CHALLENGES AND OBSTACLES P.136. From http://www.acrn.eu/resources/Journals/Joe022012/201202h.pdf

7- Kristofik, P., Kok, J., & Vries, S. (2012, November). FINANCIAL SUPPLY CHAIN MANAGEMENT –
CHALLENGES AND OBSTACLES P.137. From http://www.acrn.eu/resources/Journals/Joe022012/201202h.pdf

8- SAP. (n.d.). SAP Financial Supply Chain Management - Collections & Dispute Management . Retrieved January

IJSER
2014 from http://www.mphasis.com/pdfs/sap-financial-chain-management-collections-dispute-
management.pdf

IJSER © 2015
http://www.ijser.org