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How can you keep control when outsourcing part or all of your procure-to-pay process

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Bank-based supply chain finance models can be highly effective methods to optimize your working capital. But what if your bank restricted funds to your organization due to a change in risk appetite? You could ask your bank to act as a broker to find other banks to cover the shortfall in funding availability. But this restricts your control and can be expensive. So what other options are there? Doug Schoch reveals Siemens' approach by sharing how to:

- Work with a third party platform (Orbian) to allow institutions to show interest and set credit risk spreads and price in your company’s short-term obligations
- Bundle the flow of receivables from your suppliers with several institutions
- Create increased competition between institutions to lower risk and prices

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How can you keep control when outsourcing part or all of your procure-to-pay process

  1. 1. Siemens Supply ChainFinance Program Copyright © Siemens AGAG 2012. All rights reserved. Copyright © Siemens 2012. All rights reserved.Page 1 Financial Services
  2. 2. Agenda Global Shared Services Siemens DPO Supply chain finance and working capital organization Critical success factors and key learnings Different SCF models Win/win Copyright © Siemens AG 2012. All rights reserved.Page 2 Financial Services
  3. 3. Global Shared Services (GSS)North America P2P Statistics GSS processes over 2.1 million invoices per year Front Office is located in Orlando, Florida Back Office (transactional activity) is located in Bangalore, India 225 GSS employees supporting P2P processes for North America in the US and India Copyright © Siemens AG 2012. All rights reserved.Page 3 Financial Services
  4. 4. SCCs Basic Role in Siemens Global Financing Services CorporateInhouse Treasury Markets & Investment Pensions (PEN) (SFS TRE IHT) (SFS TRE GM) Management (FIM) BEIJING Treasury SFSL Center, In-house Bank, Pension DEN HAAG, NL Manager SFM 24h Global presence Capital and SIEMENS FinancialBusinesses ISELIN, NJ Markets SCC HONG KONG SFA EUR MUNICH SFS GmbH Copyright © Siemens AG 2012. All rights reserved.Page 4 Financial Services
  5. 5. Siemens DPO in a competitors’ benchmark Working Capital Benchmark : Study Results Cash Conversion DSO Comparison DPO Comparison DIO Comparison Cycle Benchmark 4th 3rd 2nd 1st 4th 3rd 2nd 1st 4th 3rd 2nd 1st 4th 3rd 2nd 1st Comparison Median 68 45 46 70 Siemens 68 36 67 99 General Electric 58 69 44 33 ABB 101 59 52 94 Philips 58 45 46 59 Schneider 71 51 50 70 Emerson 63 34 32 61 Honeywell 70 43 43 70 Source: The Hackett Group 2010 REL working capital DSO = days sales outstanding Lagging 4th 3rd 2nd 1st Leading Medians are based on industry segment DPO = days payables outstanding DIO = days inventory outstanding - Cash Conversion Cycle = DSO – DPO + DIO Copyright © Siemens AG 2012. All rights reserved.Page 5 Financial Services
  6. 6. SCF and Working Capital Organization – The CCC Acme Inc. Cash Conversion Cycle Competitor Cash Conversion CycleDIO 47.65 DIO 51.50 + +DSO 18.19 DSO 15.20 - -DPO 30.88 DPO 62.46 = =CCC 34.96 CCC 4.24 0 10 20 30 40 50 60 0 20 40 60 80 Days Days • Acme is at a ~30 day working capital disadvantage to Competitor Copyright © Siemens AG 2012. All rights reserved. Page 6 Financial Services
  7. 7. SCF Removes Negative Effects of Terms Extension Invoice Buyer makes Payment Received via SCF ProviderBuyer Suppliers Day 0 Day 10 Day 30 Day 60 Supplier is Paid Non-recourse by SCF Provider Grant Suppliers access to on-demand cash Reduce Supplier’s financing costs Reduce Suppliers’ days sales outstanding (DSO) Put downward pressure on costs of goods Put upward pressure on cost of goods Strengthen Buyer – Supplier partnership with “win-win” offering Copyright © Siemens AG 2012. All rights reserved. Page 7 Financial Services
  8. 8. Critical Success Factors / Key Learnings Challenge Key Learning• Resource Allocation • Upfront Budgeting• Internal Incentive Alignment • Creation of KPIs & Integration into Procurement Performance • COGS vs. Terms Mgt.• Marketing Message • Strong Delivery of Term/Price Movements• Sourcing SCF Pipeline Data • Defined Supplier On-Boarding Goals Agreed Upon Upfront• Tracking SCF Attributed Success • SCF Templates - Define Incremental Value Due to SCF Copyright © Siemens AG 2012. All rights reserved.Page 8 Financial Services
  9. 9. Implementing SCFBusiness Model Review/ApprovalRisk/Reward Analysis – supplier relations and operationsIn House Platform vs. 3rd Party ProviderRFP process, if requiredProcurement organization – defining the supplier targetsSupplier outreach – marketing message Copyright © Siemens AG 2012. All rights reserved.Page 9 Financial Services
  10. 10. What are the different SCF modelsSelecting from 3 SCF Models: Single-Bank Model Multi-Bank Model Universal Funding Model Copyright © Siemens AG 2012. All rights reserved.Page 10 Financial Services
  11. 11. Example of a discount chargeSuppliers or Sub-contractors pay a discount charge when they choose to sell receivable and receive cash early. Below is anexample of a Discount Charge in the Siemens SCF Program for a supplier has annual sales of at least $500K with Siemens. Payment Terms with Siemens: 90 days Siemens Approved Payment Amount: $10,000.00 Annualized SCF Discount Rate: 2.00% (Assumes Libor @ .50% + 1.50%) Auto-Discount Scenario Invoices Submitted = Day 0 Payment Approved by Siemens and Shared with SCF platform = Day 15 Receivable Sold to Orbian by Supplier or Sub-contractor = Day 15 Cash Received by Supplier or Sub-contractor = Day 17 Number of Days Cash Received Early = 73 days Discount Charge Paid by Supplier or Sub-contractor = $41 (73/360) x .0200 x $10k Discount Charge as a Percentage of the Receivable = 0.41% Cash Proceeds Received by Supplier or Sub-contractor on Day 17 = $9,959 Copyright © Siemens AG 2012. All rights reserved. Page 11 Financial Services
  12. 12. The SCF “Win-Win”Buyer Increases Payment Terms from traditional to extended Increase DPO, improving CCC Improve cash management (100% certainty of payment timing / amount)Supplier Accelerate payments Cut receivables financing costs with low SCF rate Decrease DSO, improving CCC Reduce A/R operating costs Improve cash management (100% certainty of payment timing / amount) Copyright © Siemens AG 2012. All rights reserved.Page 12 Financial Services
  13. 13. ContactDouglas SchochSiemens Capital Company, LLCVP, Relationship ManagerIn-House Treasury (TRE)Douglas.Schoch@siemens.com732-590-6582 office Copyright © Siemens AG 2012. All rights reserved. Page 13 Financial Services

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