1. Windesheim makes knowledge work Supply Chain Finance NOVEMBER 24, 2015 – LONDON Michiel Steeman Professorship Supply Chain Finance Windesheim University of Applied Sciences Zwolle, the Netherlands Michiel Steeman Professorship Supply Chain Finance Windesheim University of Applied Sciences Zwolle, the Netherlands

2. Windesheim makes knowledge work Physical: Information: Financial: Three Supply Chains Finished productRaw materials Intermediates Component SupplierOEMRM SupplierRetailer i i iiii 2 INTERACTING FLOWS ¥ $ € £ € £

3. Windesheim makes knowledge work Supply Chain Optimization 3 5. Finance 4. Sustainability 3. Innovation 2. Quality 1. Logistics 196019802000 2020 Hieminga, G. (2012). Addressing challenges in global supply chains - Finance starts new phase of chain optimization, Amsterdam. FIVE PHASES OF SUPPLY CHAIN OPTIMIZATION

4. Windesheim makes knowledge work The potential value of SCF 4 Economic Value Added (EVA ® ) Income Earned Income Required -/-= Sales Costs -/- = Working Capital Fixed Capital Cost of Capital +x = Adopted from Pohlen, T. L., & Goldsby, T. J. (2003). VMI and SMI programs: How economic value added can help sell the change. International Journal of Physical Distribution & Logistics Management, 33(7), 565–581. Inventory + A/R - A/P Net (Operating) Working Capital

5. Windesheim makes knowledge work The potential value of SCF 5 Economic Value Added (EVA ® ) Income Earned Income Required -/-= Sales Costs -/- = Working Capital Fixed Capital Cost of Capital +x = Adopted from Pohlen, T. L., & Goldsby, T. J. (2003). VMI and SMI programs: How economic value added can help sell the change. International Journal of Physical Distribution & Logistics Management, 33(7), 565–581. Levers of Supply Chain Finance Rate Volume Duration Volume

6. Windesheim makes knowledge work Interaction between two Flows 6 Inventory Service Levels Production Payment Terms Credit Limits Finance Facilities Physical Supply Chain Financial Supply Chain SCF aims at simultaneously optimizing physical and financial flows

7. Windesheim makes knowledge work Net (Operating) Working Capital Service Level (weighted) RO I It is not an Easy Road 7 7 1 1 2 2 1.Increasing SL leads to better ROI. 2.Reducing NWC while keeping high SL leads to top performance. EXAMPLE BASED ON GLOBAL STUDENT COMPETITION Ronald de Boer, Steeman, M., Gelsomino, L., & Perego, A. (2015). Coherent decision making in supply chain finance: a learning approach. EUROMA Neuchatel 2015. 412 students; 26 countries; 58 universities.

8. Windesheim makes knowledge work Focus on Working Capital Improvement 8 NWC-to-sales ratio of US listed companies Aktas, N., Croci, E., & Petmezas, D. (2013). Is working capital management value-enhancing? Evidence from firm performance and investments. Journal of Corporate Finance NWC = Net (Operating) Working Capital

9. Windesheim makes knowledge work Focus on Net Working Capital 9 REQUIRES COLLABORATION Finance / Treasury Purchasing Sales Supply Chain Cash | Lending | Hedging Creditors Raw MaterialFinished Goods Debtors Production| Handling| Distribution Financial Flow Physical Flow

10. Windesheim makes knowledge work Functional Collaboration 10 Ernst & Young. (2014). Partnering for performance. Part 1: the CFO and the supply chain, 5. Retrieved from http://www.ey.com/GL/en/Issues/Managing-finance/Partnering-for-performance---Bridging-the-gap-between-CFOs-and-supply-chain BETWEEN CFO AND HEAD OF SUPPLY CHAIN EBIDTA change over last 12 months “Companies with evidence of strong business partnering between the CFO and the supply chain leaders report better results than those with a traditional finance model in place.”

11. Windesheim makes knowledge work Quick fix may lead to negative PR 11 Windesheim makes knowledge work

12. Cash Conversion Cycle (CCC) 12 Firm buys inventory Firm pays for inventory Firm sells inventory InventoryAccounts Receivable Accounts Payable Firm receives Payment Operating Cycle Cash out Cash in Cash Cycle

13. Windesheim makes knowledge work Firm 1 buysFirm 1 paysFirm 1 sells InventoryAccounts Receivable Accounts Payable Cash out Cash in Cash Cycle firm 1 Firm 1 receives Supply Chain Cash Cycle 13 Firm 2 buysFirm 2 paysFirm 2 sells InventoryAccounts Receivable Accounts Payable Cash out Cash in Cash Cycle Firm 2 Firm 2 receives Firm 3 buysFirm 3 paysFirm 3 sells InventoryAccounts Receivable Accounts Payable Cash out Cash in Cash Cycle Firm 3 Firm 3 receives Collaborative C2C Cycle Based on: Hofmann, E., & Kotzab, H. (2006). Developing and discussing a supply chain- oriented model of collaborative working capital management. In IFSAM VIIIth World Congress 2006, Berlin.

