Abstract Number: 020-0115
Abstract Title:Challenges of Supply Chain Finance: a Hierarchical Model
Prof. Dileep S. More
Assit. Professor,
Operations Management Group
Indian institute of Management Calcutta,
Kolkata- 700104
India
E-mail:
Mobile: 919432013382
Prof. Preetam Basu
Assit. Professor,
Operations Management Group
Indian institute of Management Calcutta,
Kolkata- 700104
India
E-mail:
Mobile: 919007112099
Abstract
Global sourcing, distribution and outsourcing have increased the complexity of supply chain (SC) networks and operations. The language of money binds various segments of any SC, in which the operational managers are busy dealing with information and material flows to facilitate the desired cash flows. However, the variety of challenges in supply chain finance (SCF) imposes a number of constraints in managing the cash flows in the SC. The extent of influence each challenge enforces on SC partners differs and often leads to inefficient processing of transaction activities. In this study, a hierarchical relationship model of the challenges faced by SCF has been developed establishing the relationship dynamics among them. The study also identifies appropriate action plans, policies and strategies for deploying SCF with the purpose of reducing vulnerability and managing risks in the entire SC.
Key Words: Supply Chain, Supply Chain Finance, Challenges, ISM, Hierarchical Relationship Model
1. Introduction
In today’s business world firms compete on a global platform and the competition is between their supply chains (SC) rather than between isolated firms. This competitive pressure and globalized networks have resulted in complex and dynamic SCs(Zhang et al. 2003). Supply chains now require cross-company integration for optimized flow of materials, information and funds amongst the SC partners. The focus of supply chain management to date has been on the design and optimization of the flows of goods and information. In terms of the physical supply chain, collaboration and synergy amongst the supply chain partners has been achieved through practices such as ‘collaborative planning and forecasting’, ‘vendor managed inventory’, ‘enterprise resource planning’ (Cohen and Lee 1988, Thomas and Griffin 1996, Chen and Paulraj 2004). However, one aspect that has been often neglected is the financial flows along the SC (Cooper et al. 1997, Pfohl and Gomm 2009). The financial flow runs concurrently with the physical flow to manage and control the exchange of financial information and payments among the SC partners (Keebler 2002, Avanzo et al. 2003). However, the language of money binds various segments of any SC, in which the operational managers are busy dealing with information and material flows to facilitate the desired cash flows. Closer relationships with partner companies and an integrated SC are accepted in any enterprise as an effective way to cut costs and increase business agility, yet the financial communications which form an essential part of the continuum of the business operation are often overlooked. Efficiency in financial operations is therefore equally critical to efficiency in SC operations.
In the last few years SC service providers and financial institutions have come up with many solutions to release the trapped value in the financial flows of the SC. This has lead to the emerging field of Supply Chain Finance (SCF) (Robinson 2007, Aberdeen report 2006, Demica report 2007). SCF can be defined as managing, planning and controlling all the transaction activities and processes related to the flow of cash among SC stakeholders in order to improve their working capital. It is a combination of technology and trade financing that unites the buyer and the supplier.
In a globalized SC, the cash flows are subjected to a variety of complex issues and challenges. This complexity and variety of challenges in SCF imposes a number of constraints in managing the cash flows in the value chain. The extent of influence each challenge enforces on the SC partners differs and often leads to inefficient processing of transaction activities. The SCF challenges faced by a firm can be internal as well as external. The internal challenges may be results of lack of knowledge and organizational structure and processes for a successful SCF implementation. The external challenges may be linked to complexity of sourcing and delivery and uncertainty in demand forecasting. Some of the challenges may not be under the purview of management control and may induce the SC partners to take innovative actions to respond to the changing environment in order to maintain the desired cash flow in the SC. The dynamics of challenges continuously change the constraints that contribute to difficulties in managing and controlling operations and implementing effective strategies in the SCs to enhance SCF.
It is important to analyze and understand how the different challenges of SCF interact and gain an insight into their complex dynamics. Interpretive structural modeling (ISM) is a useful tool that has been widely applied to identify and summarize relationships among variables which define a problem or issue (Sage 1977). The technique is an interactive planning and learning technique and allows a group of people or individual to develop a compressive ordered structure of a set of elements of the system that define an issue or problem (Bolanos et al. 2005; Faisal et al., 2006). In this paper, we have used the ISM methodology to analyze the challenges faced by SCF and establish inter-relationships between them. The study also identifies appropriate action plans, policies and strategies for deploying SCF with the purpose of reducing vulnerability and risks associated with the financial SCs.
