SUPPLY CHAIN ​​MANAGEMENT – OPPORTUNITIES IN THE MANAGEMENT OF FINANCIAL AND INFORMATION FLOWS

The doubt regarding the limits of the concepts of Integrated Logistics and Supply Chain Management has generated a series of misinterpretations by some companies and professionals in the area of ​​operations. It is usual to find the term “supply chain management” being used to designate internal logistics activities, such as inventory management, storage and vehicle fleet control.

It is also very common for professionals to look for courses on supply chain management, often because this is the nomenclature of the area in which they are allocated, when they are actually looking for solutions to internal operational problems. Also in the areas of Consulting and Market Intelligence, confusions with the use of terms are common and demand, from time to time, correction in the scope of projects and revisions in research questionnaires. Rather than being a mere problem of terminology or foreign language1, this confusion can lead to mistakes in setting management goals and priorities.

However, this text will not address semantic or interpretive issues. Its objective is to analyze some of the main opportunities and initiatives that are currently on the agenda of companies. The maturation of the operations area in our country has led to the discussion of complex topics such as Collaborative Planning, Forecasting and Replanning (CPFR) and Coordination of Financial Flows, among others, which involve the coordination of multiple agents in the chain and will be dealt with here in a detailed manner. exploratory.
Initial considerations

It has been 12 years since professors Paulo Fernando Fleury and César Lavalle published the result of a survey on “The Stage of Development of the Logistics Organization in Large Brazilian Companies”. At that time, companies began to use the term "Integrated Logistics" to designate their transport and storage operations, but, as shown by the results of the analyzes, there was a long way to go until the model proposed by Professor Bowersox matured, which was used as a study guide.

Undoubtedly, in the last decade, Brazilian companies have advanced a lot in structuring their logistics activities. The latest Logistic Panoramas, published by our Market Intelligence area, show that, although there are still many opportunities in the logistics area in our country, the maturation of some companies, the increase in competition and complexity of the market and the imperative to seeking operational efficiency and cost reduction leads to the discussion of initiatives on another frontier in business management: Supply Chain Management.

While Logistics is seen as a business function, as well as Marketing, Production and Procurement, the concept of SCM is related to the cross-functional integration of processes that involve different areas of several companies, opening up a new range of opportunities and challenges. Thus, understanding the supply chain as a set of financial, information and product flows between different companies, the current challenge for executives is to structure the management process (management of these flows and capture the hidden benefits in the interfaces.

As initiatives for collaborative management of product flows have already been recently explored by our team in articles such as “Collaborative Transport: conceptualization, benefits and practices”, by Renata Figueiredo and Juliana Eiras, some other initiatives for managing information flows will be presented below. and financial services that have been used by world-class companies.
Information flow: collaborative demand planning between companies

The information flow can be characterized by the demand for goods and consumption that takes place between the different companies in a supply chain, being fundamental for the sizing of resources, as it determines the need to purchase inputs, production levels and distribution policies. As demand, in addition to factors such as seasonality and trends, is susceptible to uncertain events, each company measures a safety stock to guard against possible fluctuations.

However, all the demands for goods and services that occur between the agents in the chain originate from the demand of the final consumer and, therefore, only a safety stock at the end of the chain (in general, retail) would be enough to protect all the others. companies from the fluctuations that occur in the market. For this, it would be enough for the agents closest to the final consumers to pass on real demand information to their trading partners, resulting in significant reductions in inventory levels in the chain.

In practice, however, there are some difficulties in putting this simple idea to work. In the first place, companies that are closer to final consumers, especially retailers, generally have variable costs (acquisition of goods) as the main part of their cost structure. In addition, they work with tight margins, which increases the need to rotate inventories in order to obtain profit. Thus, it is not easy to convince retailers to have capital in the form of inventories, when the main requirement for obtaining profit is working capital.

Another aspect that makes it difficult to increase efficiency in chains based on managing the flow of information concerns the relationship format between commercial partners. As all companies try to maximize their results individually, there are several frictions in the relationship between suppliers and customers, who seek in the negotiation process to guarantee the greatest possible result for their shareholders. The problem is that, by doing this, companies place themselves as opponents of their trading partners and create barriers to sharing demand information, which is used to increase bargaining power in the negotiation process.

Despite the existing difficulties, companies have realized the multiple opportunities for more efficient demand management and are starting to look for alternatives to put into practice integrated planning processes that guarantee mutual benefits. The main one is the Collaborative Planning, Forecasting and Replenishment (CPFR – Collaborative Planning, Forecasting and Replenishment), which appeared in 1995, in an initiative between Wal-Mart and Warner Lambert. Currently, according to Voluntary Interindustry Commerce Solutions (VICS), around 300 companies in the US have CPFR initiatives, which shows that there is still a long way to go before the dissemination of this type of initiative.

