Financial Supply Chain
Why do you need to know?
June 2011
Benjamin Lam
Risk and liquidity management are some of the key areas of focus for
companies nowadays
5 Core Mandates for Company Treasurers after the Global Financial Crisis
> Fulfilling a strategic role that involves greater visibility and responsibility
> Ensuring liquidity and cash for on-going operations, visibility to cash flows
/ balances, efficient working capital management processes
> Managing Risk holistically, including financial , operations and regulatory
risks
> Implementing and optimising technology to enable real time decision-making….
> Complying with new regulations
Source: Serving the new Corporate Treasurer by Oliver Wyman
The above needed to be done….
> When open account trade continues to grow as a proportion of international trade
– now at 70%
> International trade growth is virtually all from open account trade the last 10 years
What is supply chain?
Cash Conversion Cycle
Procurement
Inventory
Sales
Physical Supply Chain
Raw materials
Transfer
Process
Storage
Distributio
n
Invoicin
g
Financial Supply Chain
Payables
Financing Inventory
Receivables
Company’s Considerations
•
•
•
•
Days Payable Outstanding
Cost of Goods Sold
Early payment supplier discounts
Access to financing
• Inventory Turnover
• Access to financing
• Days Sales Outstanding
• Cash flow Efficiency
•
•
•
•
Return on Invested Capital
Net Debt / EBITDA
EBITDA / Interest
EV / EBITDA
• Return on Capital employed
• Off Balance Sheet Funding
• Risk Management
Why Supply Chain?
> Optimising the efficiency of a company’s end to end supply chain, both physical and
financial is essential for working capital needs
> Supply chain management has the potential to improve the three key drivers of financial
performance – growth, profitability and capital utilisation
Working Capital Efficiency
Costs
Cash Flow
Reduces Days Sales Outstanding and accelerates the cash conversion cycle
through readily accessible liquidity; or more sales with unchanged DSOs
Reduces financing cost by leveraging on the Buyer’s credit strength;
secured long-term supply; reduce purchasing cost
Improved liquidity allows suppliers to allocate funds to other use including
capital expenditure or investment opportunities
Risk
With the assignment of receivables, there is an opportunity to transfer the
buyer’s default/payment risk to the bank
Balance Sheet Impact
Subject to auditor’s confirmation, potential to minimise impact on the
basis of “true sale” of the receivables to ANZ
Access to Credit
RF provides an alternative source of funding by leveraging off the credit
profile of their Buyers, with minimal impact to existing bank relationships
(for without recourse structure)
Financing supply chain – bank’s approach
A bank’s approach is to ensure that the financial supply chain is designed to match the
physical supply chain; financing and/or risk management is triggered by selected events in
the chain
> A supply chain event can be issuing of invoice; maturity of payment terms; delivery of
goods and etc
> The solution can be provision of financing, guaranteeing payment to you or on your behalf,
or both
> The solution can be provided based on your company’s strengths or those of your buyers
Your supplier
Stora
ge
>Sales
>
Payme
nt
$
FINANCIAL SUPPLY
CHAIN
PHYSICAL SUPPLY CHAIN
MANUFACTURERS/
SERVICES
Accounts Payable
Raw
materials
Funds
Transfer
Your company
Financing Inventory
Storag
e
Process
Labour
I.P.
Networks
Accounts Receivable
>Sales
>
Paymen
t
>Sales
>
Paymen
t
$
Raw
materials
Your customer
Funds
Transfer
>
Process
An example – receivables solutions
How does it work?
1. Buyer and seller have a sales contractual
relationship
2. Seller to enter a Receivables Purchase
Agreement (‘RPA”) with a bank which is
comfortable with the buyer’s financial position
and the seller’s ability to produce and deliver
goods.
Delivery of
Goods
BUYERS
Seller
3. Seller delivers goods to the buyer and issues
invoice (or against PO issued by buyer with
invoice to be issued later)
4. ANZ makes payment to the seller (funded
structure) or guaranteeing payment upon
payment maturity (unfunded structure)
5. On due date of the receivable, the buyer
makes payment for the invoiced goods to the
bank (for unfunded structures, this payment is
forwarded by ANZ to the seller).
Is this Cash?
1. Commercial disputes
2. Money ‘wrongly received’ or ‘deducted’
Immediate
Payment
Deferred
Payment
Bank
Case Study 1 – Receivables solution against a large distributor
Supplier :
ABC Company – global medical product
company selling their products in China via
hospitals and distributors
Buyer:
CBA Group – domestic drug distribution
conglomerate with 12 major subsidiaries
(ABC sells around 25% of their products
through CBA Group’s subsidiaries by value)
Recourse:
Without recourse to supplier
(1) Sign Contract
CBA
Group
ABC
(2) Delivery of goods
Company
(3-d) Notice of
Assignment
Facility Size: over USD30M
Objectives: shorten cash conversion cycle, reduce risk
Special points of interest:
 ABC Company sells the corresponding receivables to
ANZ China on a without-recourse basis to obtain the
funding. Upon receipt of Notice of Assignment sent by
ABC Company, at maturity CBA Group will effect
payment to ANZ China.
