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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
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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
¥ $ € £€ £
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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
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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
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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
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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
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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.
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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
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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
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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.”
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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 [email protected]
Ronald de BoerAssociate Professor Supply Chain [email protected]
Anne Rikst EngbersResearcher [email protected]
Christiaan de GoeijResearcher/Lecturer [email protected]
Joost van den HondelProgramme Management
Wijke de RuiterResearcher/Lecturer
Matthijs van BergenResearcher
Lisa ZonProgramme Management
Saskia VolgersManagement assistant
SCF Research Team
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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
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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
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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
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Examples of SCF (1)
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Examples of SCF (2)
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Examples of SCF (3)
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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
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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
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SCF for Logistic Service Providers
Pledging Inventory
Inventory Finance
Supplier Finance
Subcontractor Financing
Fixed Asset Financing