22 November 2008

Viewpoint : FMCG

Efficiency is on the cards

Published:: 01 April 2008
Article Type:: Viewpoint
Byline:: James Le Brocq

The drive for efficiency in physical supply chains has benefited firms prepared to adopt new models and technology. Meanwhile, the financial supply chain has ground to make up if it is to avoid becoming a significant bottleneck.

More focus on cash management in the financial supply chain is inevitable as supply chains lengthen due to globalisation and market conditions squeezing corporate liquidity.

Developments in technology and other areas have increased physical supply chain efficiency to the extent that there is an argument that the biggest efficiency bottleneck is now in the financial supply chain.

Inefficiencies are created by late payments from customers, excess inventory, premature payment of suppliers and time-consuming administrative procedures. This last element includes requisitioning, order raising, invoice receipt and approval and invoice payment - an array of bureaucratic steps which, while existing to ensure good practice and close fiscal control, need not impinge so notably on the quest for streamlined operations.

The UK government realised as much in the late 1990s, after a National Audit Office (NAO) einquiry uncovered the headline-friendly instance of a governmental department spending €95 on the procurement of a padlock that cost €1.2. The rest of the cost was organisation and processing. Such glaring inefficiency led to the introduction of Government Purchasing Cards (GPCs). While the cards were introduced for low-cost, ad hoc purchases, they are now used to purchase goods and services worth upwards of €1bn in total, producing savings of almost €243m.

The NAO says that on average €36 is saved per transaction, compared with traditional paper-based systems. More than 62,000 cards have been used to date.

This success has led to leading Banks developing their own prepaid card products to provide businesses with an alternative method of paying suppliers. The cards look and act like debit or credit cards, with the key difference that they are not linked to bank accounts.

They are ''loaded'' with funds and can be topped up remotely by companies. In supply chain finance, they serve as a development of the corporate credit card yet offer a number of advantages.

While removing layers of administration and costly paper-based processes, the cards still allow firms to retain control over their funds than would be the case using company credit cards. For instance, there is no possibility of spending company funds that have not previously been loaded onto the card.

Furthermore, they can be programmed to function only in specific outlets or for agreed merchants, ring-fencing their use and ensuring that opportunities for misuse or fraud are minimised.

Also, detailed information on purchasing can be collected, providing an analytical tool to help drive further spending efficiencies. Cards can be loaded with euros, dollars or sterling.

The potential benefits are clear. Indeed, such cards have already proved their value in the US, which saw an estimated €46bn worth of transactions using prepaid cards in 2006 across a range of applications.

James Le Brocq is director of prepaid cards at Alliance & Leicester Commercial Bank

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