 A grace period is added to the financing period to allow
flexibility in payments made by CBA Group
 Receivables are financed on 100% basis with interest
to collect from ABC Company upon maturity.
 Upon expiry of grace period, ABC Company has the
option of buying back purchased receivables
(3-a) Apply for
Financing & Sign
Agreement
(5) Payment
at maturity
(30-60 days)
(3-b)
Establish
Buyer
Limit
(3-c) Submit
documents
Bank
(4) Drawdown for
100%
Case Study 2 – Application of receivables solution in IT industry
Supplier:
XYZ Technology – global IT equipment
supplier outside China
Buyer:
DDD Company - key national IT product
distributors in China
>1. Order
XYZ WTC
>IBM
Facility Size: Over USD50M
Objectives: offload a portion of supplier’s risk against
the buyer to stay within its own internal credit limit
irrespective of expected sales growth through the
buyer.
Special points of interest:
> XYZ’s local company is responsible for delivery of
goods to DDD while payments is made by DDD to
XYZ’s regional billing centre
>2. Ship & invoice
5. Payments by
remittance to XYZ
3. A/R Assignment
and intra company
settlement
Regional
> XYZ will not seek to sell receivables to bank unless its
internal credit limit against the buyer is exceeded
> Long grace period included in the structure to allow
DDD flexibility in making payments to XYZ
>DDD
>DCT
XYZ
> Assignment of receivables (hence risk) will not
happen until DDD defaults on payment
4. Master Risk Participation
>Agreement
>IBM HK
8. Bank claim on
receivables
against DCT
Regional
7. If DCT defaults, A/R
assignment to ANZ
6. Settlement
Bank
>ANZ
Case Study 3 – Receivables solution with traditional trade tool
Supplier:
AAA Trading Company – trading company
of surface mount technology (SMT)
machines in Asia
Buyer:
HH Electronics – leading electronic product
manufacturer
4. Shipment of goods
Facility Size: over USD40M
Objective:
obtain finance leveraging on the buyer’s
strengths to settle own import of product
under letter of credits
Key points of interest:
> A receivables solution combining a letter of credit
operation for AAA’s purchase of end products
- LC is issued to ultimate supplier upon AAA’s signing
of contract with HH
- finance (upto its cost of purchase) is provided to AAA
to allow its settlement of the LC outstanding
> Quality and reputation of the ultimate supplier is also
key to the success of the solution
HH
Electro
nics
Supplier
AAA
Trading
5.
Drawdown
for 85%
invoice
bank
Case Study 4 – Receivables solution when there is no sales contracts
Supplier :
DD Electronics – reputable manufactuer
of computer peripherial devices
Buyer:
QQ Computer – one of the largest
notebook producers globally
Facility Size: over USD30M
Objectives: provide finance to DD on a without
recourse basis based on the long-term supply
relationship with QQ
QQ
Compute
r
Key points of interest:
> Buyer and seller have worked together for long
time hence no sales contract is signed
> inter-connected purchasing and invoicing system
hence no physical document flow
m
(1) Posts order via
online system
DD Group
(2-a) Access system
and confirms
acceptance of order via
telephone
(2-b) Delivery of goods
with supporting
documents
k
(3) Submit
documents
(5) Payment
at maturity
l
(4) Drawdown
for 90%
How do I get started?
> Look at your company’s balance sheet and profit & loss account
— Do you find your receivables / payables too large and want to trim it down or maintain it while
sales grows?
— Do you find your gross profit margin under pressure and want to improve / maintain?
— Do you find your finance cost a bit and want to reduce it?
— Select those largest, most critical payables and receivables as a start by understanding the credit
terms and settlement arrangements
> Talk to your purchasing departments
— Review purchase contracts with key suppliers and discuss the purchasing process
— Establish purchasing objectives: better purchase price? secure long-term supply? reduce payment
pressure?
— Ask them to talk to the suppliers
> Talk to your sales departments
— Review sales contracts with key buyers and discuss the sales process
— Establish sales objectives: grow sales by better credit terms? Control exposure to key buyers while
sales are growing?
— Understand the settlement record of your key buyers and their financial strengths?
— Ask them to talk to their buyers if they are willing to allow your assignment of receivables to bank
Just to re-cap….
> The physical supply chain of your company is also an important source for you
to extract values
> Financial supply chain is not just about financing, it is also about balance
sheet and risk management
> A supply chain solution is not an off-the-shelf product offered by banks. It is
developed highly dependent on your company’s physical supply chain
> A capable bank should pay attention to your company’s physical supply chain
in order to develop a solution that suits you
> Developing a supply chain solution requires the involvements of various
departments within your company and it takes time; start from your largest
or most critical receivables / payables, ie suppliers / buyers and get them
prepared to talk to your bank
Contacts
Benjamin Lam
Head of Trade and Supply Chain
China
T. +86 21 6169 6308
E. benjamn.lam@anz.com
Yen Poon
Head of Business Development
Trade and Supply Chain China
T. +86 21 6169 6123
E. yen.poon@anz.com
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