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Home » Driving Up Profits Through Supply Chain Finance

Driving Up Profits Through Supply Chain Finance

May 1, 2013
Business Insider

Private equity groups are being forced to start making their profits by diving into operations in order to make firms more profitable and efficient.

However, there may still be a few places where financial optimization and smart negotiation can boost the operating profits of companies. One place that has started to get more attention recently is supply chain finance. While most firms focus on internal optimizations, different types of financing throughout a supply chain can have significant effects on every firm involved in the production and sale of a given product.

Supply chains are typically affected by two major financial issues. The first is double marginalization, where everyone in the supply chain thinks of themselves as an independent entity and tries to protect their own profits by pushing up prices. As the price raises each step, the total profits for the entire supply chain are lowered and the end product becomes less competitive in the retail market - especially when compared against vertically integrated producers.

The second problem is the instability and risk that comes from suppliers failing to deliver necessary components in a supply chain. By forcing the brunt of the financing burden down to suppliers, manufacturers or retailers can end up making their critical components producers less reliable. In fact, according to the paper The Effects of Supply Chain Glitches on Shareholder Wealth, the stock market returns for publicly-traded firms suffering from supply disruptions are roughly 40 percent lower than their competitors.

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