A.T. Kearney 82/7478 1
Supply Chain Financing
Dr. Dale S. RogersNevada Logistics Institute
Reno, NV
13 August 2015
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Overview Strategic Supply Chain Financing
• Supply chain financing defined• Fund the Growth• Working capital
Tactics• Supply chain finance – reverse factoring• E-Payables• Cash Conversion Cycle• Options
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Supply Chain Finance is:
1. Using the supply chain to fund the organization, and
2. Using the supplier organizations to fund the supply chain
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Fund the Growth
Firms are looking to an efficient and effective supply chain to fund the growth of the company.
Companies cannot only be dependent on revenues and financial management to grow profit.
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Sources of Operating Capital: An Example
Pricing
SKU Rationalizati
on
Mix Management
Supply Chain Savings
Functional Savings
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Reasons for Increases In Cash Holdings
Inventories have fallen
Cash flow risk for
firms has increased
Capital expenditures have
fallen
R&D expenditures have
increased.
Source: THOMAS W. BATES, KATHLEEN M. KAHLE, and REN´E M. STULZ (2009). Why Do U.S. Firms Hold So Much More Cashthan They Used To? Journal of Finance
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Manufacturer 3PL Customer
Transportation Provider (Carrier)
Bank
Supply Chain Finance(Reverse Factoring)
Pays Immediately
3PL sells accounts receivable to bank and
receives payment in less than 30 days
Pays in 30 days
Uses Manufacturer’s
credit rating
Pays in 90 days
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Timeline
0 days 30 days 60 days 90 days
3PL pays the Transportation Carrier
Manufacturer pays the Bank
Bank pays the 3PL
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Supplier Manufacturer
Aggregator
Supply Chain Finance
Or wait 90 days
Supplier can choose to receive
payment as early as 2 days after the
invoice has been approved.
Uses Manufacturer credit rating
Bundle of Manufacturer
receivables as DTC notes
Bank 1 Bank 2 Bank 3
Submits invoice to Aggregator
Agrees to SCF Arrangement
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Timeline
day 0 day 10day x day 90
Invoice sent to
Manufacturer
Invoice approved
Aggregator sends
money to supplier
day 8
Manufacturer sends money to
Aggregator
Aggregator sells
notes to bank(s)
Aggregator sends
money to bank(s)
Delivery of
productProduct received
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Dynamic Discounting Offering of early payment discounts on approved
invoices awaiting payment.
Buyers have option of choosing an APR
Supplier invoices discounted based on a sliding scale derived from the number of days supplier is paid early.
Types:• Early Payments• Extended Discount Term• Dynamic Payment Terms (ASAP)
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HOW DOES IT FIT WITH OTHER EARLY PAY PROGRAMS?THEY COMPLEMENT EACH OTHER PERFECTLY
Acco
un
ts P
ay
ab
le V
alu
e
Larger
Supplier Size
Smaller
C2FOSCF
Buyer push
Buyer extends DPO
Supplier pull
Buyer generates
profit
Cards
SPEND LEVELS
= SCF $50M+
= C2FO everything in between= P-Cards less than $1M
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Source: Bavelos Group, 2015
SCF C2FO Cards
250 500 750 1,000
1,250
1,500
1,750
2,000
$X0
$35
$30
$25
$20
$15
$10
$5
$0
APR
70%
60%
50%
40%
30%
20%
10%
0%
SPEND $M
APRSpend Value Capital Cost
Typical spend distribution of Fortune 500 company
TOGETHER THEY HELP ADDRESS ALL PARTS OF THE SUPPLY CHAINAND MAJORITY OF VALUE OPPORTUNITY IS IN MIDSECTION OF SPEND
LargestSupplier
SmallestSupplier
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E-Payables – P-Cards
RetailCommercial
Tie CardsCo-Branding
Buying FirmChief Purchasing Officer Supplier Firm
BankCard Issuer Bank
ProcessorMasterCard
Visa
FraudSecurityRebates
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SCF vs. E-Payables
SCF brings CPO and CFO together. The tension used to be on CPO focusing on price and CFO on working cap.
SCF for core suppliers, large volume of money, frequent transactions.
P-card (or virtual card) more for lots of SME suppliers.
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Cash Requirements – Monthly Payments vs. Weekly Payments
Monthly Invoice Payments
Weekly Invoice Payments
Average Cash Required
Average Cash Required
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Cash Conversion Cycle
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-60
-40
-20
0
20
40
60
80
100
Apple
Apple
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Cash Conversion Cycle
CCC = DSO + DIO – DPO
Days Sales Outstanding (DSO): the number of days needed to collect on sales.
Days Inventory Outstanding (DIO): how many days it takes to sell the inventory.
Days Payable Outstanding (DPO): the company's payment of its own bills.
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Selected CAPS Firms 2014 CCCCompany Name 2014 CCCTRANSCANADA CORP -44.99STATOIL ASA -24.90CHEVRON CORP 1.22PROCTER & GAMBLE CO 12.11XCEL ENERGY INC 24.46NORTHROP GRUMMAN CORP 31.38GENERAL MOTORS CO 35.30UNITED STATES STEEL CORP 52.18CELANESE CORP 57.77LOCKHEED MARTIN CORP 59.29HONEYWELL INTERNATIONAL INC 59.35INTEL CORP 78.10RAYTHEON CO 82.70GENERAL DYNAMICS CORP 133.71TEXAS INSTRUMENTS INC 139.27TEVA PHARMACEUTICALS 154.43
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Sources of Data
Income Statement:• Revenue• Cost of Goods Sold (COGS)
Balance Sheet:• (Average) Accounts Receivable• (Average) Accounts Payable• (Average) Inventory
The number of days in the period (year = 365 days, quarter = 90)
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Days Sales Outstanding
(Average) Accounts Receivable/ Revenue per day
Choices:• Accounts Receivable• AAR = (beginning AR + ending AR) / 2• Time average of AR
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Days Inventory Outstanding
(Average) Inventory / COGS per day
Choices:• Inventory• Average Inv. = (beginning Inv. + ending Inv.) / 2• Time average of Inventory• De-inflate COGS?