2.Research methodology
The following systematic procedure was evolved to meet the objective of the study reported in this paper.
- Identify and list key challenges of SCF
- Establish contextual relationship between challenges of SCF and develop a structural self-interaction matrix (SIM)
- Prepare direct and final reachability matrix
- Carry out level partition and build hierarchical relationship model
- Analyze the relationship dynamics and identify the means to deploy SCF.
To accomplish steps 2 to 4, the steps used in interpretive structural modeling (ISM) have been made use of. The ISM is a simple approach which transforms unclear, poorly articulated, ill-structured mental model of systems in a compact, clear, visible, and well-defined format (Jharkharia and Shankar, 2004;Thakkar et al., 2007). The details of how these steps have been carried out are discussed in the following sub sections.
2.1Identify and list key challenges of SCF
There are various ways to identify challenges of SCF. One may use literature review, expert groups opinion, brainstorming, Delphi-method, nominal techniques etc. Based on an extensive literature review, a number of challenges of SCF were identified. A survey was carried out in a well-known Indian company to ascertain the attitude and awareness of the challenges. The company realized ten different challenges of SCF that forces it to establish various actions, practices and strategies of SCF as shown in Table 1.
Table 1 Challenges of SCF
Code / Challenges of SCF1 / Lack of knowledge and information about SCF
2 / Unreliable and unpredictable cash flows
3 / Pressure to reducing the cost of finished goods to be competitive in market
4 / Lack of third party financing
5 / Pressure from top management to improve key financial ratios
6 / Lack of training on SCF
7 / Lack of automation of invoicing and payment processes
8 / Lack of common vision among the SC partners
9 / Longer transaction cycle in sourcing, hence putting financial strain on suppliers
10 / Non effective inventory management techniques
2.2 Establishing contextual relationship between the challenges and develop a SIM
Various types of contextual relationships can be identified between challenges of SCF, some of which suggested by Bolanos et al. (2005) are as follows.
- definitive (implies, origins, is reachable from),
- comparative (is more important than, is more critical than, ),
- influence (causes, leads, affects, propagates, aggravates, magnify, strengthens),
- temporal (must precede, must follow).
Here, ‘leads to’ contextual relationship is used to evaluate relationship dynamics among challenges. The relationship ‘leads to’ basically addresses that one challenge (i) leads to other challenges of SCF.
Taking into account the ‘leads to’ contextual relationship, four symbols are used to indicate the direction of influence and type of relationship that exists between any two challenges (i and j). Theses four symbols are:
F: Forward influence in which challenge ‘i’ leads to challenge ‘j’;
B: Backwardinfluence in which challenge ‘j’ leads to challenge ‘i’;
X: Crossinfluence in which challenges ‘i’ and ‘j’ lead to each other;
O: No influencebetween challenges ‘i’ and ‘j’;
Based on these contextual relationships betweenchallenges, a self interaction matrix (SIM) is developed as shown in Table 2.
2.3 Prepare direct reachability matrix
After developing the SIM, the next step is to convert it into a perceptual binary matrix called a direct reachability matrix as shown in Table 3. The direct reachability matrix is obtained by replacing the symbols F, B, X and O with 1 and 0 as per the influencing relationship between challenges of SCF.
