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Introduction to Supply Chain Finance

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This presentation was given to the Maryland/DC chapter of the International Accounts Payable Professionals association in May 2008

This presentation was given to the Maryland/DC chapter of the International Accounts Payable Professionals association in May 2008

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  • 1. Supply Chain Finance IAPP Maryland DC Chapter Meeting Steve Keifer Vice President Industry & Product Marketing May 9, 2008
  • 2. Supply Chain Finance (SCF) • What is Supply Chain Finance? • Market Drivers for SCF • Why is it Important? • Comparison to Invoice Discounting • Should you start an SCF Program? • Services available from Banks • Questions and Answers Slide 2 Introduction to Supply Chain Finance May 9, 2008
  • 3. Supply Chain Finance Working Capital Tensions Slide 3 Introduction to Supply Chain Finance May 9, 2008
  • 4. Buyer-Supplier Payment Dynamics Manufacturing Warehouse Purchase Inspection Ocean Import & Ground Invoice Invoice Payment & Assembly Receiving Order & Export In-Transit Customs Transit Delivered Approval Released 0 15 45 50 80 85 90 95 100 150 Suppliers need cash to Buyers prefer to extend pay for raw materials, payment terms and manufacturing labor and hold cash to optimize operating expenses. working capital. Supply Chain Finance attempts to relieve buyer- supplier payment tension, by enabling both parties to set the terms they prefer. Slide 4 Introduction to Supply Chain Finance May 9, 2008
  • 5. Extending Payment Terms Late Payment Net 60 Net 45 Term Cost Risk Net 30 Payment on Delivery What are the hidden risks and costs to the buyer of extending payment terms with suppliers? Slide 5 Introduction to Supply Chain Finance May 9, 2008
  • 6. Supply Chain Finance International Trade Slide 6 Introduction to Supply Chain Finance May 9, 2008
  • 7. International Trade Challenges Supplier of Goods or Buyer of Goods or Services In China Services In US Buyer’s Supplier’s Location Plant Supplier’s Challenge Buyer’s Challenges – Purchase raw materials – large – Risk of delay from inaccurate upfront expense documentation or risk – Fund labor for production – Working capital tied up in long – Very long cash-to-cash cycles - 90 lead time and buffer inventory days from shipment to payment – Risk of supplier not delivering – Risk of buyer not paying against terms and conditions Slide 7 Introduction to Supply Chain Finance May 9, 2008
  • 8. Letter of Credit International Trade Instrument Supplier’s Buyer’s Financial Institution Financial Institution • Letter of Credit – Means for a shipper to collect payment for his goods from the customer. Exchange of Funds • Useful in international shipments where US law cannot help with Sends all nonpayment Upon Receipt Documents Customer notifies For Payment to • Letter of Credit specifies in Bank to Pay Bank explicit terms what the customer wants and when. • Customer sets aside funds for payment with bank • Documents are sent to Physical Flow of Goods financial institutions to mediate payment and terms Supplier Buyer Slide 8 Introduction to Supply Chain Finance May 9, 2008
  • 9. Challenges with Letters of Credit Use of Letters of Credit are in decline in North America & Europe – LOCs are time-consuming. Manual matching of trade documents is required to satisfy payment criteria. Bank To satisfy – LOCs are expensive ($1000-$1500) personnel LOC compared to open account transactions match all requirements ($50-$200 plus variable expense). trade for payment documents to supplier – LOCs require the use of a financial institution. Open Account transactions don’t. – Trade relationships between buyers and suppliers have become more established over longer periods of time. Supply chain dependencies provide an effective deterrent against non-payment. Slide 9 Introduction to Supply Chain Finance May 9, 2008
