supply chain finance overview -...

Supply Chain

Finance Overview

January 2013

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What’s in a Name?

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What is Supply Chain Finance?

Financial Times: Supply chain finance allows a supplier to sell

its invoices to a bank at a discount as soon as they are approved

by the buyer. That allows the buyer to pay later and the supplier to

secure its money earlier. Instead of relying on the creditworthiness

of the supplier, the bank deals with the buyer – usually a less risky

prospect.

What does it really mean?

What’s in a Name?

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Wikipedia: Global supply-chain finance refers to the set of

solutions available for financing specific goods and/or products as

they move from origin to destination along the supply chain. It is

related to a quickly growing use of a battery of technologies and

financial business practices that allow for dynamic payables

discounting.


What’s in a Name?

4


Procurement Intelligence Unit: Supply chain finance is a

buyer-led initiative that facilitates favourable financing for the

supplier in order to achieve mutual benefits for both trading

partners, through the use of a technology platform and a third-party

financial institution or otherwise.


What’s in a Name?

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EDC : Supply chain finance is a form of asset-based lending and

reverse factoring that was created to help improve the financial

efficiency of supply chains. It helps both suppliers and buyers free

up working capital.


What’s in a Name?

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Supply Chain Finance refers to the culmination of people,

processes and technology that enables the infusion of

cash (early) within a traditional Business to Business

open account transaction that serves to remove costs and

strengthen the players that make up the chain of value

that allows us to conduct business.

Specialty Vehicle Value Chain

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Commodities

Energy

Value-added

commodity

products

OEM Parts &

Assemblies Mfg.

OEM Chassis Mfg.

Design Services OEM Dealer Network

Truck Bodies &

Custom Vehicles Mfg.

Emergency Vehicles

Recreational Vehicles

Trailers

Buses

Capital

Goods

After- market

Parts Distribution

Dealers / Service

Distribution

After-market

Parts Mfg.

Commercial

Buyers

Fleet Buyers

Public Sector

Buyers

Individual

Consumers

MRO

Transportation

Services

Warehousing /

Logistics

Import / Export

Control

Customs

Brokers

Financing Companies

Core Supply Chain

Secondary Supply Chain

Commodities

Energy

Value-added

commodity

products

Value-added

commodity

products

OEM Parts &

Assemblies Mfg.

OEM Chassis Mfg.

Design ServicesDesign Services OEM Dealer Network

Truck Bodies &


Truck Bodies &


Emergency VehiclesEmergency Vehicles

Recreational VehiclesRecreational Vehicles

TrailersTrailers

Buses

Capital

Goods

After- market

Parts Distribution

Dealers / Service

Distribution

After-market

Parts Mfg.

Commercial

Buyers

Fleet Buyers

Public Sector

Buyers

Individual

Consumers

MRO

Transportation

Services

Warehousing /

Logistics

Import / Export

Control

Customs

Brokers

Financing Companies

Core Supply Chain

Secondary Supply Chain

Agenda

Types of SCF

Why bother?

What’s on YOUR priority stack?

Where to start?

‘Cutesy’ video

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http://www.youtube.com/watch?v=qcteA_MLI5I

Common SCF solutions

Type Typical Characteristics Common Users

Supplier Payment

Programs

Increase DPOs

Reduce seller DSOs

Large buyer-driven

Interest rate arbitrage

Technology intensive

Retail and Consumer Goods

Transportation Sector

Manufacturing

Distributor Financing

Reduce DSO

Increase buyer DPO

Credit management intensive

Large seller driven

Interest rate-arbitrage

High technology firms

Intermediates goods providers

Inventory Finance

Vendor Managed Inventory

3rd party Inventory Ownership

Raw Material Purchase Programs

Manufacturers

Maintenance Repair & Overhaul

EPMC contractors

What about factoring?

http://www.receivablesxchange.com/

Said a different way, SCF is:

Category of solutions designed to provide working capital

financing and accelerated cash inflow to SC Participants

Links supply chain events to financing decisions and actions

Combination of financial services and technology

solutions that Links Buyers, Suppliers & Financing providers

Reduces financing costs

Increase credit availability throughout the supply chain

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Reducing Total Cost and Working Capital NeededAccelerating Cash Flow

Reducing Supply Chain Risk

A deeper dive into Supplier Payment Programs Often driven by large buyers

Usually involves a FI that provides funds and often the

technology

Value to buyer: defer DPOs - amount owing remains a trade

payable.

Value to supplier: crystallize the value of an approved

receivable.

What is it called when governments announce SCF?

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Financial Supply Chain Automation – An Example

Immediate

Discount

Discount to

Maturity

Hold Until

Due

Physical Goods & Invoice

Purchase Order Information

Invoice Funding Request

Suppliers

Purchase Order Acceptance

Funds remitted to supplier

(possibly discounted if trigger occurs before maturity)

A/P

Pa

id in f

ull

(e.g

. n

et 9

0 d

ays)

Financial

Institution

Buyer

SCF

Platform P.O. Data

Invoice data

A/P status info.

Exception alerts

Electronic InvoiceInvoice Acceptance

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SCF – The Result

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Buyers

Minimize investment in W/C by increasing DPOs

Reduces COGS – up to 5% in some cases

Reduces total borrowing costs

Automation reduces administration costs

Increase cash flow;

Increases stability of supply chain;

Suppliers

Early payment reduces (DSO);

Reduces cost of capital by leveraging the buyer’s credit rating;

Increases certainty of cash flows;

Provides pre-shipment, WIP financing based on data triggers**;

Increases the strength of the customer relationship.

SCF = Win - Win situationEliminate costs from the supply chain while

enhancing the strength of participants

So why bother?

1) Cash Conversion – efficient use of funds.

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Days sales

outstanding

Days inventory

outstanding

Days payables

outstanding

Days Working

Capital

Required

International Trade’s impact on working capital

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Impact Increase Increase Decrease Increases

Characteristics Larger buyers are

increasingly

seeking 60, 90 and

longer terms

• e.g. 180- days

not uncommon

certain markets

Longer global

supply chains

require additional

safety stock to

mitigate disruptions

Suppliers are

absorbing buyer

inventory needs

and deliver on a

just-in-time basis

or provide vendor

managed inventory

Foreign suppliers

have tighter terms

due to limited trade

credit

• 30% to 50%

down payments

on orders

• 100% payment

at shipment

For most

companies, global

trade increases the

need for working

capital to fund the

investments in

receivables and

inventory

Can you handle

international

transactions

where your cash

conversion cycle

is very long?

+ - =

Cash Conversion Cycle

So why bother?

1) Cash Conversion

2) Predictability

3) Reduce Administrative costs

4) Add visibility into organization

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So what’s on your priority stack:

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Controller / AR / AP what are 2013 priorities?

Where is a system that allows suppliers to be

paid early on that list?

Where do we start?

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ELECTRONIC INVOICES - Electronic invoices and paying your

suppliers electronically has proven over and over to save 60% over manual

costs. ( you can do it yourself, or you can look to your financial partner or 3rd

party platforms to help you out)

WORKFLOW – 70-80% timesaving in creating the system that manages

procurement to payment workflow within the organization.

Standardized Purchase terms – where you have purchasing

power, standardizing terms, liabilities, returns, early payments is a best practice.

THIS MAY BE THE STOP point for many small / mid sized

companies.

John McPherson

[email protected]

613.240.9518

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mailto:[email protected]

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