Introduction to Supply Chain Finance

Supply Chain FinanceIAPP Maryland DC Chapter Meeting

Steve KeiferVice President

Industry & Product MarketingMay 9, 2008

Introduction to Supply Chain Finance May 9, 2008Slide 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


Working Capital Tensions

Supply Chain Finance


Buyer-Supplier Payment Dynamics

Manufacturing& Assembly

PaymentReleased

OceanIn-Transit

Import &Customs

GroundTransit

WarehouseReceiving

InvoiceApproval

Inspection& Export

InvoiceDelivered

PurchaseOrder

0 15 95 1509085805045 100

Suppliers need cash to pay for raw materials,

manufacturing labor and operating expenses.

Buyers prefer to extend payment terms and

hold cash to optimize working capital.

Supply Chain Finance attempts to relieve buyer-supplier payment tension, by enabling both parties to

set the terms they prefer.


Extending Payment Terms

Payment on Delivery

Net 30

Net 45

Net 60

Late Payment

Ris

k

Cos

t

Term

What are the hidden risks and costs to the buyer of extending payment terms with suppliers?


International Trade



International Trade Challenges

Supplier of Goods or Services In China

Buyer of Goods or Services In US

Supplier’s Plant

Buyer’s Location

Supplier’s Challenge Buyer’s Challenges– Purchase raw materials – large

upfront expense– Fund labor for production– Very long cash-to-cash cycles - 90

days from shipment to payment– Risk of buyer not paying

– Risk of delay from inaccurate documentation or risk

– Working capital tied up in long lead time and buffer inventory

– Risk of supplier not delivering against terms and conditions


Letter of CreditInternational Trade Instrument

Supplier

• Letter of Credit – Means for a shipper to collect payment for his goods from the customer.

• Useful in international shipments where US law cannot help with nonpayment

• Letter of Credit specifies in explicit terms what the customer wants and when.

• Customer sets aside funds for payment with bank

• Documents are sent to financial institutions to mediate payment and terms

Buyer

Supplier’s Financial Institution

Buyer’s Financial Institution

Physical Flow of Goods

Exchange of Funds

Upon ReceiptCustomer notifies

Bank to Pay

Sends all Documents

For Payment to Bank


Challenges with Letters of Credit

– LOCs are time-consuming. Manual matching of trade documents is required to satisfy payment criteria.

– LOCs are expensive ($1000-$1500) compared to open account transactions ($50-$200 plus variable expense).

– 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.

Use of Letters of Credit are in decline in North America & Europe

Bank personnel match all

trade documents

To satisfy LOC

requirements for payment to supplier


Migration to Open Account

201020092008200720062005

Open AccountLetter of Credit

Declining Use of Bank Instruments for International Settlement

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 international buyers

– Less expensive, complex and time consuming than letter of credit

Open Account– Supplier offers credit to buyer with no

bank guarantee of payment

– Less formal structure for disputes or missed payments

– Risk shifts from buyer to supplier in a transaction


Trade Settlement RisksPrimary International Trade Instruments

Cash in Advance

Letters of Credit

Documentary Collection

Open Account

Sup

plie

r Ris

k

Buy

er’s

Ris

k

Risk of Non Delivery

Risk of Non Payment


Letter of Credit Finance Program


PaymentReleased

OceanIn-Transit

Import &Customs

GroundTransit

WarehouseReceiving

InvoiceApproval

Inspection& Export

InvoiceDelivered

PurchaseOrder

0 15 95 1209085805045

Supplier

Buyer’s Bank

Buyer

Supplier’s Bank

Supplier’s Bank Issues Export Letter of Credit

Supplier obtains financing based

upon L/C

Buyer’s Bank Issues Import

Letter of Credit

Upon Matching of Documents,

Payment Occurs

Risk for Supplier’s Bank is low with L/C

guaranteeing Payment from Buyer’s Bank

100


Open Account Supplier Finance


PaymentReleased

OceanIn-Transit

Import &Customs

GroundTransit

WarehouseReceiving

InvoiceApproval

Inspection& Export

InvoiceDelivered

PurchaseOrder

0 15 95 1209085805045

Supplier

Buyer’s Bank

Buyer

Supplier’s Bank

Supplier seeks financing based

upon PO

Risk for Supplier’s Bank is high with just a

Purchase Order and no Guarantee of Payment from Buyer or Buyer’s

Bank

Buyer pays upon maturity of invoice and resolution of

disputes

Funds transfer occurs at

settlement

100


Open Account & Extended TermsHidden Costs and Risks in the Supply Chain

Small Supplier Large Buyer

Longer Days Sales Outstanding and greater cash flow

challenges

Must seek alternative terms of financing based upon supplier’s

credit worthiness and ratings

Inability to seek appropriate financing may result in

insolvency or work stoppage

Realizes higher overall costs as supplier’s pass on financing

costs in pricing

Extended payment terms may increase tensions in

relationships with suppliers

Risk of supply chain disruption if supplier insolvency or work

stoppage occurs

What impact do Open Account and Extended Payment Terms have on Small Suppliers?


