What exactly is SAP FSCM - a high level guide to the processes and the benefits
At the end of last week I was having a chat with a fellow consultant who approached me on the subject of my recent blogs on FSCM.
The conversation focused on what ACTUALLY is SAP FSCM. I was a bit taken aback from this comment - didn't everyone know what FSCM was, what is stood for and what area of the business it supported? The world of SAP is a big one, and I am the first to say I only know a fraction of non ERP technology. I, like my fellow college read other blogs and articles and are constantly encounter anachronisms and don't fully know what they mean to me.
Please treat the following blog as a high level overview of FSCM, what it actually is, what it replaces and the actual benefits of the suite of products.
What is FSCM?
FSCM = Financial Supply Chain Management.
Bit of a mouthful, and as the name suggests it is focused on the supply chain within finance. What is the supply chain within Finance I hear you ask? A simple answer would be "improving the efficiencies of the accounts receivable and accounts payable teams leading to an improvement of the business's cash flow". By focusing on your cash flow you can provide extra working capital for your organization to invest in product development, stock or expansion. In today's current market cash flow is even more important due to the reduced availability of cash in the market. This has lead to the associated business processes being put under the microscope to find ways of improving the cash flow to provide a competitive edge against an Organization's competitors.
What business area does it tackle?
One stand out "stat" that was presented to me when I was first introduced to FSCM nearly 5 years ago now was that over time efficiencies have been achieved in the sales order process relating to order creation, customer deliveries and invoice creation. This has reduced the time in the supply chain from order capture to invoice creation and distribution to the customer. However one area that has stayed static is the time it takes a business to collect the debt from its customers after invoices have been created. Please see table below that highlights the benefits.
The process should be simple. You produce a customer invoice, send it to the customer, and in theory when the invoice is due for payment the customer should pay that invoice in full. However in a world where a business may have tens of thousands of customers, and some of those larger customer could again be receiving thousands of invoices a month the likelihood of the process being followed correctly for all customers for all invoices is not that high.
Add to this, that the invoice could be wrong (the price or quantity or even a missing purchase order number) then the number of invoices being paid on time reduces further. The goods supplied could be faulty, might not have arrived, might have been sent to the wrong customer, the wrong good supplied to the customer, and you should now understand that managing this process can be tricky. Add into the equation that the customer might have some Financial difficulties of their own, as their customers are not paying them to the agreed terms and the whole cash collection process could be a tricky process to manage.
Financial impact of cash collection
OK - so this addresses in part the business process issue. However lets look at the financial impact of the process. All organisations will sell to customers, and have either purchased a product to re-sell at a profit, or bought a product, amended it and then sold it at a profit, or lastly provided a service, and have the cost of the individual who provided the service. Either way, there will be some form of "cost of sale".
So - if you buy something for $100 and are looking to sell it for $120, you need to outlay $100. If you buy ten products, you need to spend $1000, and in theory you could sell all 10 of your products. A common payment term is net monthly, so your customers would pay you a month after you provided them with an invoice. You may now want to purchase some more products, in order for you to sell some more. However if you do not have the funds to buy more products, you may need to take out a loan from the bank or use your overdraft. Either way you would be paying a fee to be able to purchase more goods. This in turn is reducing your profit. The quicker you receive your payments from your different customers the quicker you can either buy new products without paying for a loan, or the quicker you can pay off your loan. Put this into the SAP world and the organisations that are using SAP, their turnover may well run into the billions of dollars, and the speed which you need to receive money becomes more important.
How can SAP FSCM help you?
So the business process should now be clearer, how does SAP FSCM actually help organisations that use SAP? The main business issues are:
Contacting your customers to chase for payments
Being able to record and track customer disputes
Ensuring that you provide significant mitigation for bad debt issues
1 - Contacting your customers to chase for payments
As mentioned - Organizations that use SAP will in the main have plenty of customers. This requires a team of "cash collectors" to call customers to chase for payments. This could be pro-active calling ensuring the required payment will be met, or chasing debt that is now overdue. The standard SAP solution would be to use the aged debt report, and then randomly select customers to call.
Within FSCM there is a sub-module called "Collections Management". The number 1 benefit, is that it provides the cash collectors a prioritised work list of customers for them to call. The work-list is defined through a number of measures that are defined via configuration. This provides an organisation a structured process to tackle the cash collection process. Further to this, the customer can add notes around the call with the customer, record a promise to pay and raise a dispute that a customer has raised. All of this is done via ERP 6, is a single screen which removes the dependency to use 3rd party systems or spreadsheets.
2 - Being able to record and track customer disputes
The second area is the logging and resolution of customer raised disputes. As mentioned before, there are a number of reasons why a customer could raise a dispute against an invoice or group of invoices. An efficient process is required to log customers disputes and ensure the correct person within an organisation has visibility of that dispute so it can be resolved.
"Dispute Management" is the sub module within FSCM to tackle this. A SAP case record is created to capture the dispute information. Various users can be assigned to a dispute to process or resolve the dispute. Further to this dispute creation can be automated, workflow can be used to ensure the correct individual is passed the correct dispute dependant on the reason of the dispute, type of customer etc. By designing and implementing an efficient dispute management solution in ERP 6 ensures that the customers can pay more invoices in a quicker time reducing the value and volume of unpaid overdue invoices.
3 - Ensuring that you provide significant mitigation for bad debt issues
The last area focuses on the credit limit that you provide your customers. There is no point selling a customer a product for say $100,000 if they cannot afford to pay for that. This will lead to a bad debt where you will need to "write-off" the fact that the customer cannot afford to pay for you product. At the same time, where a customer is a good payer, and they are growing you may want to increase their credit limit so they can buy more, and you sell more to them.
The traditional SAP solution for credit management was fairly manual. You would take data from 3rd party systems that provided a credit score against a customer. This was based on how that customer was perceived as a payer against a number of other organisations. This information whilst useful does not provide accurate information to your Organisation, as you are basing their paying power based on other Organisations.
Within FSCM Credit Management the main benefit, is that you can create your own rules to calculate a credit score against a customer. This can be based on a number of factors, internal and external. You can still use the external credit score, but you can also see how well that customer pays you, what their current credit exposure is and the sales the customer has made in the past. This provides you more relevant credit information for you, allowing you to make a better more informed decision when granting a credit limit to a customer.
Hopefully this now answers some questions that you may have had. You should also be able to see the true benefits to an organisation. Hopefully you will be able to talk about the product to your peers as I believe most SAP ERP 6 users would benefit from some form of SAP FSCM implementation. Please feel free to re-read my earlier blogs and hopefully the bits that did not make sense now do - if not let me know and I will iron them out.