Table 2 Structural self- interaction matrix (SIM)
Challenges / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 101 / - / O / O / O / O / B / F / O / F / O
2 / - / O / B / F / O / B / B / F / B
3 / - / O / B / O / O / O / O / F
4 / - / O / O / O / B / F / O
5 / - / O / O / O / O / O
6 / - / F / B / F / O
7 / - / B / F / O
8 / - / F / F
9 / - / O
10 / -
Table 3 Direct reachability matrix
Challenges / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 101 / 1 / 0 / 0 / 0 / 0 / 0 / 1 / 0 / 1 / 0
2 / 0 / 1 / 0 / 0 / 1 / 0 / 0 / 0 / 1 / 0
3 / 0 / 0 / 1 / 0 / 0 / 0 / 0 / 0 / 0 / 1
4 / 0 / 1 / 0 / 1 / 0 / 0 / 0 / 0 / 1 / 0
5 / 0 / 0 / 1 / 0 / 1 / 0 / 0 / 0 / 0 / 0
6 / 1 / 0 / 0 / 0 / 0 / 1 / 1 / 0 / 1 / 0
7 / 0 / 1 / 0 / 0 / 0 / 0 / 1 / 0 / 1 / 0
8 / 0 / 1 / 0 / 1 / 0 / 1 / 1 / 1 / 1 / 1
9 / 0 / 0 / 0 / 0 / 0 / 0 / 0 / 0 / 1 / 0
10 / 0 / 1 / 0 / 0 / 0 / 0 / 0 / 0 / 0 / 1
After developing direct reachability matrix, the final reachability matrixincluding transitivity in the relationships is developed. The transitivity relationship basically indicates indirect relationship. For instance, if challenge 1leads to challenge 2 and 2leads to challenge3, then the challenge1 must also leads to the challenge3. The final reachability matrix considering the transitivity relationship among the challenges is shown in Table 4.
Table 4 Finalreachability matrix
Code / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10 / MI / Rank1 / 1 / 1 / 1 / 0 / 1 / 0 / 1 / 0 / 1 / 1 / 7 / 3
2 / 0 / 1 / 1 / 0 / 1 / 0 / 0 / 0 / 1 / 1 / 5 / 5
3 / 0 / 1 / 1 / 0 / 1 / 0 / 0 / 0 / 1 / 1 / 5 / 5
4 / 0 / 1 / 1 / 1 / 1 / 0 / 0 / 0 / 1 / 1 / 6 / 4
5 / 0 / 1 / 1 / 0 / 1 / 0 / 0 / 0 / 1 / 1 / 5 / 5
6 / 1 / 1 / 1 / 0 / 1 / 1 / 1 / 0 / 1 / 1 / 8 / 2
7 / 0 / 1 / 1 / 0 / 1 / 0 / 1 / 0 / 1 / 1 / 6 / 4
8 / 1 / 1 / 1 / 1 / 1 / 1 / 1 / 1 / 1 / 1 / 10 / 1
9 / 0 / 0 / 0 / 0 / 0 / 0 / 0 / 0 / 1 / 0 / 1 / 6
10 / 0 / 1 / 1 / 0 / 1 / 0 / 0 / 0 / 1 / 1 / 5 / 5
MBI / 3 / 9 / 9 / 2 / 9 / 2 / 4 / 1 / 10 / 9
Rank / 4 / 2 / 2 / 5 / 2 / 5 / 3 / 6 / 1 / 2
In the final reachability matrix the measure of influencing (MI) and measure of being influenced (MBI) for each challenge are estimated. The measure of influencing for a challenge is the total numbers of challenges that it is influencing. However, the measure of being influenced for a challenge is the total number of challenges that it is being influenced. Based on the measure of influencing and measure of being influenced, the challenges are ranked, as shown in the last column and the last row of Table 4, respectively.
2.4 Carry out level partitioning and build hierarchical model
Level partitioning is carried out using final reachability matrix (Table 4). Two sets viz. influencing setand influenced set, based on final reachability matrix are identified for each challenge of SCF. The former set is a set of challenges being influenced by a challenge including itself,whereas the latter set is a set of challenges influencing a challenge including itself. After identifying these two sets for eachchallenge, their intersection setsare established. The challenges, for which influencing and intersection sets are the same, are placed at top position in the hierarchical model. Once the challenge at the top level are identified and placed, they are removed from the list and the same process is carried out on the remaining challenges to find out the challenges at second level. This process of identifying and placing challenges at different levels is repeated until all the challenges are recognized with their specific levels.
After the level partitioning step, the final reachability matrix is rearranged as per the levels of challenges, which leads to a canonical form (lower triangular form). The final reachability matrix in canonical form is directly used for constructing hierarchical relationship model (HRM) of challenges of SCF as shown in Figure 1.
Figure 1Hierarchical relationship model of challenges of SCF
3.0 Analysis of the relationship dynamics of challenges of SCF
The study reported in the preceding sections helped identify how various challenges are related to each other as shown Figure 1 and with the application of ISM methodology, it was possible to group the stimuli into various clusters.
