W i n d e s h e i m m a k e s k n o w l e d g e w o r k

Supply Chain Finance

N O V E M B E R 2 4 , 2 0 1 5 – LO N D O N

Michiel SteemanProfessorship Supply Chain FinanceWindesheim University of Applied SciencesZwolle, the Netherlands

W i n d e s h e i m m a k e s k n o w l e d g e w o r k2

• Physical:• Information:• Financial:

Three Supply Chains

Finished product

Raw materialsIntermediat

es

Component Supplier OEMRM Supplier Retailer

ii ii ii

INTERACT ING FLOWS

¥ $ € £€ £

W i n d e s h e i m m a k e s k n o w l e d g e w o r k3

Supply Chain Optimization

5. Finance

4. Sustainability

3. Innovation

2. Quality

1. Logistics

1960 1980 2000 2020

Hieminga, G. (2012). Addressing challenges in global supply chains - Finance starts new phase of chain optimization, Amsterdam.

F IVE PHASES OF SUPPLY CHA IN OPT IM IZAT ION

W i n d e s h e i m m a k e s k n o w l e d g e w o r k4

The potential value of SCF

Economic Value Added (EVA®)

Income Earned

Income Require

d

-/- =

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

W i n d e s h e i m m a k e s k n o w l e d g e w o r k5

The potential value of SCF

Economic Value Added (EVA®)

Income Earned

Income Require

d

-/- =

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

W i n d e s h e i m m a k e s k n o w l e d g e w o r k6

Interaction between two Flows

Inventory

Service Levels

Production

Payment Terms

Credit Limits

Finance

Facilities

Physical Supply ChainFinancial Supply Chain

SCF aims at simultaneously optimizing physical and financial flows

W i n d e s h e i m m a k e s k n o w l e d g e w o r k7

Net (Operating) Working Capital

Service Level (weighted)

ROI

It is not an Easy Road

7

1

2

1. Increasing SL leads to better ROI.

2. Reducing NWC while keeping high SL leads to top performance.

EXAMPLE BASED ON GLOBAL STUDENT COMPET IT ION

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.

W i n d e s h e i m m a k e s k n o w l e d g e w o r k8

Focus on Working Capital Improvement

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

Reduction of NOWC with 1 standard deviation frees up $11.8 mln. of cash and increases ROA with 1.36%

Great potential for companies with excess WC

NWC = Net (Operating) Working Capital

W i n d e s h e i m m a k e s k n o w l e d g e w o r k9

Focus on Net Working CapitalREQUIRES COLLABORATION

Finance / Treasury

Purchasing Sales

Supply Chain

Cash | Lending | Hedging

Creditors

Raw Material FinishedGoods

Debtors

Production| Handling| Distribution

Financial Flow

Physical Flow

W i n d e s h e i m m a k e s k n o w l e d g e w o r k10

Functional Collaboration

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.”

W i n d e s h e i m m a k e s k n o w l e d g e w o r k11

Quick fix may lead to negative PR

W i n d e s h e i m m a k e s k n o w l e d g e w o r k

W i n d e s h e i m m a k e s k n o w l e d g e w o r k12

Cash Conversion Cycle (CCC)

Firm buysinventory

Firm pays forinventory

Firm sellsinventory

Inventory Accounts Receivable

Accounts Payable

Firm receivesPayment

Operating Cycle

Cash out Cash inCash Cycle

W i n d e s h e i m m a k e s k n o w l e d g e w o r k13

Firm 1 buys Firm 1 pays Firm 1 sells

Inventory Accounts ReceivableAccounts Payable

Cash out Cash inCash Cycle firm 1

Firm 1 receives

Supply Chain Cash Cycle

Firm 2 buys Firm 2 pays Firm 2 sells

Inventory Accounts Receivable

Accounts PayableCash out Cash inCash Cycle Firm 2

Firm 2 receives

Firm 3 buys Firm 3 pays Firm 3 sells

Inventory Accounts ReceivableAccounts Payable

Cash out Cash inCash 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.

