Supply Chain Finance: IAPP Maryland DC Chapter Meeting

Supply Chain Finance
IAPP Maryland DC Chapter Meeting
Steve Keifer
Vice President
Industry & Product Marketing
May 9, 2008
Supply Chain Finance (SCF)
What is Supply Chain Finance?

Market Drivers for SCF
Why is it Important?
Comparison to Invoice Discounting
Should you start an SCF Program?
Services available from Banks
Questions and Answers
Introduction to Supply Chain Finance
Slide 2
May 9, 2008
Working Capital Tensions
Slide 3
May 9, 2008
Buyer-Supplier Payment Dynamics

Purchase
Order
Manufacturing
& Assembly
Inspection
& Export
Ocean
In-Transit
Import &
Customs
Ground
Transit
Warehouse
Receiving
Invoice
Delivered
15
45
50
80
85
90
95
Suppliers need cash to

pay for raw materials,
manufacturing labor and
operating expenses.
Invoice
Approval
Payment
Released
100
Buyers prefer to extend

payment terms and
hold cash to optimize
working capital.
Supply Chain Finance attempts to relieve buyersupplier payment tension, by enabling both parties to
set the terms they prefer.
Slide 4
May 9, 2008
150
Extending Payment Terms

Late Payment
Net 60
Net 30
Payment on Delivery
What are the hidden risks and costs to the buyer

of extending payment terms with suppliers?
Slide 5
May 9, 2008
Cost
Risk
Term
Net 45
International Trade
Slide 6
May 9, 2008
International Trade Challenges

Supplier of Goods or
Services In China
Buyer of Goods or
Services In US
Buyers
Location
Suppliers
Plant
Suppliers Challenge
Buyers Challenges
Purchase raw materials large

upfront expense
Fund labor for production
Very long cash-to-cash cycles - 90
days from shipment to payment
Risk of buyer not paying
Risk of delay from inaccurate

documentation or risk
Working capital tied up in long
lead time and buffer inventory
Risk of supplier not delivering
against terms and conditions
Slide 7
May 9, 2008
Letter of Credit
International Trade Instrument
Suppliers
Financial Institution
Buyers
Letter of Credit Means for

a shipper to collect payment
for his goods from the
customer.
Exchange of Funds
Sends all
Documents
For Payment to
Bank
Upon Receipt
Customer notifies
Bank to Pay
Useful in international
shipments where US law
cannot help with
nonpayment
Letter of Credit specifies in
explicit terms what the
customer wants and when.
Customer sets aside funds
for payment with bank
Documents are sent to
financial institutions to
mediate payment and terms
Physical Flow of Goods
Supplier
Buyer
Slide 8
May 9, 2008
Challenges with Letters of Credit

Use of Letters of Credit are in
decline in North America & Europe
LOCs are time-consuming. Manual
matching of trade documents is required to
satisfy payment criteria.
Bank
personnel
match all
trade
documents
To satisfy
LOC
requirements
for payment
to supplier
LOCs are expensive ($1000-$1500)

compared to open account transactions
($50-$200 plus variable expense).
LOCs require the use of a financial
institution. Open Account transactions dont.
Trade relationships between buyers and
suppliers have become more established
over longer periods of time. Supply chain
dependencies provide an effective deterrent
against non-payment.
Slide 9
May 9, 2008
Migration to Open Account

Open Account
Declining Use of Bank Instruments
for International Settlement
Supplier offers credit to buyer with no

bank guarantee of payment
Less formal structure for disputes or
missed payments
Risk shifts from buyer to supplier in a
transaction
Market Drivers for Open Account

International trade transactions
between are becoming more common
as global export/imports boom
2005
2006
2007
Letter of Credit
2008
2009
2010
Open Account
Suppliers have established longstanding relationships with

international buyers
Less expensive, complex and time
consuming than letter of credit
Slide 10
May 9, 2008
Trade Settlement Risks

Primary International Trade Instruments
Open Account
Buyers Risk
Risk of Non
Payment
Supplier Risk
Documentary Collection
Letters of Credit
Risk of Non
Delivery
Cash in Advance
Slide 11
May 9, 2008
Letter of Credit Finance Program

Purchase
Order
Manufacturing
& Assembly
Inspection
& Export
Ocean
In-Transit
Import &
Customs
Ground
Transit
Warehouse
Receiving
Invoice
Delivered
Invoice
Approval
15
45
50
80
85
90
95
100
Supplier
Suppliers
Bank
Supplier obtains
financing based
upon L/C
120
Buyer
Risk for Suppliers Bank

is low with L/C
guaranteeing Payment
from Buyers Bank
Suppliers Bank
Issues Export
Letter of Credit
Payment
Released
Buyers Bank
Issues Import
Letter of Credit
Upon Matching of
Documents,
Payment Occurs
Slide 12
Buyers
Bank
May 9, 2008
Open Account Supplier Finance