The CPFR, as described by Rodrigo Arozo in his article “CPFR – Collaborative Planning: looking to reduce costs and increase the level of service in supply chains”, is a structured process of collaborative planning that provides not only for the exchange of information of demand, but also the joint allocation of resources to meet it. We can, in a simplified way, separate the functioning of the CPFR into four parts:

• Collaboration: fundamental basis of the process that deals with the establishment of a contract between commercial partners, defining objectives, metrics and performance indicators, shared information, resources used by each company involved and a governance policy to resolve possible divergences during the process . In general, contracts are long-term, with annual reviews;
• Planning: consists of the temporal analysis of events that may influence market service, such as new product launches, product withdrawals, promotions calendars, decision windows and major changes in the process. The time horizon considered is usually the budgetary period (one year) and the review meetings take place quarterly;
• Forecasting: consideration and statistical analysis of historical sales, detailed promotions calendar, competitor actions and pricing. Calculated for the next 12 months, with a focus on the next three months and monthly review.
• Resupply: based on forecasts, the need for resources is calculated and resupply orders are generated for the next 12 weeks (three months), focusing on orders for the first four weeks. In this step, performance indicators are monitored and occurrences and exception events are recorded.

Table 1 - Summary of CPFR components

To overcome obstacles to the exchange of information and joint planning between companies, it is necessary to observe some points highlighted by executives of companies that have been using the CPFR for some time. The first is the need for organizational restructuring to support the process of collaboration and information exchange. In the traditional process, formal communication between companies is carried out by the supplier's commercial area with the customer's purchasing area, which in general have antagonistic evaluation metrics, since both must seek, in the negotiation process, to guarantee the greatest possible margin for their companies. This creates personal friction between those involved, who are unlikely to act as partners and collaborators. Relationships are not created suddenly with the signing of a contract, but with living together and with common goals.

For this, the companies involved must create a "paired" structure, in which areas with similar interests and metrics can coexist and create bonds of trust, such as, for example, bringing the supplier's operations area closer to the customer's operations area, who probably have similar indicators and can easily find synergies in their activities. In some cases, where scale exists, it is possible to create organizational structures dedicated to a specific customer/supplier.

Another point that should be noted is the “phased” implementation, that is, as the construction of a collaborative process needs time for relationships to be built, the opening of information must be staggered over time. At the beginning, consolidated information is opened and unambitious short/medium term objectives are established. With this, the first benefits are soon recognized by the participants and the first relationships of trust are established. The second step can then be taken, with the detailing of information and the establishment of new, more ambitious objectives. After verifying the new results, consolidating the mutual benefits and increasing confidence among the participants, companies can make a wide disclosure of information and share assets. At this stage, according to VICS, the inventory reduction reaches around 30% in the companies involved and the increase in sales can reach 20%.

Financial Flow: opportunities in the allocation of resources in the supply chain

In commercial relations between companies in a supply chain, the flows of information and products are accompanied by financial flows, which take place in raising funds in the market to make production and operations viable, interest payments or in the buying and selling process. of goods and services between the different participants in the chain. As companies can present very different cost structures, many times these financial flows end up suboptimized, hiding opportunities for gains in the interface between companies.

To illustrate the benefits of efficient management of financial flows, one can take a very common case in Brazilian agribusiness: the agreement for the sale of chicken production between a farmer and a large food industry2. The farmer manages to produce one hundred thousand chickens at an average cost of R$ 3 per unit and sell them at an average price of R$ 3,30, obtaining a return of 10% on the capital invested in this production. The industry, in turn, buys the 3,30 chickens for an average price of R$ 2,70 and has an additional cost of processing, packaging and distribution of R$ 6, totaling an average total cost of R$ 7,20 per chicken . She manages to sell this lot at retail for the price of R$ 20 per unit, which results in a return of XNUMX% on the invested capital.

Table 1 - Traditional financial flow

In this traditional relationship, in which we easily find the elements present in most commercial transactions in other segments, significant opportunities may be hidden. To illustrate them, let's take a hypothetical relationship in which the farmer passes the chicken at cost price (R$ 3) to the industry. If we believe that R$ 7,20 is the fair price3 per unit, the final margin per unit is R$ 1,50 (= R$ 7,20 – R$ 3,00 – R$ 2,70). If we were to remunerate shareholders according to the previously required rates, we would have to pay R$0,30 to the farmer (10%) and R$1,14 to the industry (20% of R$5,70). Note that there will be R$ 0,06 left over (= R$ 1,50 – R$ 0,30 – R$ 1,14), which is the industry margin (20%) over the farmer’s margin (10% = R$ 0,30). Despite existing in all commercial relationships, this double margin does not remunerate the capital of the commercial partners involved in the process. How, then, can companies capture a portion of this value and increase their profit?

Some activities at the interface of the relationship between companies, such as maintenance of an information system or the physical distribution of products, represent costs for the farmer and could be assumed, without a decrease in efficiency or increase in costs, by the industry. This would result in a decrease in the double margin and, consequently, an increase in results for the industry.

Imagine that the industry assumes responsibility for handling inputs, which corresponds to a cost of R$ 0,20/unit sold. The farmer's unit cost would decrease to R$ 2,80 and the selling price with the expected 10% margin would be R$ 3,08. The industry, in turn, would buy the chicken unit for BRL 3,08, would have an additional cost of BRL 2,90 (= BRL 2,70 + BRL 0,20) and would sell the chicken for the fair price of BRL 7,20. With this, it would obtain a margin of 20,4%, higher, therefore, than the margin of 20% in the traditional relationship described above.

