1. Supply Chain Finance (SCF) Lecture # 5
Jan H Jansen

2. 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)

3. Recap
Lecture 4

4. Continuation

5. 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.

6. 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.

8. Any questions?

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

10. EVA™
Working
Capital

11. 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

12. 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

13. Conceptual model SCF for WCM in SMEs

14. 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

15. 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 ABS FC OC Finance 2 7

16. Assignment 4

17. Lecture 5
Working Capital
&
Dynamic Discounting

18. 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 £ 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.

19. 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%

20. 24/02/2019
EAR
IFC ABS FC OC Finance 2 7

21. Dynamic Discounting
YouTube: To watch at home:

22. Source:http://resources. taulia

23. 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?

24. 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’

25. 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%

26. Dynamic Discounting

27. Source:

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

29. Case
ACCA /

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

31. 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.’

32. 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

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

34. 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.’

35. 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.’

36. Reversed factoring: Sharing benefits in the supply chain

37. Reversed factoring: Market size