B2B payments and working capital management are increasingly intertwined as companies look to their payables to drive strategic value. Both Procurement and Finance are turning their attention to new payment, working capital management, and supply chain finance strategies. In this session, analysts from McKinsey and Chainlink will share research and perspectives on the changes, challenges, and opportunities that companies face with these new strategies. This session is sponsored by Discover, SAP Ariba's partner in developing and delivering the award-winning innovation AribaPay.
Business Model Canvas (BMC)- A new venture concept
Procurement & Payables: An Analyst Perspective on the Future of B2B Payment and Working Capital Management
1. Procurement & Payables: An Analyst Perspective on the Future of
B2B Payment and Working Capital Management
Jason Hanson, Partner, McKinsey & Company
Bill McBeath, Principle Analyst, Chainlink Research
Scott Pezza, Sr. Consultant, SAP Ariba / March 15, 2016
Public
5. U.S. B2B Payments Overview
March 15th, 2015
Jason Hanson, Principal, McKinsey & Company
6. McKinsey & Company 6|
Domestic B2B payables is a $30T payment flow; ~$6T (30%) of those
payables are financed in some fashion
SOURCE: McKinsey Payments Map, Federal Reserve, IRS Corporate Tax Returns, U.S. Census
Facilitated
financed
payables
4.23.7
Intra-
company
transfers2
33.5
B2G tax
payments
True
domestic
B2B
payables
Gov’t and
NPO
spending1
21.1
Paid at
maturity
Financed
payables
7.4
9.3
Domestic
business
and gov’t
payments
79.2
Value of
U.S. imports
3.6
Value of
U.S. exports
3.0
Domestic
and internat-
ional
payments
85.8
Non-
facilitated
buyer funded
discounts
7.9
29.0
1 Federal, state, and local government and nonprofit spending
2 Includes payments from zero balance, sweep, cash concentration, and controlled disbursement accounts which are not true B2B spend
2013 Domestic and international payments, USD trillions
7. McKinsey & Company 7|
07
U.S. B2B EMEA B2BPayment Instrument
SOURCE: McKinsey U.S. Payments Map, Release Q1-2014
Continued opportunity for electrification in the U.S. market
3%
71%
5%
13%
3%
5%0%
1%
0%
Check 23%
60%
Other (Debit,
Book Entry, Prepaid)
Wire Transfer
Cash
16%
Credit Card
ACH
8. McKinsey & Company 8|
The order to payment process is complex
Procurement /
Purchasing
Order Receipt /
Processing
Accounts
receivable
Accounts
payable
1 Purchase order
sent to supplier
Buyer Supplier
2
P.O. data sent to
AR for credit
evaluation /
invoicing
3
Invoice sent to
buyer
4
P.O. data sent
to AP for
reconcilement
Payment sent
to supplier
5
Goods / services
sent to buyer
6
Supply Chain Management
EIPP space
Simplified order-to-payment process
9. McKinsey & Company 9|
AP processes challenges
Vendor
Negotiation
Ordering
Accounts PayableProcurement
A/R
▪ Manual processes / exceptions rates lead to longer cycle times –
higher labor cost, missed discounts, and late fees
– Errors lead to overpayments
– Paper makes auditing more difficult
– Paper processes tend to drive paper payments
▪ Lack of integration with AP
can lead to poor tracking of
vendor compliance with
negotiated terms
2
▪ Lack of visibility / unpredictability into the paper oriented order-to-pay cycle leads to working capital inefficiencies1
3
Purchase
Order (PO)
Matching
Invoice
Receipt
Exceptions
/ Research
Payment
Approval
Payment
Origination
10. McKinsey & Company 10|
AR challenge – separate information flows
Accounts
Payables
Payment
Network
Payables
Automation
Platform
Accounts
Receivables
Invoice Data
Receivables
Automation
Platform
A/R Matching
Match
Separate flows of payment
and invoice information
necessitates an A/R matching
function that adds to the
complexity of the network
system
InvoicePayment
Payment Data
11. McKinsey & Company 11|
Benefits of improving B2B payments
Buyer side (A/P) Supplier side (A/R)
▪Reduction in wholesale lockbox costs –
electronic invoicing and payment alleviates the
need for wholesale lock-box
▪Labor cost savings – a streamlined invoice
creation and P.O. matching
▪Better terms for receivables factoring
▫Greater visibility provided to the lender /
guarantor can reduce factoring costs
▫Reduce DSO
▫Better liquidity
▪Labor cost savings – reduction of data /
invoice entry
▪Spend management – consolidated views of
all spending activity to reduce expenditure
▪Discount management – greater visibility
allows buyers to take more discounts
▪More advantageous trade finance terms –
greater visibility provided to the lender /
guarantor can reduce financing costs
▪Reduction in payment costs – check
processing and postage costs
12. McKinsey & Company 12|
Real savings potential
SOURCE: McKinsey U.S. Payments Map, expert interviews
78
3
5-10
Wire2
40-50
$45-$60
Check $50-$65
<1
25-35
ACH $30-$45
<1
<1
25-35
5-10
Accounts receivableSeller1 Accounts payableBuyer1
Delivery time and
informationTransaction costs and soft costs
1 Includes float/working capital considerations
2 Illustrative, wire transfers typically used for large infrequent payments (average value estimated at $60,000)
USD per transaction, assuming average transaction size of $3,000
▪T+1-2, but with limited
accompanying data in
addenda records/email
▪T+0, with limited
accompanying data in
addenda records/email
▪T+4-5, with limited
accompanying data
“below the perforation”
14. Working Capital and Supply Chain Finance
Unlocking Strategic Value for
Procurement, Supply Chain, and Finance Professionals
Bill McBeath
Chief Research Officer, ChainLink Research
15. Agenda
• The Working Capital Tug-of-War
• Full Lifecycle SCF and Networked Platforms
• Receivables Financing
• Benefits of SCF
• Ownership and Capabilities
21. Consequences of Burden-shifting
• Supplier’s cost of capital/
access to capital
• Supplier’s financial health
and viability
• Supplier’s speed of
execution
22. Decreased
Costs
Source: ChainLink Research
Suppliers Cost of Borrowing
With Traditional Financing
Increased
Returns
Buyer’s Typical Returns
from Cash on Hand
Cost for Supplier / Returns for
Buyer w/ Network Approach
Traditional Approach
Holistic SCF via
Network-Platform
Traditional Approach0%-1%
3%-5%
10%-15%+
TypicalArbitrage
Opportunity
Traditional Loans,
Factoring
Arbitrage Opportunity
•Local / In-
country
Lenders
•Limited bi-
directional
visibility
•High rates
23. Various
Production
Milestones
Blanket or
Master P.O.
