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Supply Chain Financing
Dale S. Rogers, Ph.D.
W. P. Carey School of BusinessArizona State University
January 25, 2017
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Main Ideas
• Procurement Organizations need to be better educated on SCF
• Supplier Development with SCF• How SCF programs work
– Funding• Amount of variability in the Fintechs• Accounting Treatment (Alcoa Case)
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Supply Chain Flows
Product Flow
Information Flow
Financial Flow
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Supply Chain Finance is:
1. Using the supply chain to fund the organization, and
2. Using the organization to fund the supply chain.
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Supply Chain Financing
Fund the Growth
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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.
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Sources of Operating Capital: An Example
Pricing
SKU Rationalization
Mix Management
Supply Chain Savings
Functional Savings
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Reasons for Increases In Cash Holdings
Inventories have fallen
Cash flow risk for firms
has increased
Capital expenditures have fallen
R&D expenditures
have increased.
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Manufacturer 3PL Customer
Transportation Provider (Carrier)
Bank
Supply Chain Finance(Reverse Factoring)
Pays Immediately
3PL sells accounts receivable to bank
and receives payment in less
than 30 daysPays in 30
days
Uses Manufacturer’s
credit rating
Pays in 90 days
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Timeline
0 days 30 days 60 days 90 days
3PL pays the Transportation Carrier
Manufacturer pays the Bank
Bank pays the 3PL
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Supplier Manufacturer
Aggregator
Supply Chain Finance
Or wait 90 days
Supplier can choose to receive
payment as early as 2 days after the
invoice has been approved.
Uses Manufacturer credit rating
Bundle of Manufacturer receivables as DTC notes
Bank 1 Bank 2 Bank 3
Submits invoice to
Aggregator
Agrees to SCF
Arrangement
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Timeline
day 0 day 10day x day 90
Invoice sent to
Manufacturer
Invoice approved
Aggregator sends
money to supplier
day 8
Manufacturer sends
money to Aggregator
Aggregator sells notes to bank(s)
Aggregator sends
money to bank(s)
Delivery of
productProduct received
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List of Largest Banks Participating in SCF
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Fintech Firms
Firm Specialization CommentsAriba Supply Chain
Financing and Dynamic Discounting
Unit of SAP, that is providing a complete procure-to-pay capability
Basware Procure-to-Pay Platform
A Finnish software company selling enterprise software for financial processes, purchase to pay and financial management.
C2FO Exchange-based Dynamic Discounting/early payment.
Similar concept to Priceline only for early payment of receivables. Target market is SME firms.
GT Nexus / Infor
Supply chain collaboration platform with some CF functionality.
Merged with TradeCard, another provider of Supply Chain Finance solutions. And it was recently acquired by Infor, a provider of cloud-based software for businesses.
Orbian Supply Chain Financing
Early Fintech company that started originally as a JV between SAP and Citibank. They finance the purchases of the receivables with financial partners under Clearstream, Euroclear, and DTC note issuances under no-purchase agreement
Firm Specialization CommentsPrime Revenue
Supply Chain Financing and Dynamic Discounting
Technology platform that is widely considered to be the most robust. Their software can help analyze firm spend and provide a strategy to optimize payment terms based on multiple benchmarks and supplier characteristics. Technology includes payment terms optimization. Also, in addition to SCF can help firms do dynamic discounting.
Taulia Supply Chain Financing and Dynamic Discounting
A procure-to-pay platform that is independent of ERP software firms or banks. They are able to provide flexible options for buyers and sellers.
Textura Supply Chain Financing
Concentrates on the construction industry. Value proposition for general contractor is higher quality process.
Trax Logistics transaction risk management and data refining.