W i n d e s h e i m m a k e s k n o w l e d g e w o r k14

2.7 %

Cash Cycle firm 1Rating: BBB

Cash Cycle Firm 2Rating BB

Cash Cycle Firm 3Rating: AA

4.2%1.5%

Supply Chain Cash Cycle

Collaborative C2C Cycle

Short term cost of capital differs between supply chain parties

EXAMPLE

W i n d e s h e i m m a k e s k n o w l e d g e w o r k15

2.7 %

Cash Cycle firm 1Rating: BBB

Cash Cycle Firm 2Rating BB

Cash Cycle Firm 3Rating: AA

4.2%1.5%

Supply Chain Cash Cycle

Collaborative C2C Cycle

Shortening one partner’s C2C Cycle usually inflates total Supply Chain financing cost

EXAMPLE

W i n d e s h e i m m a k e s k n o w l e d g e w o r k

PO Issue

Production

Doc Prep Ship

In Transit / LSP

Receive Goods

Invoice

Approval

Payment

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 OTH

ER

W i n d e s h e i m m a k e s k n o w l e d g e w o r k17

SCF Strategic Framework

Risk

Responsiveness

Relationship

Responsibility

ROI

Release WC

0

5 Service Level

Sustainability

Financial Performance

R. de Boer, M. Steeman (2015), Strategic Relevance of Supply Chain Finance, Windesheim

MAIN REASONS FOR IMPLEMENTING SCF

W i n d e s h e i m m a k e s k n o w l e d g e w o r k18

Examples

R. de Boer, M.Steeman (2015), Strategic Relevance of Supply Chain Finance, Windesheim

DIFFERENT ORGANIZAT IONS HAVE D IFFERENT MOTIVES

W i n d e s h e i m m a k e s k n o w l e d g e w o r k

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 2.0

Shaping the future ofSupply 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

W i n d e s h e i m m a k e s k n o w l e d g e w o r k

Michiel SteemanProfessor Supply Chain FinanceMa.Steeman@windesheim.nl

Ronald de BoerAssociate Professor Supply Chain Financer.deboer@windesheim.nl

Anne Rikst EngbersResearcher ar.engbers@windesheim.nl

Christiaan de GoeijResearcher/Lecturer caj.de.goeij@windesheim.nl

Joost van den HondelProgramme Management

Wijke de RuiterResearcher/Lecturer

Matthijs van BergenResearcher

Lisa ZonProgramme Management

Saskia VolgersManagement assistant

SCF Research Team

W i n d e s h e i m m a k e s k n o w l e d g e w o r k21

BACKUP SLIDES

W i n d e s h e i m m a k e s k n o w l e d g e w o r k

SCF = Financial Supply Chain Management

SCF = Supply Chain

Financing

SCF Schools of thought

22

SCF = Buyer-driven

Payables Solution

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

W i n d e s h e i m m a k e s k n o w l e d g e w o r k23

What is Supply Chain Finance?

“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 PRACT ICAL DEF IN IT ION

W i n d e s h e i m m a k e s k n o w l e d g e w o r k24

Examples of SCF (1)

W i n d e s h e i m m a k e s k n o w l e d g e w o r k25

Examples of SCF (2)

W i n d e s h e i m m a k e s k n o w l e d g e w o r k26

Examples of SCF (3)

W i n d e s h e i m m a k e s k n o w l e d g e w o r k27

Reverse Factoring

Buyer Financier

STEPS IN A STANDARD REVERSE FACTORING PROCESS

Supplier sends goods & Invoice

1

Financier pays amount minus fee

3

Buyer pays full amount

4Supplier

Difference in creditworthiness is leveraged and benefits are divided among buyer, supplier and bank

Buyer approves invoice

2

Approved

invoice

W i n d e s h e i m m a k e s k n o w l e d g e w o r k28

SCF

What is SCF?

Pfohl, H.-C., & Gomm, M. (2009). Supply chain finance: optimizing financial flows in supply chains. Logistics Research, 1(3-4), 149–161.

Actors

Objects Levers

Duration

Volume

Capital Cost Rate

Supportive members

Primary members

NWC

AssetsEquity

W i n d e s h e i m m a k e s k n o w l e d g e w o r k29

SCF for Logistic Service Providers

Pledging Inventory

Inventory Finance

Supplier Finance

Subcontractor Financing

Fixed Asset Financing