Unbalanced Trade Terms

Buyer(Importer)

Supplier(Exporter)

Cash FlowPressures burden Small Suppliers

Buyers introduce Higher Risk and

Cost


Introduction to SCF



Supply Chain Finance Example

Financing Source

Supplier’s AccountsReceivable

Buyer’s Accounts

Payable

4 – Buyer approves invoice for payment and sends confirmation to

bank

5 – Supplier offered early

payment discount

6 – Supplier accepts early payment

7 – Bank funds early payment to supplier8 – Buyer makes

payment on original due date

Or extends payment terms

3 – Supplier invoices buyer

1 – Buyer issues purchase order

2 – Supplier delivers goods

Supply Chain Processes

Opportunity Identified

Supplier Payment Process

Buyer Settlement Process


Supply Chain Finance BenefitsA Win-Win-Win Scenario for All Participants

Supplier Buyer

Bank

– Immediate access to cash– Reduced DSOs– Improved cash flow visibility– Lower financing costs– No debt on balance sheet

– Lower cost of goods sold – Lower supply chain risk – Longer DPOs– Use financial strength as

competitive advantage

– Re-intermediation into supply chains even open account

– Income from financing– New customers – suppliers

who gain financing– Cross-sell opportunities

Costs and Risks are

lowered in the supply chain

Working Capital

optimized for all parties


Multiple Funding Options

Supplier’sBank

Supplier’s AccountsReceivable

Buyer’s Accounts

Payable

Buyer’sBank

Buyer’sTreasury

Third PartyFinancier

FinancedTransaction


Supplier Segmentation by Credit Rating

Cost of Working Capital = Small to Medium Suppliers have the greatest interest rate expense

Cost of FundsLibor Plus

5.0%(4.0%+100bp)

Large CorporateBuyers & Suppliers

SmallSuppliers

MediumSuppliers

Cost of FundsPrime Plus

8.50%(6.0%+250bp)

Cost of FundsPrime Plus Premium13.50%

(6.0%+750bp)

13.5%

8.5%

5.0%


Supplier Segmentation by Credit Rating

Cost of FundsLibor Plus

5.0%(4.0%+100bp)

LargeBuyer

SmallSuppliers

Cost of FundsPrime Plus Premium13.50%

(6.0%+750bp)

13.5%

5.0%

Post-Shipment Finance Scenario

– Buyer has received goods and confirmed intention to pay invoice

– Invoice is date-certain, dollar-certain from bank’s perspective

– Risk is with buyer non-payment, independent of supplier credit

– Financing can be offered to supplier based upon buyer’s credit rating and limits

– Bank can obtain a margin for accepting the risk and utilizing its working capital

– Supplier benefits from significantly improved rates

Opportunity for Cost Reduction


Supply Chain Finance Defined


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


What’s New in SCF?



Invoice DiscountingBuyer Initiated and Funded Early Payment Program

Buyer

Supplier

PurchaseOrder

PhysicalShipment

SupplierInvoice

BuyerPayment

PaymentTerm

Buyer

Supplier

PurchaseOrder

PhysicalShipment

Normal Accounts Payable Process

Accounts Payable with Discounting

SupplierInvoice

DiscountedPayment


Payment DiscountingBuyer Initiated Early Payment Program

Discounting Explained– Buyer manages program– Upon invoice approval propose discount

to supplier– Full payment minus discount released

upon acceptance of proposal– Buyer funds with cash on balance sheet

(or through 3rd party)– Buyer compares opportunity cost of

using cash for discounting versus others

Pros & Cons of Discounting– Accelerates cash flow to supplier

reducing DSOs and freeing up working capital

– Provides cost savings to buyer with strong cash position

– Only available post-shipment– Relatively high financing rates

Buyer

Supplier

PurchaseOrder

PhysicalShipment

Accounts Payable with Discounting

SupplierInvoice

DiscountedPayment


Factoring ReceivablesSupplier Initiated Early Payment Program

Buyer

Supplier

PurchaseOrder

PhysicalShipment

SupplierInvoice

BuyerPayment

PaymentTerm

Buyer

Supplier

PurchaseOrder

PhysicalShipment

Normal Accounts Receivable Process

Accounts Receivable with Factoring

SupplierInvoice

UpfrontPayment

Final Payment

Financial Institution


Factoring ReceivablesSupplier Initiated Early Payment Program

Factoring Explained– Supplier initiates process with Factor.– Sells book of receivables to Factor.– Cash for as much as 90% of invoice– Receive remaining 10% minus a

factoring service fee once the company receives payment

– Factoring fees depend upon credit worthiness of customers

– Factor assumes responsibility for accounts receivable and collections

Pros & Cons Factoring– Free up cash-flow to solve short-term

financial crunches– Smoother, more consistent cash flow. – Relatively expensive financing cost– Must factor book of receivables to