  • 10. Migration to Open Account Open Account Declining Use of Bank Instruments – Supplier offers credit to buyer with no for International Settlement bank guarantee of payment – Less formal structure for disputes or missed payments – Risk shifts from buyer to supplier in a transaction Market Drivers for Open Account – International trade transactions between are becoming more common as global export/imports boom – Suppliers have established long- standing relationships with 2005 2006 2007 2008 2009 2010 international buyers Letter of Credit Open Account – Less expensive, complex and time consuming than letter of credit Slide 10 Introduction to Supply Chain Finance May 9, 2008
  • 11. Trade Settlement Risks Primary International Trade Instruments Risk of Non Open Account Payment Buyer’s Risk Documentary Collection Supplier Risk Letters of Credit Risk of Non Cash in Advance Delivery Slide 11 Introduction to Supply Chain Finance May 9, 2008
  • 12. Letter of Credit Finance Program Manufacturing Warehouse Purchase Inspection Ocean Import & Ground Invoice Invoice Payment & Assembly Receiving Order & Export In-Transit Customs Transit Delivered Approval Released 0 15 45 50 80 85 90 95 100 120 Supplier Buyer Risk for Supplier’s Bank is low with L/C guaranteeing Payment from Buyer’s Bank Supplier’s Bank Supplier obtains Buyer’s Bank Issues Export financing based Issues Import Letter of Credit upon L/C Letter of Credit Upon Matching of Documents, Supplier’s Buyer’s Payment Occurs Bank Bank Slide 12 Introduction to Supply Chain Finance May 9, 2008
  • 13. Open Account Supplier Finance Manufacturing Warehouse Purchase Inspection Ocean Import & Ground Invoice Invoice Payment & Assembly Receiving Order & Export In-Transit Customs Transit Delivered Approval Released 0 15 45 50 80 85 90 95 100 120 Supplier Buyer Risk for Supplier’s Bank is high with just a Buyer pays upon Supplier seeks Purchase Order and no maturity of invoice financing based Guarantee of Payment and resolution of upon PO from Buyer or Buyer’s disputes Bank Funds transfer occurs at Supplier’s Buyer’s settlement Bank Bank Slide 13 Introduction to Supply Chain Finance May 9, 2008
  • 14. Open Account & Extended Terms Hidden Costs and Risks in the Supply Chain Small Supplier Large Buyer Longer Days Sales Outstanding Realizes higher overall costs as and greater cash flow supplier’s pass on financing challenges costs in pricing Must seek alternative terms of Extended payment terms may financing based upon supplier’s increase tensions in credit worthiness and ratings relationships with suppliers Inability to seek appropriate Risk of supply chain disruption if financing may result in supplier insolvency or work insolvency or work stoppage stoppage occurs What impact do Open Account and Extended Payment Terms have on Small Suppliers? Slide 14 Introduction to Supply Chain Finance May 9, 2008
  • 15. Unbalanced Trade Terms Buyer Supplier (Importer) (Exporter) Buyers introduce Cash Flow Higher Risk and Pressures burden Cost Small Suppliers Slide 15 Introduction to Supply Chain Finance May 9, 2008
  • 16. Supply Chain Finance Introduction to SCF Slide 16 Introduction to Supply Chain Finance May 9, 2008
  • 17. Supply Chain Finance Example 1 – Buyer issues purchase order Supplier’s Buyer’s 2 – Supplier delivers goods Accounts Accounts Receivable Payable 3 – Supplier invoices buyer 5 – Supplier 4 – Buyer approves 6 – Supplier accepts offered early invoice for payment and early payment payment sends confirmation to discount bank 7 – Bank funds early payment to supplier 8 – Buyer makes payment on original due date Or extends Supply Chain Processes payment terms Opportunity Identified Financing Supplier Payment Process Source Buyer Settlement Process Slide 17 Introduction to Supply Chain Finance May 9, 2008