Table 2 - The industry assumes part of the producer's costs, reducing double margin and increasing your return

Furthermore, in most cases, there are significant differences in terms of the cost of obtaining credit for each agent in the chain. In general, larger companies get lower interest rates and, therefore, manage to have lower costs in their operations than their smaller trading partners. This, in itself, represents a great opportunity to optimize financial flows in the supply chain.

Part of the cost of BRL 3 for the farmer is related to the interest paid on the loan to buy production inputs, such as feed, water and medicines. This cost is fully passed on to the food industry in the chicken sales price. Considering R$ 0,20 as the cost of interest paid by the farmer for the production of each chicken, it can be concluded that the industry is paying R$ 0,22 in interest per chicken purchased (R$ 0,20 + 10% of the farmer's wages). However, the interest rate paid by the large industry for the acquisition of inputs is half that obtained by the farmer, which could mean savings of approximately R$ 0,11/unit or R$ 11.000 (increase of 10% in the result of the industry ).

Table 3 – The industry gets credit for the producer for half of the interest rate, reducing the total cost of the chain and increasing its result by 10%

In order to appropriate these benefits, the industry must change its relationship with its supplier, establishing a long-term partnership and financing its productive activities. This example was used because in agribusiness, where the difference in size between commercial partners is usually very large, mechanisms are already used to properly manage financial flows in their supply chains, capitalizing on part of the gains described above.

In Brazil, in general, large food companies finance their small commercial partners, providing all the necessary inputs for production, since they get credit at lower interest rates. Afterwards, they enter into closed contracts for the purchase of all production at low prices, minimizing the risk of default, which causes banks to charge higher rates, and reducing the double margin of the operation. Obviously, the gains presented in the example above and highlighted in tables 2 and 3 could be shared with the producer, resulting in mutual benefits. The division of gains, however, is usually proportional to the bargaining power of commercial partners.

Financing mechanisms and long-term contracts are useful tools for managing financial flows in the supply chain, making it possible to obtain substantial gains. Even in sectors where the commercial partners are large companies, there are several opportunities to use these instruments to increase profit and build relationships with shared gains.

CONCLUSION

In the same way that, at the beginning of the 1990s, companies started an intense search for the best performance of their operations, pursuing the benefits proposed by the Integrated Logistics model, today they envision the innumerable possibilities of gains with an integrated management of processes together with its commercial partners, which characterizes the concept of Supply Chain Management.

There are numerous unexplored opportunities in managing information, product and financial flows between companies in a supply chain. The initiatives to integrate and improve these flows represent an important step towards a broader model of Supply Chain Management. We sought, through examples of integrated management practices used by large companies, to present some of these hidden opportunities and justify the growing interest in the subject.

BIBLIOGRAPHY

AROZO, RODRIGO. “CPFR – collaborative planning: in search of cost reduction and increased service level in supply chains”. Tecnologística Magazine, São Paulo, pp.60-66, Nov/2000.

BALLOU, HR. “Supply Chain Management: Planning, Organization and Business Logistics”, Editora Bookman, Porto Alegre, 2006.

BOWERSOX, DJ; DAUGHERTY, PJ; DRÖGE, CL; ROGERS, DS; WARDLOW, DL. “Logistical Excellence: it's not business as usual”, Burlinton, MA, Digital Equipment Press, 1992.

CHOPRA, S.; MEINDL, P.. “Supply Chain Management: Strategy, Planning and Operation”, Prentice Hall, USA, 2000.

FIGUEIREDO, KF; ARKADER, R.. “From physical distribution to Supply Chain Management: thinking, teaching and logistics training needs”. Tecnologística Magazine, São Paulo, 1998.

FIGUEIREDO, R.; EIRAS, J.. “Collaborative Transport: conceptualization, benefits and practices”. Tecnologística Magazine, São Paulo, 2007.

FLEURY, PF. “Supply Chain Management: concepts, opportunities and challenges of implementation”. Tecnologística Magazine, São Paulo, pp.24-32, Feb/1999.

FLEURY, PF; WANKE, P.; FIGUEIREDO, K.. F. “Business Logistics: The Brazilian Perspective”. Coppead Administration Collection, Editora Atlas, São Paulo, 2000.

LAMBERT, DM. “Supply Chain Management: Processes, Partnership, Performance”, Supply Chain Management Institute, 2001.

LAVALLE, CR. “The Stage of Development of the Logistics Organization in Brazilian Companies: Case Studies”. Advisor: Professor Paulo Fernando FLEURY, Ph.D.. Thesis (Master of Science) – Coppead Institute of Administration – UFRJ, Rio de Janeiro, 1995.

www.cscmp.org

www.ilos.com.br

www.vics.org

¹ – Foreignness: use of terms from other languages ​​for convenience, lack of similar meaning or standardization of terms
² – The values ​​presented are fictitious and serve to conceptually illustrate the problem
³ – The fair price is found in the equilibrium of supply and demand curves