Receives, standardizes, normalizes, and corrects logistics data, and general invoice risk data. They are able to provide an agreed upon risk score for each invoice which can then be
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SCF FundersName Specialty Countries
Advance Global Capital
Funding SMEs in the emerging markets throughout the world
UK
Apex Peak Funding for SMEs throughout Singapore and in South Africa
Singapore
Greensill Capital Principal investor group specializing in structured trade finance, working capital optimization, specialty financing and contract monetization
Australia, UK, and US
GemCorp Investment Fund focused on emerging markets in Africa, Asia, and Europe across sectors and asset classes
UK
Propel Provides Working Capital Solutions, such as Supplier Finance and Receivables finance to firms in African countries
South Africa
Tower Trade Group
Supply Chain Finance and IT services for companies in Ireland, South Africa, Spain, Switzerland, UK, and the US
Switzerland
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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)
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HOW DOES IT FIT WITH OTHER EARLY PAY PROGRAMS?THEY COMPLEMENT EACH OTHER PERFECTLY
Acco
unts
Pay
able
Val
ue
Larger
Supplier Size
Smaller
C2FOSCF
Buyer push
Buyer extends DPO
Supplier pul l
Buyer generates profit
Cards
SPEND LEVELS
= SCF $50M+
= C2FO everything in between
= P-Cards less than $1M
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Source: Bavelos Group, 2015
SCF C2FO Cards
250 500 750 1,000 1,250 1,500 1,750 2,000
$X0
$35
$30
$25
$20
$15
$10
$5
$0
APR
70%
60%
50%
40%
30%
20%
10%
0%
SPEND $MAPRSpend Value Capital Cost
Typical spend distribution of Fortune 500 company
TOGETHER THEY HELP ADDRESS ALL PARTS OF THE SUPPLY CHAINAND MAJORITY OF VALUE OPPORTUNITY IS IN MIDSECTION OF SPEND
LargestSupplier
SmallestSupplier
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E-Payables
E-Payables
P-Card
Ghost Card
Virtual Card
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E-Payables – P-Cards
RetailCommercial
Tie CardsCo-Branding
Buying FirmChief Purchasing Officer Supplier Firm
BankCard Issuer BankProcessor
MasterCardVisa
FraudSecurityRebates
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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.
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SupplierPay Pledge
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Average WC Required
Average WC Required
Time
Weekly Payments
Monthly Payments
Working Capital
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Cash Conversion Cycle
-60
-40
-20
0
20
40
60
80
100
Apple
Apple
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Further Explanation
• http://financing.supply
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End Of Presentation
Extra slides follow
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Payments
PurchaseRequisition
PurchaseOrder
• Check• ACH• VCA• Wire Transfer• FedWire
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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.
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Fees
$ Tr
ansa
ctio
n Si
ze
Fees
120 Basis Points + $40
$7,255.22
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Cash Conversion Cycle
-60
-40
-20
0
20
40
60
80
100
Apple
Apple
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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.
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Further Explanation
• http://financing.supply
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Funder Solutions
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Cash Conversion Cycle
-60
-40
-20
0
20
40
60
80
100
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
Apple
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Sources ofCapital
Equity
Debt
Supply Chain/
Operating Capital
Cash
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Sources ofOperating
Capital
Pricing
SKU Rationaliza
tion
Supply Chain
Savings
Functional
Savings
Mix Manage
ment
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Retail /Commercial
Tie CardsCo-
Branding
Buyer Supplier
CardIssuer
MerchantAcquirer
Processor
FraudSecurityRebates
Goods/ Services
Payment
30 days after close of billing cycle (average
of 45 days)
2 days after card has been
processed
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Transmitter:
MasterCard, Visa,
etc.
CITI Bank
Acquirer Bank (or
other institution)
SellerBuyer
-250 BP
-200 BP
-200 BP
-50 BP
20 BP
20 BP
Risk Mgt.Profit
Day 0
Day 2
Day 45
80 BP
50 BP
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Supplier Buyer
Provider
Or wait 90 days
Uses Buyers’ credit rating to
assess risk
Finance receivabl
es
Syndicate/
Consortium of Banks
Submits
approved
invoice
Agrees to SCF
Arrangement
SCF Provider
Bank
Bank
Funder
Supplier can
receive early
payment of
approved invoice
Pays in 90 days
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FintechSupply Chain
Finance
Dynamic Discountin
g
Commercial Credit Card
FinancingBanks
Specialized
ProvidersOthers: Pension Funds,
Insurers, Mutual Funds
Procure-to-PayIdentify SKU /
Supplier
Request Goods /
Send PO
Receive Invoice
Receive Goods
Approve Invoice
Document Management /Analytics / Reporting
Payment
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Purc
hase
Vol
ume
Supplier Size
Commercial Card
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Purc
hase
Vol
ume
Supplier Size
Dynamic Discounting
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Purc
hase
Vol
ume
Supplier Size
Reverse Factoring
Largt
Smallet
Larg
est
Sm
alle
st
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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.
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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)
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Days Sales Outstanding
(Average) Accounts Receivable/ Revenue per day
• Choices:– Accounts Receivable– AAR = (beginning AR + ending AR) / 2– Time average of AR
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Days Inventory Outstanding
(Average) Inventory / COGS per day
• Choices:– Inventory– Average Inv. = (beginning Inv. + ending Inv.) /
2– Time average of Inventory– De-inflate COGS?
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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?