Supply Chain Finance (SCF) Lecture # 5 Jan H Jansen E-mail: jan.jansen@han.nl

Lectures period 1 or 3 Lecture Topic Preparation 1 Introduction SCF & Elements of SCF: SCM, Purchase, APS, ERP and ICT 2 Financial ratios Assignment 1 Annual reports 2016 & 2017 Unilever, Philips & Heineken The Power of SCF 3 DuPont Analysis & Value Assignment 2 Case study KPN 4 Working Capital Assignment 3 Case study SCF EU 5 Working Capital Management Dynamic Discounting Assignment 4 Case study ACCA Standard definitions for Techniques of SCF EBA SCF 6 SCF instruments Introduction The Cool Connection Cool connection round 1 Assignment 5 7 Risk management in SCF Cool connection round 1 (evaluation)

Recap Lecture 4

Continuation

Advantages SCF for SME’s An SME or start-up supplier that needs to wait a large number of days before receiving payment on an invoice effectively has the invoice sum unavailable to its financial operations until the invoice is settled. This has a negative effect on the working-capital ratio of the supplier (see above), and imposes financial risk on the supplier.

Added value of SCF for SME’s An important success factor for a Supply Chain Finance arrangement to work is to understand the position of suppliers and to gain their trust. As it is almost in all cases the buyer that together with a financial intermediary sets up the Supply Chain Finance arrangement, suppliers that are approached to participate in the arrangement fear to be taken for a ride. In the world of finance, and especially in buyer-supplier relationships, introduction of new financial arrangements do not usually lead to mutual benefit. The win-win-win aspect of Supply Chain Finance does not always appear immediately apparent to approached suppliers.

Any questions?

Supply Chain Finance: How it all fits together (developed by JH Jansen)

EVA™ Working Capital

NWC = ( A/R + Inventory ) - A/P Net Working Capital Note that NWC is not the same as Current assets & Current liabilities. Assets Liabilities & Net Worth Cash Accounts payable (A/P) Accounts receivable (A/R) Short-term debt Inventory Current assets Current liabilities NWC = ( A/R + Inventory ) - A/P

Operating and Cash Cycles Operating Cycle Accounts Payable Period Accounts Receivable Period Input Sourcing Period Quotation Period Inventory Period Price Quote Order Placed Inputs Received Order Shipped Payment Received time t0 t1 t2 t3 t4 t5 Cash Outflow Cash Intflow Cash Payment for Inputs Cash Settlement Received Cash Conversion Cycle

Conceptual model SCF for WCM in SMEs

SCF: Using the C2C variables to strengthen the supply chain (Source: Randall & Farris II, 2009, Int Journal of Physical Distribution $ Logistics Management) Sub-componnet supplier Instruments for Measuring and Testing of Electricity and Electrical Signals (SIC 3825) Tier2 Supplier Component manufacturer Semi-conductors (SIC 3674) Tier1 Supplier OEM Radio and Television Broadcasting and Communications Equipment (SIC 3663) Focal Company DPO (AP) 141.0 days 49.0 days 59.3 days DSO (AR) 68.6 days 29.4 days 57.1 days DIO 207.9 days 83.1 days 28.3 days C2C 135.5 days 63.5 days 26.1 days Explanation: DPOFC ≠ DSOTIER1 and DPOTIER1 ≠ DSOTIER2

Example: Terms of Sale (EAR) 24/02/2019 Example: Terms of Sale (EAR) On a €100 sale, with terms 5/10 net 60, what is the implied interest rate on the credit given? IFC 2014-2015 ABS FC OC Finance 2 7

Assignment 4

Lecture 5 Working Capital & Dynamic Discounting

You place an order for 400 units of inventory at a unit price of £ 125 You place an order for 400 units of inventory at a unit price of £ 125. The supplier offers terms of 1/10, net 30. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit? What is the discount being offered? How quickly must you pay to get the discount? If you do take the discount, how much should you remit? If you don’t take the discount, how much interest are you paying implicitly? How many days’ credit are you receiving? Calculate the EAR of the terms of sales of this offer from the supplier.

Solution 1. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit? 30 days & £ 50,000 2. What is the discount being offered? How quickly must you pay to get the discount? If you do take the discount, how much should you remit? £ 500 & £ 49,500 3. If you don’t take the discount, how much interest are you paying implicitly? How many days’ credit are you receiving? £ 500 & 20 days 4. Calculate the EAR of the terms of sales of this offer from the supplier. 20.13%

24/02/2019 EAR IFC 2014-2015 ABS FC OC Finance 2 7

Dynamic Discounting YouTube: https://www.youtube.com/watch?v=IyIIBh4ixEg To watch at home: https://www.youtube.com/watch?v=84zlUcULd04

Source:http://resources. taulia

Basic idea behind Dynamic Discounting Supplier offers terms of 2/10, net 30 2% discount within 10 days payment Net payment within 30 days Assume after 3 days you already confirmed the invoice ERP system waits 10 days for the payment Why not pay directly after 3 days? Advantage for the supplier is clear Advantage for the buyer? Why should he do this? (and missing 7 days of credit from the supplier) Higher discount? Non-financial reasons?

Dynamic Discounting (Source: Standard definitions for techniques of supply chain finance, June 2015, Global supply chain forum) ‘A number of methods through which early payment discounts on invoices awaiting payment are offered to suppliers. The service is dynamic in the sense that the earlier the payment the higher the discount’

Days of early payment Days of credit Discount 30 3,0% 29 1 2,9% 28 2 2,8% 27 3 2,7% 26 4 2,6% 25 5 2,5% 24 6 2,4% 23 7 2,3% 22 8 2,2% 21 9 2,1% 20 10 2,0% 19 11 1,9% 18 12 1,8% 17 13 1,7% 16 14 1,6% 15 1,5% 1,4% 1,3% 1,2% 1,1% 1,0% 0,9% 0,8% 0,7% 0,6% 0,5% 0,4% 0,3% 0,2% 0,1% 0,0%

Dynamic Discounting

Source: http://primerevenue.com

Dynamic discounting (Source: http://primerevenue.com

Case ACCA /

Source: http://www.accaglobal.com/ab111

Definition SCF ‘Supply chain finance can be defined (EBA 2013) as the use of financial instruments, practices and technologies for optimising the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners. The development of advanced technologies to track and control events in the physical supply chain creates opportunities to automate the initiation of SCF interventions.’

Checklist SCF Fee structure (service costs & interest rates) Transfer of title Limits & Thresholds Payments Data (time based nature of SCF) Risk Benefits Costs Legal aspects

Supply Chain Finance Instruments (‘Umbrella’) Source: Standard definitions for techniques of Supply Chain finance, 2015

Reversed factoring (I) ‘The estimated global market size for reverse factoring ranges between US$255 billion and US$280 billion, of which about one-third can be attributed to Europe. An extrapolation for estimating the business potential of reverse factoring is to apply a 20–25% ‘conversion factor’ to the value of accounts payables.’

Reversed factoring (II) ‘Reverse factoring reduces costs across the supply chain by letting suppliers ‘borrow’ against their customers’ creditworthiness instead of their own. On average, 80% of the resulting value is shared between the suppliers and the buyer, with varying degrees of allocation depending on whether the buyer wants to facilitate its key suppliers’ financials (i.e. the largest share goes to supplier)or, instead, take all the benefits by extending payment terms. Typically, the buyer will capture 35% to 50% of all savings, while suppliers will get 25% to 45%. Another 15% goes to the financial intermediary while the remaining 5% is for the service provider.’

Reversed factoring: Sharing benefits in the supply chain

Reversed factoring: Market size