Whereas the product supply chain is achieving both visibility and velocity in the New Economy, the money supply chain lags far behind, with most companies still working under Old Economy, 60-day payment schedules.
But an emerging system that automates payments to suppliers along the supply chain could free up trillions of dollars in working capital. Service providers such as Electronic Data Systems Corp. and financial institutions including Bank of America Corp. are partnering with marketplace platform providers such as Ariba Inc. and Commerce One Inc. to launch these services.
The system will be triggered by matching a purchase order to a shipping document, with the invoice sent to a financial institution for payment rather than to a customer.
Here's how it will work.
In the commercial supply chain, company A sells products to company B, which in turns sells products to company C. At every stage, everyone who is a seller carries the buyer for 60 days with all of the suppliers driven by a single order.
With the proposed system in place, the financial institution will be able to pool the transactions and fund each company as it executes an order. Financial institutions will match the financial engine -- accounts receivable and accounts payable records -- to the supply chain so that every company is paid immediately and electronically via a third-party bank.
"For example, [General Motors] will issue a purchase order. The order triggers the series. Then financing gets attached, and each participant in the supply chain gets paid," said John Macauley, a consultant at San Francisco-based A. T. Kearney (ATK).
The biggest challenge to the implementation of the proposed system is the Old Economy culture that says companies should hold on to their money as long as possible. In addition, some are unwilling to accept the discount rate, according to John Hagerty, vice president of e-business applications at AMR Research in Boston. "When somebody pays for you, [they are] taking the risk, and risk doesn't come for free," Hagerty said.
Nonetheless, capital for these services will come from a major financial institution, which will act as a utility to deliver payments across the supply chain, just as a power utility delivers electricity to all of its customers. "Banks desperately want to remain relevant in e-business and are trying to figure out how to plug in with money, service, and credit where it is needed," Hagerty said.
The technology required sits on top of and integrates with the same data feeds that e-enable and manage the physical supply chain.
Companies such as Aceva, heavily financed by Oracle, use a combination of Java Enterprise edition, XML APIs, and "snippets" of HTML pages to serve into a customer's HTML page to simplify the deployment process and to integrate with order-entry, ERP (enterprise resource planning), and legacy financial systems, as well as supply-chain and logistics packages, said David Pann, vice president of product management at Aceva.
Aceva's Collaborative Financial Management (CFM) platform integrates at the business level, Pann said. "You want to avoid plugging in at the data level because you won't get all the intelligent business processes triggered," Pann warned.
Meanwhile, ATK and parent company EDS are developing a joint service offering to deliver an end-to-end capital management service that will include processing services by a "multienterprise utility," ATK's Macauley said.
"We are working with major financial institutions to provision financing at point of sale," Macauley said.
According to Macauley, the new ATK-EDS back-office services will be for financial processing that is outsourced to a financial institution that will aggregate volume across enterprises to achieve low-cost performance. "It's like apps on tap," Macauley said.
Bank of America and Ariba are also partnering and headed toward delivering these same financial services to Ariba's marketplace customers. In the deal, set to launch by the end of the second quarter, Bank of America will launch a "financial services engine" to offer a variety of payment and finance options on Ariba's marketplace, according to Brad Russell, a BofA spokesman. The system will integrate with EDI (electronic data interchange) and XML and will use a variety of payment instruments. The deal is not exclusive with Ariba and is only the first in a multistage effort to finance the supply chain, he said.
Change is under way in how the capital market is rewarding companies that can afford to invest in intangibles such as customers, channel, and product, Macauley said. Company assets are often tied up on the balance sheet, and there is limited opportunity to focus the few differential assets they have on what really counts. "Companies want to invest in things that have strategic differential value," he said.
Freeing up capital
Current billing practices tie up trillions of dollars in assets.
* 85 percent of b-to-b commerce involves credit or settlement services.
* 90 percent of the $100 trillion trade receivable market is on sellers' balance sheets.
* In 2004, b-to-b commerce will reach $7.3 trillion.
Sources: Gartner and Aceva