  • 18. Supply Chain Finance Benefits A Win-Win-Win Scenario for All Participants Supplier Buyer – Immediate access to cash – Lower cost of goods sold – Reduced DSOs – Lower supply chain risk – Improved cash flow visibility – Longer DPOs – Lower financing costs – Use financial strength as – No debt on balance sheet competitive advantage Bank – Re-intermediation into supply Working Costs and chains even open account Capital Risks are – Income from financing – New customers – suppliers optimized for lowered in the who gain financing all parties supply chain – Cross-sell opportunities Slide 18 Introduction to Supply Chain Finance May 9, 2008
  • 19. Multiple Funding Options Supplier’s Buyer’s Financed Accounts Accounts Transaction Receivable Payable Third Party Buyer’s Buyer’s Supplier’s Financier Bank Treasury Bank Slide 19 Introduction to Supply Chain Finance May 9, 2008
  • 20. Supplier Segmentation by Credit Rating Cost of Working Capital = Small to Medium 13.5% Suppliers have the greatest interest rate expense 8.5% Cost of Funds Prime Plus 5.0% Cost of Funds Premium Prime Plus 13.50% 8.50% (6.0%+750bp) Cost of Funds (6.0%+250bp) Libor Plus 5.0% (4.0%+100bp) Small Large Corporate Medium Suppliers Buyers & Suppliers Suppliers Slide 20 Introduction to Supply Chain Finance May 9, 2008
  • 21. Supplier Segmentation by Credit Rating Post-Shipment Finance Scenario 13.5% – Buyer has received goods and confirmed intention to pay invoice Opportunity for Cost Reduction – Invoice is date-certain, dollar- certain from bank’s perspective Cost of Funds Prime Plus – Risk is with buyer non-payment, 5.0% Premium independent of supplier credit 13.50% – Financing can be offered to (6.0%+750bp) Cost of Funds supplier based upon buyer’s Libor Plus credit rating and limits 5.0% (4.0%+100bp) – Bank can obtain a margin for accepting the risk and utilizing its working capital Small Large – Supplier benefits from Suppliers Buyer significantly improved rates Slide 21 Introduction to Supply Chain Finance May 9, 2008
  • 22. Supply Chain Finance Defined Supply Chain Finance A category of solutions designed to provide working capital financing and accelerated cash inflow to suppliers on the basis of the value of physical or financial supply chain events such as issuance of a purchase order or approval of an invoice. These solutions frequently include features that are beneficial to the buyer, but this is not a requirement. SCF solutions are equally applicable to domestic and cross-border trade activity. Source: Tower Group Slide 22 Introduction to Supply Chain Finance May 9, 2008
  • 23. Supply Chain Finance What’s New in SCF? Slide 23 Introduction to Supply Chain Finance May 9, 2008
  • 24. Invoice Discounting Buyer Initiated and Funded Early Payment Program Normal Accounts Accounts Payable Payable Process with Discounting Buyer Buyer Purchase Purchase Supplier Order Order Invoice Payment Term Physical Physical Shipment Shipment Supplier Invoice Buyer Discounted Payment Payment Supplier Supplier Slide 24 Introduction to Supply Chain Finance May 9, 2008
  • 25. Payment Discounting Buyer Initiated Early Payment Program Discounting Explained Accounts Payable – Buyer manages program with Discounting – Upon invoice approval propose discount to supplier – Full payment minus discount released Buyer upon acceptance of proposal – Buyer funds with cash on balance sheet (or through 3rd party) Purchase Supplier – Buyer compares opportunity cost of Order Invoice using cash for discounting versus others Physical Shipment Pros & Cons of Discounting – Accelerates cash flow to supplier reducing DSOs and freeing up working Discounted capital Payment – Provides cost savings to buyer with strong cash position – Only available post-shipment Supplier – Relatively high financing rates Slide 25 Introduction to Supply Chain Finance May 9, 2008