Purchase
Order
Manufacturing
& Assembly
Inspection
& Export
Ocean
In-Transit
Import &
Customs
Ground
Transit
Warehouse
Receiving
Invoice
Delivered
15
45
50
80
85
90
95
Invoice
Approval
Supplier
100
Payment
Released
120
Buyer
Supplier seeks
financing based
upon PO
Suppliers
Bank
Risk for Suppliers Bank

is high with just a
Purchase Order and no
Guarantee of Payment
from Buyer or Buyers
Bank
Buyer pays upon

maturity of invoice
and resolution of
disputes
Funds transfer
occurs at
settlement
Slide 13
Buyers
Bank
May 9, 2008
Open Account & Extended Terms

Hidden Costs and Risks in the Supply Chain
Small Supplier
Large Buyer
Longer Days Sales Outstanding

and greater cash flow
challenges
Realizes higher overall costs as

suppliers pass on financing
costs in pricing
Must seek alternative terms of

financing based upon suppliers
credit worthiness and ratings
Extended payment terms may

increase tensions in
relationships with suppliers
Inability to seek appropriate

financing may result in
insolvency or work stoppage
Risk of supply chain disruption if

supplier insolvency or work
stoppage occurs
What impact do Open Account and Extended

Payment Terms have on Small Suppliers?
Slide 14
May 9, 2008
Unbalanced Trade Terms

Buyer
(Importer)
Supplier
(Exporter)
Buyers introduce
Higher Risk and
Cost
Cash Flow
Pressures burden
Small Suppliers
Slide 15
May 9, 2008
Introduction to SCF
Slide 16
May 9, 2008
Supply Chain Finance Example

1 Buyer issues purchase order
Suppliers
Buyers
2 Supplier delivers goods
Accounts
Payable
Accounts
Receivable
3 Supplier invoices buyer
5 Supplier
offered early
payment
discount
4 Buyer approves
invoice for payment and
sends confirmation to
bank
6 Supplier accepts
early payment
7 Bank funds early

payment to supplier
8 Buyer makes
payment on
original due date
Or extends
payment terms
Supply Chain Processes

Opportunity Identified
Financing
Source
Supplier Payment Process

Buyer Settlement Process
Slide 17
May 9, 2008
Supply Chain Finance Benefits

A Win-Win-Win Scenario for All Participants
Supplier
Buyer
Immediate access to cash

Reduced DSOs
Improved cash flow visibility
Lower financing costs
No debt on balance sheet
Lower cost of goods sold

Lower supply chain risk
Longer DPOs
Use financial strength as
competitive advantage
Bank
Costs and
Risks are
lowered in the
supply chain
Re-intermediation into supply

chains even open account
Income from financing
New customers suppliers
who gain financing
Cross-sell opportunities
Slide 18
Working
Capital
optimized for
all parties
May 9, 2008
Multiple Funding Options
Buyers
Accounts
Payable
Buyers
Bank
Suppliers
Financed
Transaction
Accounts
Receivable
Third Party
Financier
Buyers
Treasury
Slide 19
Suppliers
Bank
May 9, 2008
Supplier Segmentation by Credit Rating

Cost of Working Capital = Small to Medium
13.5%
Suppliers have the greatest interest rate

expense
8.5%
5.0%
Cost of Funds
Libor Plus
5.0%
(4.0%+100bp)
Large Corporate
Buyers & Suppliers
Cost of Funds
Prime Plus
8.50%
(6.0%+250bp)
Medium
Suppliers
Slide 20
Cost of Funds
Prime Plus
Premium
13.50%
(6.0%+750bp)
Small
Suppliers
May 9, 2008
Supplier Segmentation by Credit Rating

Post-Shipment Finance Scenario
13.5%
Buyer has received goods and

confirmed intention to pay
invoice
Opportunity for
Cost Reduction
5.0%
Cost of Funds
Libor Plus
5.0%
(4.0%+100bp)
Large
Buyer
Invoice is date-certain, dollarcertain from banks perspective
Cost of Funds
Prime Plus
Premium
13.50%
(6.0%+750bp)
Risk is with buyer non-payment,

independent of supplier credit
Financing can be offered to
supplier based upon buyers
credit rating and limits
Bank can obtain a margin for
accepting the risk and utilizing its
working capital
Small
Suppliers
Supplier benefits from