14. Windesheim makes knowledge work 2.7 % Cash Cycle firm 1 Rating: BBB Cash Cycle Firm 2 Rating BB Cash Cycle Firm 3 Rating: AA 4.2% 1.5% Supply Chain Cash Cycle 14 Collaborative C2C Cycle Short term cost of capital differs between supply chain parties EXAMPLE

15. Windesheim makes knowledge work 2.7 % Cash Cycle firm 1 Rating: BBB Cash Cycle Firm 2 Rating BB Cash Cycle Firm 3 Rating: AA 4.2% 1.5% Supply Chain Cash Cycle 15 Collaborative C2C Cycle Shortening one partner’s C2C Cycle usually inflates total Supply Chain financing cost EXAMPLE

16. Windesheim makes knowledge work PO IssueProduction Doc Prep Ship In Transit / LSP Receive Goods Invoice Approval Payment Equity Related SCF Fixed Asset Financing Working Capital Finance Pre-shipment In-Transit Post-shipment Raw Material Financing PO-Financing Advance Payments SMI/VMI/BMI LSP Managed Inventory Inventory Pledge Credit Financing Warehouse Reverse Factoring Dynamic Discounting Equipment Financing Pay on Production Vendor Leasing Supplier subsidies Take over / merger Joint Venture Minority interest Supply Risk Sharing Insurance Currency Risk Sharing Strategic Tactical Operational OTHER

17. Windesheim makes knowledge work SCF Strategic Framework 17 Service Level Sustainability Financial Performance R. de Boer, M. Steeman (2015), Strategic Relevance of Supply Chain Finance, Windesheim MAIN REASONS FOR IMPLEMENTING SCF

18. Windesheim makes knowledge work Examples 18 R. de Boer, M.Steeman (2015), Strategic Relevance of Supply Chain Finance, Windesheim DIFFERENT ORGANIZATIONS HAVE DIFFERENT MOTIVES

19. Windesheim makes knowledge work SCF for SMEs Alternative financing models to support SMEs  Commissioned by Ministry of Economic Affairs  SME’s have difficulties obtaining necessary credit  Led to creation of « Betaalme.nu » SCF for SMEs Alternative financing models to support SMEs  Commissioned by Ministry of Economic Affairs  SME’s have difficulties obtaining necessary credit  Led to creation of « Betaalme.nu » SCF ISD Linking developing countries to international market  Integrate sustainability in SCF  Investigate innovative models for supply chain relying on developing countries  Leverage focal company credit worthiness to reduce risk in the chain SCF ISD Linking developing countries to international market  Integrate sustainability in SCF  Investigate innovative models for supply chain relying on developing countries  Leverage focal company credit worthiness to reduce risk in the chain SCF 2.0 Shaping the future of Supply Chain Finance  From post- to pre-shipment financing  New SCF models reaching beyond tier 1 suppliers  Collaboration with major players like Heineken, Philips and Unilever SCF 2.0 Shaping the future of Supply Chain Finance  From post- to pre-shipment financing  New SCF models reaching beyond tier 1 suppliers  Collaboration with major players like Heineken, Philips and Unilever Supply Chain Finance at Windesheim

20. Windesheim makes knowledge work Michiel Steeman Professor Supply Chain Finance Ma.Steeman@windesheim.nl Ronald de Boer Associate Professor Supply Chain Finance r.deboer@windesheim.nl Anne Rikst Engbers Researcher ar.engbers@windesheim.nl Christiaan de Goeij Researcher/Lecturer caj.de.goeij@windesheim.nl caj.de.goeij@windesheim.nl Joost van den Hondel Programme Management Wijke de Ruiter Researcher/Lecturer Matthijs van Bergen Researcher Lisa Zon Programme Management Saskia Volgers Management assistant SCF Research Team

21. Windesheim makes knowledge work BACKUP SLIDES 21

22. Windesheim makes knowledge work SCF = Financial Supply Chain Management SCF = Supply Chain Financing SCF Schools of thought 22 Templar, S., Cosse, M., Camerinelli, E., & Findlay, C. (2012). An investigation into current supply chain finance practices in business: a case study approach. Supply Chain Management

23. Windesheim makes knowledge work What is Supply Chain Finance? 23 “SCF deals with financial arrangements used in collaboration by at least two supply chain partners with the aim of improving the overall financial performance and mitigating the overall risks of the supply chain.“ Steeman, M. (2014). The Power of Supply Chain Finance, Windesheim Knowledge & Research Series (No. 50), Zwolle. Steeman, 2014 A PRACTICAL DEFINITION

24. Windesheim makes knowledge work Examples of SCF (1) 24

25. Windesheim makes knowledge work Examples of SCF (2) 25

26. Windesheim makes knowledge work Examples of SCF (3) 26

27. Windesheim makes knowledge work Reverse Factoring 27 Buyer Financier STEPS IN A STANDARD REVERSE FACTORING PROCESS Supplier sends goods & Invoice 1 1 Financier pays amount minus fee 3 3 Buyer pays full amount 4 4 Supplier Difference in creditworthiness is leveraged and benefits are divided among buyer, supplier and bank Buyer approves invoice 2 2 Approve d invoice

28. Windesheim makes knowledge work SCF What is SCF? 28 Pfohl, H.-C., & Gomm, M. (2009). Supply chain finance: optimizing financial flows in supply chains. Logistics Research, 1(3-4), 149–161. Actors ObjectsLevers Duration Volume Capital Cost Rate NWC Assets Equity

29. Windesheim makes knowledge work SCF for Logistic Service Providers 29