To evaluate the dynamics of challenges of SCF and to discuss managerial implications, one may group the challenges in a number of ways. The challenges which have potential to influence other challenges (MI score) and also those which will be influenced by others (MBI score) is used to categorise the challenges into four groups (Groups A to D)as shown in Figure 2.The values of MI and MBI indicate specific influencing and influenced strength of each challenge.
Figure 2 Influencing-influenced diagram of challenges of SCF
The reasons for classifying the challenges into different families may be, firstly, all the challenges do not have equal significance in a competitive business environment; secondly,their influence may be of different magnitude and durations; thirdly, their span of influence and vulnerability across the SC may be differentand finally, each challenge can be reduced, eliminated or adapted by various tools, techniques, policies and practices which are managed in different ways with different costs.
4.0 Discussion and conclusion
Selecting an appropriate practice, strategy, policy or a tool to enhance cash flows in the SC depends on the nature, dynamics and sources of challenges in an integrated SC network. Organizations must therefore identify potential influences, causes and sources of challenges at every significant operation and link along the SC in order to assess their risk exposure. However, the challenges may be of different nature and may relate to internal or external SC environment. They may be ‘needs, requirements or challenges’ in the SC. Their consequences on cash flows in the chain may be lighter or severe.They may relate to different segments of the SC and associate with various players and entities. Identifying and analyzing the challenges is therefore the first step in developing various business strategies for SCF.
In this paper ten challenges of SCF faced by a well-known Indian company have been considered. The HRM developed in this paper helped to understand the complexrelationships among the challenges, imposing the specific order and direction oncomplex relationships of challenges of SCF. In the model the top challenges have higher MBI and weak MI, whereas the bottom challenges have lower MBI and higher MI. The MBI values increase from bottom to top, whereas MI scores increase from top to bottom of the hierarchical model. The challenges placed at the top of the model are the final outcomes of the relationship structure or final reach of all the remaining challenges. Based on the analysis (Table 4, figures 1 and 2) a number of managerial implications can be suggested.
- The challenge ‘lack of common vision among the SC partners (8)’ has highest MI score (Rank 1) in final reachability matrix indicates the basic cause of all the challenges. Moreover, it also has the lowest MBI score indicating it is not being influenced by others.
- The group I challenges (lack of knowledge and information about SCF (1), lack of training on SCF (6) and lack of common vision among the SCF (8)) in Figure 2 are placed at the bottom of the HRM which have higher MI and weaker MBI scores. All these challenges are basic causes and active at sub-system and system levels. The company must think at tactical and strategic level to overcome these challenges. In order to achieve the desired cash flow and maintain required working capital, the company must work in collaboration with SC partners specifically under a common vision and goal. The company should also provide enough training on SCF to its managers and executives.
- The group II challenges (4 and 7) are being influenced by group I challenges and leads to group III challenges. These challenges have moderate MI and lower MBI score. In this group, the challenge ‘lack of automation of invoicing and payment process (7)’ is a linkage connecting the bottom challenges to the top challenges. It can be overcome by focusing on technology, particularly automation of transaction. The next challenge in this group is ‘lack of third party financing (4)’ which is not being influenced by any bottom challenges, however it is placed at level three. This challenge can be overcome by involving and tying up with 3rd party.
- The group III challenges (2, 3, 5 and 10) are being influenced by group II challenges and lead to the top challenge. These challenges have moderate MI and higher MBI score and all are related to the internal environment of SC. These challenges can be overcome by other bottom challenges.
- The group IV challenge ‘longer transection cycle in sourcing (9)’is placed at the top of the HRM whichhas lower MI and highest MBI score. This is the final outcome of all the challenges and needs to be tacked at strategic level. However, the challenge is primarily related to inbound side of the SCF putting financial strain on suppliers as a result of longer transaction cycle in sourcing. In order to overcome this challenge the company should overcome all the challenges at least the challenges at level 2. The company can also adopt business practices like raw material financing, e-payment, e-invoicing, purchasing cards etc.
This model helped in understanding the dynamics of challenges of SCF and in analyzing each challenge by taking into account its nature, the degree of relevance of the segments of SC and also the association of each stimuli with various players and entities. This analysis also motivatesthe firms to rethink, reengineer, redefine and redesign SC relationship, policies and strategies to achieve desired cash flow in the SC, though the model has not been statistically validated.
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