Improving working capital performance
with Supply Chain Finance
September 20, 2012
Big challenges to working capital performance
“
Despite a global business environment where companies can be harshly punished by Wall
Street for even small missteps in predicting revenue or earnings, most large companies
say they cannot correctly forecast operational basics like inventory, receivables, payables,
and the underlying cash requirements to support them…”
“... typical large companies in the annual REL 1000 analysis could generate nearly $2
billion in additional cash annually by optimizing working capital management.”
REL Consulting (a division of The Hackett Group, Inc.), Working Capital: Successes, Challenges, and 2012
Objectives, (April 26, 2012)
“
Since, on average, roughly 50% of companies’ working capital is tied up in the
supply chain, there are very significant benefits to taking a more holistic view of the
supply chain...”
Ernst & Young insight: Getting the most from your supply chain (March 12, 2012)
How do you improve performance?
Payables…
 Extend Days Payables Outstanding (DPO)
 Control financing costs
 Manage A/P processes more efficiently
Receivables…
 Shorten Days Sales Outstanding (DSO)
 Improve “quality” of receivables
 Lower financing costs
 Expand sales markets (revenue growth)
 Reduce payment and FX risk
Inventory…
 Lower Cost of Goods Sold (COGS)
 Align procurement terms to match sales terms
 Accelerate inventory turnover
 Ensure a predictable supply chain
More efficient financing may be the solution
3
Peer comparison*
Working capital benchmarking analysis —
an example
From a working capital perspective,
how would you stack up against your peers?
* Standardized in USD MM 360-day calendar, based on the latest FYE results and average two-year balances
Source information: 2011 corporate annual reports (available online)
Evolution of finance in the global supply chain
Management of the Supply Chain has involved over time to a more holistic view
Convergence of the physical and financial supply chains
• Historically, the Supply Chain has addressed physical aspects: inventory flows, transportation spending
• Supply Chain Finance (“SCF”) expanded the focus to Inventory control and A/R reduction
• Today, efficiency in Payables has become a key component of Cash Conversion Cycle discussions
Effect of Global Financial Crisis on Working Capital Optimization
• The Global Financial Crisis illustrated that the cost and availability of capital can change dramatically in a short
period of time and underscored the importance of counterparty and supplier risk management
• As a result, working capital optimization became a renewed area of high interest
Best in Class Companies
• Today most Fortune 500 companies are using programs such as Card Solutions, ePayables, SCF that enable them
to generate a value proposition from their payables:
•
Card solutions as a bottom up solution that can extend terms or more often generate fee rebates
•
SCF provides a top down, more cost effective, solution for larger suppliers
5
Overview of Supply Chain Finance
Purpose
• Provides a “Buyer” with a means to stretch out payables or reduce COGS while also offering suppliers the ability to
receive payments as quickly as possible
• Create a “value exchange” that can improve working capital or, alternatively, allow negotiation of pricing concessions
Program
• Suppliers can tap into funds earlier in their receivable cycle by allowing them to secure discounted funds against those
receivables
• Web-based technology can provide a seamless solution for both parties
• Available to both domestic and international suppliers and can be used for foreign currency purchases
Pricing
• Suppliers bear the on-going cost of the program, at a cost of funds aligned with the Buyer, set as a per annum rate,
fixed spread over the relevant LIBOR for the period of the discount
• Discount rate charged to vendors incorporates the credit spread and the program’s administrative costs
• Cost is generally lower than the suppliers’ cost of debt and well below their Cost of Capital, WACC or IRR
SCF: who it benefits
Buyers benefit by…
 Improving cash flow by extending DPO while maintaining
trade payables classification
 Alternatively use a mechanism to negotiate better
pricing
 Reduced administration through end-to-end payables
reconciliation solution
 Strengthening supplier relationships/sustainability
 Can be part of an integrated payment network solution
Suppliers benefit by…
 Improving cash flow by reducing DSO in an accounting
neutral way
 Obtaining funding based on receivables as a financial
asset, rather than supplier creditworthiness
 Obtaining financing at rates more favorable than those
offered by alternative finance mechanisms
 Avoiding use of often limited credit availability from their
bank
 Improving cash flow forecasting and flexibility
A win-win
 Having a tool to manage the concentration of
receivables
for both buyers and suppliers
SCF: how it works
1. Buyer transmits purchase orders to Supplier
2. Supplier submits invoices to Buyer
3. Buyer reconciles and feeds approved
invoice file into Bank’s platform (webbased)
4. Supplier selects and requests discount of
approved invoices (or auto-discount) – all or
part
Bank System
5. Bank discounts invoices and remits
proceeds to Supplier
6. Bank debits Buyer account on
invoice maturity date for total due and
remits amounts not discounted.
