Supply Chain Financing
Dr. Dale S. Rogers
Nevada Logistics Institute
Reno, NV
13 August 2015
A.T. Kearney 82/7478
1
Overview
 Strategic Supply Chain Financing
•Supply chain financing defined
•Fund the Growth
•Working capital
 Tactics
•Supply chain finance – reverse factoring
•E-Payables
•Cash Conversion Cycle
•Options
2
2
Supply Chain Flows
Product
Flow
Financial
Flow
Information
Flow
3
Supply Chain Finance is:
1. Using the supply chain to fund the
organization, and
2. Using the supplier organizations to fund
the supply chain
4
Supply Chain Financing
Fund the Growth!
5
5
Fund the Growth
Firms are looking to an efficient and
effective supply chain to fund the
growth of the company.
Companies cannot only be dependent on
revenues and financial management to
grow profit.
6
6
Sources of Operating Capital:
An Example
Pricing
Functional
Savings
Supply Chain
Savings
SKU
Rationalization
Mix
Management
7
Reasons for Increases In Cash Holdings
Inventories
have fallen
R&D
expenditures
have
increased.
Cash flow
risk for firms
has
increased
Capital
expenditures
have fallen
Source: THOMAS W. BATES, KATHLEEN M. KAHLE, and REN´E M. STULZ (2009). Why Do U.S. Firms Hold So Much More Cash
than They Used To? Journal of Finance
8
Supply Chain Finance
(Reverse Factoring)
Uses Manufacturer’s
credit rating
Pays in 90 days
Bank
3PL sells accounts
receivable to bank and
receives payment in less
than 30 days
Transportation
Provider (Carrier)
Pays in 30
days
Manufacturer
3PL
Customer
Pays Immediately
9
Timeline
Bank pays the 3PL
3PL pays the
Transportation
Carrier
0 days
30 days
Manufacturer pays
the Bank
60 days
90 days
10
Supply Chain Finance
Uses
Manufacturer
credit rating
Agrees to SCF
Arrangement
Aggregator
Supplier can
choose to receive
payment as early as
2 days after the
invoice has been
approved.
Supplier
Submits invoice
to Aggregator
Manufacturer
Bundle of Manufacturer
receivables as DTC notes
Bank 1
Bank 2
Bank 3
Or wait 90 days
11
Timeline
Aggregato
r sends
money to
bank(s)
Delivery
of
Product
product received
Invoice sent
to
Manufactur
er
day 0
Aggregato
Aggregato r sends
money to
r sells
Invoice
supplier
approved notes to
bank(s)
day 8
day x
day 10
Manufactur
er sends
money to
Aggregator
day 90
12
Dynamic Discounting
 Offering of early payment discounts on approved invoices
awaiting payment.
 Buyers have option of choosing an APR
 Supplier invoices discounted based on a sliding scale
derived from the number of days supplier is paid early.
 Types:
•Early Payments
•Extended Discount Term
•Dynamic Payment Terms (ASAP)
13
HOW DOES IT FIT WITH OTHER EARLY PAY PROGRAMS?
THEY COMPLEMENT EACH OTHER PERFECTLY
SPEND LEVELS
Buyer p ush
= SCF $50M+
Buyer extends DPO
Accounts Payable Value
= C2FO everything in between
= P-Cards less than $1M
Supplier p ull
Buyer generates profit
SCF
Cards
C2FO
Supplier Size
Larger
Smaller
14
TOGETHER THEY HELP ADDRESS ALL PARTS OF THE SUPPLY CHAIN
AND MAJORITY OF VALUE OPPORTUNITY IS IN MIDSECTION OF SPEND
Typical spend distribution of Fortune 500 company
Spend
Value
APR
Capital Cost
SPEND $M
APR
$X0
70%
$35
60%
$30
50%
$25
40%
$20
30%
$15
20%
$10
10%
$5
$0
0%
Largest
Supplier
250
SCF
500
750
1,000
1,250
C2FO
1,500
1,750
2,000
Smalles
t
Supplie
Cards
r
Source: Bavelos Group, 2015
15
Payments
Purchase
Requisition
Purchase
Order
•
•
•
•
•
Check
ACH
VCA
Wire Transfer
FedWire
16
E-Payables
P-Card
EPayables
Virtual
Card
Ghost
Card
17
E-Payables – P-Cards
Buying Firm
Chief Purchasing Officer
Supplier Firm
Retail
Commercial
Tie Cards
Co-Branding
Fraud
Security
Rebates
Bank
Card Issuer
Processor
MasterCard
Visa
Bank
18
SCF vs. E-Payables
 SCF brings CPO and CFO together. The tension used to be
on CPO focusing on price and CFO on working cap.
 SCF for core suppliers, large volume of money, frequent
transactions.
 P-card (or virtual card) more for lots of SME suppliers.
19
Cash Requirements – Monthly Payments vs.
Weekly Payments
Monthly Invoice Payments
Average Cash Required
Weekly Invoice Payments
Average Cash Required
20
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
Cash Conversion Cycle
Apple
100
80
60
40
20
Apple
0
-20
-40
-60
21
Cash Conversion Cycle
CCC = DSO + DIO – DPO
 Days Sales Outstanding (DSO): the number of days
needed to collect on sales.
 Days Inventory Outstanding (DIO): how many days it takes
to sell the inventory.
 Days Payable Outstanding (DPO): the company's payment
of its own bills.
22
Selected CAPS Firms 2014 CCC
Company Name
TRANSCANADA CORP
STATOIL ASA
CHEVRON CORP
PROCTER & GAMBLE CO
XCEL ENERGY INC
NORTHROP GRUMMAN CORP
GENERAL MOTORS CO
UNITED STATES STEEL CORP
CELANESE CORP
LOCKHEED MARTIN CORP
HONEYWELL INTERNATIONAL INC
INTEL CORP
RAYTHEON CO
GENERAL DYNAMICS CORP
TEXAS INSTRUMENTS INC
TEVA PHARMACEUTICALS
2014 CCC
-44.99
-24.90
1.22
12.11
24.46
31.38
35.30
52.18
57.77
59.29
59.35
78.10
82.70
133.71
139.27
154.43
23
Further Explanation
 http://financing.supply
24
Funder Solutions
25
End Of Presentation
Extra slides follow
26
Sources of Data
 Income Statement:
•Revenue
•Cost of Goods Sold (COGS)
 Balance Sheet:
•(Average) Accounts Receivable
•(Average) Accounts Payable
•(Average) Inventory
 The number of days in the period (year = 365 days,
quarter = 90)
27
Days Sales Outstanding
(Average) Accounts Receivable/ Revenue per day
 Choices:
•Accounts Receivable
•AAR = (beginning AR + ending AR) / 2
•Time average of AR
28
Days Inventory Outstanding
(Average) Inventory / COGS per day
 Choices:
•Inventory
•Average Inv. = (beginning Inv. + ending Inv.) / 2
•Time average of Inventory
•De-inflate COGS?
29
Days Payable Outstanding
(Average) Accounts Payable / COGS per day
 Choices:
•Accounts Payable
•AAP = (beginning AP + ending AP) / 2
•Time average of AP
•De-inflate COGS?
30