balance risk for 3rd party factor

Buyer

Supplier

PurchaseOrder

PhysicalShipment

Accounts Receivable with Factoring

SupplierInvoice

UpfrontPayment

Final Payment

Financial Institution


Supply Chain Finance Versus Traditional

FundingSources

FinancingRates

PaymentTiming

FinancingAmount

InvoiceDiscounting

ReceivablesFactoring

Supply ChainFinance

Cash RichBuyers

3rd PartyFinancial

Institutions

Buyer, SupplierBuyer or Supplier’s Bank

3rd Party Financier

15-25% EffectiveAPR is typical

Can be based upon buyer’s credit rating

Upon Buyer’sInvoice Approval

Typically uponInvoice Submission

On DemandPO Acknowledgement

Export, Import orInvoice Approval

15-25% EffectiveAPR is typical

IndividualInvoice

Entire invoice orSpecific line items on purchase order

Bundle ofReceivables


Other Financing Types



Three Types of Financing


PaymentReleased

OceanIn-Transit

Import &Customs

GroundTransit

WarehouseReceiving

InvoiceApproval

Inspection& Export

InvoiceDelivered

PurchaseOrder

0 15 13095 1009085805045

Most banks will only offer financing once the invoice is approved by the buyer. The window for financing is only the last 30-60 days of a 130-

180 day transaction

Post-Export Financing

Inventory owners (which may be buyer or supplier) want to finance the inventory while it

is in transit. Banks offer financing for goods as they

flow through the supply chain.

Inventory Financing

Suppliers need a working capital loan to finance

purchases of raw materials and to fund

operating expenses for manufacturing and labor.

Pre-Export Financing


Multi-Stage Supply Chain Finance ExamplePart 1 – Export Triggered Finance Opportunity


PaymentReleased

OceanIn-Transit

Import &Customs

GroundTransit

WarehouseReceiving

InvoiceApproval

Inspection& Export

InvoiceDelivered

PurchaseOrder

0 15 13095 1009085805045

Supply Chain Finance Platform

Supplier Financier

Electronic Confirmation of Export from Port

of Origin.

EventNotification

Quality Inspection Certificate from Buyer’s Local

Agent in Region.

Buyer

Bank presents early payment

option to supplier

Supplier accepts option for partial early payment


Multi-Stage Supply Chain Finance ExamplePart 2 – Export Triggered Finance Opportunity


PaymentReleased

OceanIn-Transit

Import &Customs

GroundTransit

WarehouseReceiving

InvoiceApproval

Inspection& Export

InvoiceDelivered

PurchaseOrder

0 15 13095 1009085805045

Supplier Financier


of Origin.

EventNotification


Agent in Region.

Buyer

70% of Purchase Order Value

Transferred to Supplier



Multi-Stage Supply Chain Finance ExamplePart 3 – Buyer Receipt Triggered Payment


PaymentReleased

OceanIn-Transit

Import &Customs

GroundTransit

WarehouseReceiving

InvoiceApproval

Inspection& Export

InvoiceDelivered

PurchaseOrder

0 15 13095 1009085805045

Supplier Financier


of Origin.

EventNotification


Agent in Region.

Electronic Proof of Delivery from

Buyer’s Warehouse

EventNotification

Buyer

30% of Purchase Order Value

Transferred to Supplier

Supply Chain Finance PlatformPhase 1

Phase 2


Multi-Stage Supply Chain Finance ExampleMulti-Stage Example –Part 4 - Buyer Payment at Term


PaymentReleased

OceanIn-Transit

Import &Customs

GroundTransit

WarehouseReceiving

InvoiceApproval

Inspection& Export

InvoiceDelivered

PurchaseOrder

0 15 13095 1009085805045

Supplier Financier Buyer


of Origin.

EventNotification

70% of Funds Released to Supplier


Agent in Region.

Electronic Proof of Delivery from

Buyer’s Warehouse

EventNotification

Remaining 30% of Funds Released to Supplier

Payment Approved and

Release by Buyer

Phase 1

Phase 2

100% of Funds Release to Financial Institution



Starting a Program



Benefits Achieved from SCFAberdeen Research – State of the Market 2008

Level of Activity in SCF Benefits Achieved

15% - Actively using SCF

18% - Plans in Place for

SCF

40% -Investigating

SCF

26% - No Action Taken

Lower unit costs of procured goods

Lower risk in supplier base

Extended payment terms (DPOs)

Lower production costs

Lower days sales outstanding

Improved business continuity

Trade financing at lower rate

57%

48%

33%

52%

43%

38%

43%


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


Bank Services



Banks focus on Supply Chain Finance

201020092008200720062005

New MechanismsLetter of Credit

Declining Use of Bank Instruments for International Settlement

201020092008200720062005

New Working Capital Services

TraditionalTrade Finance

Declining Trade Revenues Need to Be Offset with New Services


Landscape of Banking Services



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


Thank You

Date post:	14-Sep-2014
Category:	Technology
View:	15,695 times
Download:	4 times

Introduction to Supply Chain Finance

Technology