Major Facts
Many companies relocate their manufacturing facilities to emerging economies for production cost reduction. Supply chain finance is the process of collaboration with partners, which allows reducing costs. Through this process, a company’s executives can optimize their financial resources. According to ACAA (2014), reverse factoring “allows a supplier to receive a discounted payment of an invoice due to be paid by a buyer” (p. 7). The process allows third-party manufacturers to finance their manufacturing for a particular company by acquiring money from banks. In this way, the invoice is paid on the due date, while the manufacturer has resources for operations.
Major Problem
Risks include supply chain resilience and sensitivity to internal factors. According to ACAA (2014), such an issue exists because third-party manufacturers are responsible for the production of essential components. Thus, problems with such a company would affect the rest of the chain, failing to develop a product. Additionally, daily operational liquidity has become essential for executives (ACAA, 2014). Therefore, to successfully apply supply chain management, a company needs proper planning and awareness of components, which contribute to successful outcomes.
Possible Solutions
- Proper planning, which ensures that all parties involved understand the agreement and can obtain resources to fulfill it, is the key to resolving possible supply chain limitations. The solution allows considering factors that may influence the operations, which is its primary advantage. The disadvantage is that some components may be left out and unplanned, resulting in further difficulties.
- Understanding financial structure, which comprises supply chain management, is required. It is evident that this operational activity differs from conventional manufacturing, and third-party individuals have to obtain proper resources to be able to fulfill an order. As was previously mentioned, daily liquidity is the crucial component of supply chain management, while the structure of the process is designed to ensure that a manufacturer can obtain financial resources without the buyer paying in advance. Additionally, knowledge regarding currency differences, payment systems, and local banking procedures is required. The advantage is that the approach allows mitigating financial risks. The disadvantage is that in case of unexpected events, the buyer may not receive the needed product, which will affect the organization’s work.
- Adequate legal assistance, which ensures that all parties involved can agree on a contract’s terms, can help mitigate adverse outcomes. Additionally, specific components, including tax regulations, have to be considered. Specific dates and possible consequences of the agreement’s violations should be included. This method allows to minimize legal issues; however, it does not take into account other processes, which contribute to production.
- Risk assessment and response strategies are required because events impacting one component of the chain structure would affect the entire production. Thus, the external and internal analysis performed using SWOT, TOWS, or PEST tools can be applied to understand political, legal, and social factors influencing a partner company. The advantage of this method is that it combines important aspects and prepares a plan for problem-solving. The disadvantage is that financial risks would be challenging to minimize.
Choice and Rationale
The selection for this case study is option D – risk assessment using appropriate tools. This method allows to incorporate options A, B, and C and create an appropriate plan for choosing and working with a third-party manufacturer. Additionally, it includes risk factors that may impact the process of product development and aim to offer adequate responses. Financial limitations are part of the analysis as well, as it is among the crucial components for the supply chain management.
Implementation
To implement the choice, a company should create a structure and plan for risk assessment. Companies, which specialize in advising for such cases can be involved in the process of planning. Relevant information regarding the country in which the partner manufacturer resides should be optioned through reliable resources. The most reliable and risk-free manufacturer should be chosen. Possible risks should be discussed as well as strategies in which the company would address them.
Reference
ACAA. (2014). A study of the business case for supply chain finance. Web.