 Invoice
 Purchase order
Buyer
Supplier
Traditional negotiation of terms - “zero-sum game”
Buyer receivables are a substantial part of its suppliers’ working capital costs
Supplier
Buyer
Objective: Increase DPOs
Objective: Decrease DSOs
Assets
Equity & Liabilities
Assets
Equity & Liabilities
ABC A/R = Buyer A/P
Buyer
A/R
ABC
A/P
Supply Chain Finance offers a “win-win” solution
SCF enables Buyer suppliers to discount approved invoices at a very competitive rate
ABC Company
Benefit: Decreased DSOs
Assets
E&L
Buyer
A/R
Supplier DSO = 10
(unlock cash flow)
Bank
Buyer
Benefit: Increased Lending
Assets
Buyer
A/R
Bank owns A/R 41
E&L
Benefit: Increased DPOs
Assets
E&L
ABC
A/P
Buyer DPO = 51
(reduce working
capital)
14
8%
12
7%
6%
10
5%
8
4%
6
Many buyers enjoy…
 Low cost of financing
 Investment graded
 Strong balance sheet
 Access to low cost capital
 Many banking options
3%
4
B-
B
B+
BB-
BB
BB+
CCC+
Suppliers by S&P
BBB-
 Non-investment graded
BBB
0%
BBB+
0
A-
 High cost of debt or other capital alternatives
A
1%
A+
2
AA-
While many suppliers face…
AA
2%
AA+
Quantity of Suppliers
Typical financing inefficiencies – both
domestically and internationally
 A/R concentration limit issues
 Restrictive or limited bank credit lines
Est. Rate by S&P*
SCF Rate
A Supply Chain Finance (SCF) program can help
allocate financing more efficiently to the benefit of both parties
* Based on S&P 2012 rating scale
Cash flow improvement —
an example
Supply Chain Finance Benefits Calculator
Improved cash flow
Supply Chain Finance Benefits Calculator
Supplier Name
Supplier Sales to Buyer
Current Terms
Target Terms
Invoice Approval Days
Supplier's Capital Rate
SCF Rate
LIBOR
Supplier Name
Supplier Sales to Buyer
Current Terms
Target Terms
Invoice Approval Days
Supplier's Capital Rate
SCF Rate
LIBOR
$25,000,000
30
59
5
5.00%
2.00%
0.30%
$25,000,000
60
115
5
5.00%
2.00%
0.49%
Today
Today's
Terms
Target
Terms
Paym ent
Term s
60
60
115
5
DSO
60
5
5
2.30%
2.30%
Supplier's
Interest
Rate
5.00%
2.49%
2.49%
$104,167
$57,292
$103,611
Supplier's
Interest
Cost
$208,333
$112,465
$207,569
Supplier's
A/R
$2,083,333
$347,222
$347,222
Supplier's
$4,166,667
A/R
$347,222
$347,222
Buyer's
A/P
$2,083,333
$2,083,333
$4,097,222
Buyer's
A/P
$4,166,667
$7,986,111
Supplier's Break-Even Rate
2.30%
Supplier's Interest Savings ($) $46,875
Supplier's Interest Savings (%) 0.1875%
Supplier's Cash Flow Increase $1,736,111
Buyer's Cash Flow Increase
$0
4.97%
$556
0.0022%
$1,736,111
$2,013,889
Supplier's Break-Even Rate
2.49%
Supplier's Interest Savings ($) $95,868
Supplier's Interest Savings (%) 0.3835%
Supplier's Cash Flow Increase $3,819,444
Buyer's Cash Flow Increase
$0
4.98%
$764
0.0031%
$3,819,444
$3,819,444
Today
Today's
Terms
Target
Terms
Paym ent
Term s
30
30
59
DSO
30
5
Supplier's
Interest
Rate
5.00%
Supplier's
Interest
Cost
$4,166,667
Example of successful application of Supply Chain Finance
Company
A multinational company with over $2BN in revenues in the wholesale manufacturing market
Objective
Dramatically extend its very short supplier terms and improve its Cash Conversion Cycle.
Situation
Company was well below its peers in both DPO and CCC, had already extracted all possible benefits in
inventory control and was being pressed to extend sales terms to its customers
Response
Through our recently established program the Company expects to achieve the following:
Dramatically extend its DPO, which will approach industry leaders
Generate approximately $60mm in additional cash flow by year end 2011 and increasing to $150mm by
year end 2012
Set a new standard for negotiations with new suppliers as to terms
Seek to further extend supplier terms in the future
In Summary
 Corporate focus on working capital metrics can be a more cost-effective effort than capital raising or
increasing bank debt
 Solutions that benefit both a buyer and a supplier are an easier sell
 Payables programs can often be easily implemented and should be targeted where supplier
adoption is most likely and provides the most benefit
 Can be part of an overall streamlined and automated payment process designed to generate
capital/revenue and reduce administrative burden and cost