  • 26. Factoring Receivables Supplier Initiated Early Payment Program Normal Accounts Accounts Receivable Receivable Process with Factoring Buyer Buyer Purchase Purchase Supplier Order Order Invoice Payment Term Physical Physical Shipment Shipment Financial Institution Supplier Invoice Buyer Upfront Final Payment Payment Payment Supplier Supplier Slide 26 Introduction to Supply Chain Finance May 9, 2008
  • 27. Factoring Receivables Supplier Initiated Early Payment Program Factoring Explained Accounts Receivable – Supplier initiates process with Factor. with Factoring – Sells book of receivables to Factor. – Cash for as much as 90% of invoice – Receive remaining 10% minus a Buyer factoring service fee once the company receives payment – Factoring fees depend upon credit Purchase Supplier worthiness of customers Order Invoice – Factor assumes responsibility for Physical accounts receivable and collections Shipment Financial Institution Pros & Cons Factoring – Free up cash-flow to solve short-term Upfront Final financial crunches Payment Payment – Smoother, more consistent cash flow. – Relatively expensive financing cost – Must factor book of receivables to Supplier balance risk for 3rd party factor Slide 27 Introduction to Supply Chain Finance May 9, 2008
  • 28. Supply Chain Finance Versus Traditional Invoice Receivables Supply Chain Discounting Factoring Finance 3rd Party Buyer, Supplier Cash Rich Funding Financial Buyer or Supplier’s Bank Buyers Sources 3rd Party Financier Institutions Can be based Financing 15-25% Effective 15-25% Effective upon buyer’s APR is typical Rates APR is typical credit rating On Demand Payment PO Acknowledgement Upon Buyer’s Typically upon Export, Import or Invoice Approval Invoice Submission Timing Invoice Approval Entire invoice or Financing Individual Bundle of Specific line items Amount Invoice Receivables on purchase order Slide 28 Introduction to Supply Chain Finance May 9, 2008
  • 29. Supply Chain Finance Other Financing Types Slide 29 Introduction to Supply Chain Finance May 9, 2008
  • 30. Three Types of Financing Manufacturing Warehouse Purchase Inspection Ocean Import & Ground Invoice Invoice Payment & Assembly Receiving Order & Export In-Transit Customs Transit Delivered Approval Released 0 15 45 50 80 85 90 95 100 130 Pre-Export Financing Inventory Financing Post-Export Financing Inventory owners (which may Most banks will only offer Suppliers need a working be buyer or supplier) want to financing once the invoice is capital loan to finance finance the inventory while it approved by the buyer. The purchases of raw is in transit. Banks offer window for financing is only materials and to fund financing for goods as they the last 30-60 days of a 130- operating expenses for flow through the supply chain. 180 day transaction manufacturing and labor. Slide 30 Introduction to Supply Chain Finance May 9, 2008
  • 31. Multi-Stage Supply Chain Finance Example Part 1 – Export Triggered Finance Opportunity Manufacturing Warehouse Purchase Inspection Ocean Import & Ground Invoice Invoice Payment & Assembly Receiving Order & Export In-Transit Customs Transit Delivered Approval Released 0 15 45 50 80 85 90 95 100 130 Quality Inspection Electronic Event Certificate from Confirmation of Notification Buyer’s Local Export from Port Agent in Region. of Origin. Supply Chain Finance Platform Bank presents early payment option to supplier Supplier accepts option for partial early payment Financier Buyer Supplier Slide 31 Introduction to Supply Chain Finance May 9, 2008
  • 32. Multi-Stage Supply Chain Finance Example Part 2 – Export Triggered Finance Opportunity Manufacturing Warehouse Purchase Inspection Ocean Import & Ground Invoice Invoice Payment & Assembly Receiving Order & Export In-Transit Customs Transit Delivered Approval Released 0 15 45 50 80 85 90 95 100 130 Quality Inspection Electronic Event Certificate from Confirmation of Notification Buyer’s Local Export from Port Agent in Region. of Origin. Supply Chain Finance Platform 70% of Purchase Order Value Transferred to Supplier Financier Buyer Supplier Slide 32 Introduction to Supply Chain Finance May 9, 2008