Issued
Material
Release or
Individual
P.O. Issued
Delivered to Buyer
or VMI Hub
Invoice Approved
by Buyer
Goods
Shipped Payment by
Buyer, per Terms
Pulled from
VMI Hub
In-transit
Financing
VMI
Financing
Receivables
Financing
Pre-shipment
Financing
Source:
ChainLink Research
Full Lifecycle Supply Chain Finance—
Across the Procure-to-Pay Lifecycle
24. Various
Production
Milestones
Blanket or
Master P.O.
Issued
Material
Release or
Individual
P.O. Issued
Delivered to Buyer
or VMI Hub
Invoice Approved
by Buyer
Goods
Shipped Payment by
Buyer, per Terms
Pulled from
VMI Hub
In-transit
Financing
VMI
Financing
Receivables
Financing
Pre-shipment
Financing
Source: ChainLink Research
Increasing Risk for Lender / Decreasing Leverage of Buyer Creditworthiness
Milestone Visibility Points for Lenders
25. Network PlatformVarious
Production
Milestones
Blanket or
Master P.O.
Issued
Material
Release or
Individual
P.O. Issued
Delivered to Buyer
or VMI Hub
Invoice Approved
by Buyer
Goods
Shipped Payment by
Buyer, per Terms
Pulled from
VMI Hub
In-transit
Financing
VMI
Financing
Receivables
Financing
Pre-shipment
Financing
Source:
ChainLink Research
IssuePO
Buyer
ReceivePO
Supplier
Supplier
Record
Production
Milestones
Bank
ReceiveMilestones
Notifications
Shipper
TenderLoad
Carrier
Respondto
Tender
Shipper
SendASN
Carrier
Status
updates
ReceiveASN
Buyer
Supplier
SendInvoice
ReceiveInvoice
Buyer
ApproveInvoice
Bank
SendDiscounted
EarlyPayment
Payment
Buyer
Receive
Discounted
EarlyPayment
Supplier
Bank
Rcv
Payment
3rd Party
Inspector
Inspection
Docs/
Approval
Bank
RcvInspection
Documentation
RcvProof
ofDelivery
Supplier
27. Various
Production
Milestones
Blanket or
Master P.O.
Issued
Material
Release or
Individual
P.O. Issued
Delivered to Buyer
or VMI Hub
Invoice Approved
by Buyer
Goods
Shipped Payment by
Buyer, per Terms
Pulled from
VMI Hub
In-transit
Financing
VMI
Financing
Receivables
Financing
Pre-shipment
Financing
Source: ChainLink Research
Traditional
Factors
Network Platform Enabled Approaches
Early Payment
Discount
Programs
Platform-based
Receivables
Funding
28. Source: ChainLink Research
Early Payment
Discount
Programs
Platform-based
Receivables
Funding
Traditional
Factors
Network Platform Enabled Approaches
•Local / In-
country
Lenders
•Limited bi-
directional
visibility
•High rates
•Buyer- or Lender-funded
early payment
•‘dynamic discounting’
•Typically buyer- or
lender-managed
program
•Buyer/Lender or Supplier
sets rates
•Automation/rules based
processing
•Bank- or Third-
party buys
receivables
•Supplier-
initiated
•Lenders
compete for
buying
receivables
29. Milestone Visibility
Past Performance Visibility
Accurate, Timely
Documents
Competitive Lending
Marketplace
Automated Payment
Legal Framework
• Lower Lending Risk
• Increased Lending Competition
• Lower Lending Rates
• Increased Pool of Early Payment
Discounts Available
• Lower Cost of Capital
• Lower COGS
Source: ChainLink Research
30. Supply Chain Glitches Are Very Costly
-30
-25
-20
-15
-10
-5
0
-125 -100 -75 -50 -25 0 25 50 75 100 125
Trading day relative to announcement date
Averageshareholderreturns(%)
Source: “Impact of Supply Chain Performance on Shareholder Value”
V. Singhal, Georgia Institute of Technology