President Obama was officially sworn in today at Noon on the steps of the US Capitol. One of the key themes of his inaugural address was the on-going concern about the rapidly deteriorating US economy. Fortunately, this is another area that B2B e-commerce can help with. In the last of my series of posts on how the Obama-Biden administration can leverage e-commerce to further its policy agenda, I will focus on the areas of manufacturing competitiveness and small business.
Improving America’s Manufacturing Competitiveness
The financial crisis of the Big 3 automotive OEMs has shined a spotlight on the challenges America is facing with competition in the global manufacturing industry. The Obama-Biden plan calls for investment in training programs to bolster the competitiveness of US manufacturers to retain jobs and strengthen company growth. One of the key principles that should be employed by US manufacturers is the concept of demand driven supply chains which has been advocated by think tanks such as AMR Research and the Stanford University Supply Chain Council. Studies have demonstrated that corporations such as Apple, Dell, IBM, Procter & Gamble and Wal-Mart, which embrace best-in-class, demand-driven principles have achieved above average financial returns. There are numerous examples of supply chain best practices that can be used to achieve a demand driven model. One of the best illustrations is collaborative demand planning, in which manufacturers align their supply chains with actual end-consumer behaviors. Goods are replenished in a continual fashion based upon recent sales volumes and current inventory positions. Such a demand driven approach to replenishment is in stark contrast to the push-oriented, build-to-stock models that dominated much of the US supply chain strategy throughout the twentieth century. Manufacturers have historically determined production volumes for individual products based upon factors such as ensuring 100% utilization of available labor and manufacturing plant capacity. The result was usually that either too much or too little of a particular product was manufactured.
Success with demand driven models require that buyers and suppliers be able to share large volumes of quantitative data with each other electronically in near real-time. E-commerce technologies such as EDI and XML are the principle instrument by which data is shared between the ERP systems of manufacturers in the supply chain. Unfortunately, e-commerce technologies have only been adopted by a minority of the companies in the supply chain. Small businesses often lack the budget, resources and expertise to engage in e-commerce initiatives. Large, multi-national enterprises have been the primary adopters of supply chain management technologies such as e-commerce. However, even some of the largest companies are struggling to fully leverage technology for demand driven models. Government encouraged training and incentive programs to further e-commerce adoption would help to improve America’s competitiveness in the manufacturing sector.
Short Term Financing for Small Businesses
The Obama-Biden economic plan calls for tax relief to be provided to start-ups and small businesses to encourage innovation and job creation. However, there is a more immediate need to provide working capital solutions to the millions of small businesses that have been most impacted by the economic recession. Reliant upon financially distressed retailers and automotive manufacturers, many small companies are struggling to obtain financing due to high-risk cash flows. Short term lending programs such as factoring and supply chain finance can help small businesses reduce Days Sales Outstanding (DSOs) and optimize working capital. A critical component to a program such as supply chain finance is the use of electronic invoices. E-invoicing enables much faster processing as the bills can be automatically uploaded to a buyer’s accounts payable systems, matched to corresponding purchase orders and validated against material receipts. Once a buyer has approved an invoice for future payment a third party can intervene to offer accelerated payment to the supplier.
A number of major financial institutions including Citigroup, National City Bank and BB&T offer such programs. The financial institution will usually pay the supplier on day 10 of a 90-day payment term, freeing up 80 days of working capital. The financial institution assesses a nominal fee to the supplier in exchange for the early payment and then assumes the responsibility of collecting the receivable from the buyer. Programs such as supply chain finance would enable tens of thousands of small businesses to reduce their Days Sales Outstanding (DSO) without impacting their buyer’s cash flow cycles. Furthermore, supply chain finance can provide a noteworthy, transaction-based revenue stream to banks that might reduce the need to seek out higher risk sub-prime lending opportunities.
Closing thoughts
This series of posts has lobbied for stronger public policy and federal endorsement of e-commerce. However, I should point out that while government can and should help raise the awareness of the benefits of e-commerce to manufacturing competitiveness, homeland security, health care costs and the environmental crisis, the biggest changes need to come from industry itself. Only by embracing a more digital business model will businesses both inside the US and out be able to reap the many benefits that e-commerce can offer.