  • 33. Multi-Stage Supply Chain Finance Example Part 3 – Buyer Receipt Triggered Payment Manufacturing Warehouse Purchase Inspection Ocean Import & Ground Invoice Invoice Payment & Assembly Receiving Order & Export In-Transit Customs Transit Delivered Approval Released 0 15 45 50 80 85 90 95 100 130 Quality Inspection Electronic Electronic Proof Event Event Certificate from Confirmation of of Delivery from Notification Notification Buyer’s Local Export from Port Buyer’s Agent in Region. of Origin. Warehouse Supply Chain Finance Platform Phase 1 Phase 2 30% of Purchase Order Value Transferred to Supplier Financier Buyer Supplier Slide 33 Introduction to Supply Chain Finance May 9, 2008
  • 34. Multi-Stage Supply Chain Finance Example Multi-Stage Example –Part 4 - Buyer Payment at Term Manufacturing Warehouse Purchase Inspection Ocean Import & Ground Invoice Invoice Payment & Assembly Receiving Order & Export In-Transit Customs Transit Delivered Approval Released 0 15 45 50 80 85 90 95 100 130 Quality Inspection Electronic Electronic Proof Event Event Payment Certificate from Confirmation of of Delivery from Notification Notification Approved and Buyer’s Local Export from Port Buyer’s Release by Buyer Agent in Region. of Origin. Warehouse Supply Chain Finance Platform Phase 1 Phase 2 Remaining 30% of Funds Released to Supplier 100% of Funds Release to Financial 70% of Funds Institution Released to Supplier Financier Buyer Supplier Slide 34 Introduction to Supply Chain Finance May 9, 2008
  • 35. Supply Chain Finance Starting a Program Slide 35 Introduction to Supply Chain Finance May 9, 2008
  • 36. Benefits Achieved from SCF Aberdeen Research – State of the Market 2008 Level of Activity in SCF Benefits Achieved 26% - No 15% - Actively Lower unit costs of 57% Action Taken using SCF procured goods Lower risk in 48% supplier base Extended payment 33% terms (DPOs) Lower production 52% costs Lower days sales 43% outstanding Improved business 38% continuity 18% - Plans 40% - Trade financing at in Place for 43% Investigating lower rate SCF SCF Slide 36 Introduction to Supply Chain Finance May 9, 2008
  • 37. Should you Create an SCF Program? Considerations for You – Accounting Treatment – A/P versus Short Term Debt – Credit Rating as compared to Supplier Community – Funding Sources – Internal versus Banks & Specialists – Opportunity Cost of Credit Lines and Cash versus Others Vendor Considerations – Global Footprint in Locations Suppliers are based – Legally authorized to Factor in Supplier’s Country – Understands Taxes owed on Factored Invoices – Financial Resources to Fund Your Program Slide 37 Introduction to Supply Chain Finance May 9, 2008
  • 38. Supply Chain Finance Bank Services Slide 38 Introduction to Supply Chain Finance May 9, 2008
  • 39. Banks focus on Supply Chain Finance Declining Use of Bank Instruments Declining Trade Revenues Need to for International Settlement Be Offset with New Services 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010 Traditional New Working Letter of Credit New Mechanisms Trade Finance Capital Services Slide 39 Introduction to Supply Chain Finance May 9, 2008
  • 40. Landscape of Banking Services Slide 40 Introduction to Supply Chain Finance May 9, 2008
  • 41. Supply Chain Finance Post-Shipment Scenario – Financing based upon the credit rating of the buyer. – Buyer using good credit to provide low cost financing to suppliers. – Can be a competitive differentiator in battle of supply chains. Reverse Factoring – Financing buyer’s A/P versus supplier’s A/R – True sale of supplier’s receivable – Recourse solely back to buyer – Required date and dollar certainty from buyer on invoices Slide 41 Introduction to Supply Chain Finance May 9, 2008
  • 42. Thank You Slide 42 Introduction to Supply Chain Finance May 9, 2008

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