significantly improved rates
Slide 21
May 9, 2008
Supply Chain Finance Defined

A category of solutions designed to provide working capital financing and
accelerated cash inflow to suppliers on the basis of the value of physical
or financial supply chain events such as issuance of a purchase order or
approval of an invoice.
These solutions frequently include features that are beneficial to the
buyer, but this is not a requirement.
SCF solutions are equally applicable to domestic and cross-border trade
activity.
Source: Tower Group
Slide 22
May 9, 2008
Whats New in SCF?
Slide 23
May 9, 2008
Invoice Discounting
Buyer Initiated and Funded Early Payment Program
Normal Accounts
Payable Process
Accounts Payable
with Discounting
Buyer
Purchase
Order
Buyer
Purchase
Order
Payment
Term
Physical
Shipment
Supplier
Invoice
Physical
Shipment
Supplier
Invoice
Buyer
Payment
Discounted
Payment
Supplier
Supplier
Slide 24
May 9, 2008
Payment Discounting
Buyer Initiated Early Payment Program
Accounts Payable
with Discounting
Buyer
Purchase
Order
Supplier
Invoice
Physical
Shipment
Discounting Explained
Buyer manages program
Upon invoice approval propose discount
to supplier
Full payment minus discount released
upon acceptance of proposal
Buyer funds with cash on balance sheet
(or through 3rd party)
Buyer compares opportunity cost of
using cash for discounting versus others
Pros & Cons of Discounting

Discounted
Payment
Supplier
Accelerates cash flow to supplier

reducing DSOs and freeing up working
capital
Provides cost savings to buyer with
strong cash position
Only available post-shipment
Relatively high financing rates
Slide 25
May 9, 2008
Factoring Receivables
Supplier Initiated Early Payment Program
Normal Accounts
Receivable Process
Accounts Receivable
with Factoring
Buyer
Purchase
Order
Buyer
Purchase
Order
Payment
Term
Physical
Shipment
Physical
Shipment
Supplier
Invoice
Supplier
Invoice
Buyer
Payment
Upfront
Payment
Supplier
Supplier
Slide 26
May 9, 2008
Final
Payment
Factoring Receivables
Supplier Initiated Early Payment Program
Accounts Receivable
with Factoring
Buyer
Purchase
Order
Physical
Shipment
Supplier
Invoice
Factoring Explained
Supplier initiates process with Factor.

Sells book of receivables to Factor.
Cash for as much as 90% of invoice
Receive remaining 10% minus a
factoring service fee once the company
receives payment
Factoring fees depend upon credit
worthiness of customers
Factor assumes responsibility for
accounts receivable and collections
Pros & Cons Factoring

Upfront
Payment
Supplier
Final
Payment
Free up cash-flow to solve short-term

financial crunches
Smoother, more consistent cash flow.
Relatively expensive financing cost
Must factor book of receivables to
balance risk for 3rd party factor
Slide 27
May 9, 2008
Supply Chain Finance Versus Traditional

Invoice
Discounting
Receivables
Factoring
Funding
Sources
Cash Rich
Buyers
3rd Party
Financial
Institutions
Buyer, Supplier
Buyer or Suppliers Bank
3rd Party Financier
Financing
Rates
15-25% Effective
APR is typical
15-25% Effective
APR is typical
Can be based
upon buyers
credit rating
On Demand
PO Acknowledgement
Export, Import or
Invoice Approval
Payment
Timing
Upon Buyers
Invoice Approval
Typically upon
Invoice Submission
Financing
Amount
Individual
Invoice
Bundle of
Receivables
Slide 28
Supply Chain
Finance
Entire invoice or
Specific line items
on purchase order
May 9, 2008
Other Financing Types
Slide 29
May 9, 2008
Three Types of Financing

Purchase
Order
Manufacturing
& Assembly
Inspection
& Export
Ocean
In-Transit
Import &
Customs
Ground
Transit
Warehouse
Receiving
Invoice
Delivered
15
45
50
80
85
90
95
Invoice
Approval
100
Payment
Released
130
Pre-Export Financing
Inventory Financing
Post-Export Financing
Suppliers need a working

capital loan to finance
purchases of raw
materials and to fund
operating expenses for
manufacturing and labor.
Inventory owners (which may

be buyer or supplier) want to
finance the inventory while it
is in transit. Banks offer
financing for goods as they
flow through the supply chain.
Most banks will only offer

financing once the invoice is
approved by the buyer. The
window for financing is only
the last 30-60 days of a 130180 day transaction
Slide 30
May 9, 2008
Multi-Stage Supply Chain Finance Example

Part 1 Export Triggered Finance Opportunity
Purchase
Order
Manufacturing
& Assembly
Inspection
& Export
Ocean
In-Transit
Import &
Customs
Ground
Transit
Warehouse
Receiving
Invoice
Delivered
15
45
50
80
85
90
95
Quality Inspection
Certificate from
Buyers Local
Agent in Region.
Electronic
Confirmation of
Export from Port
of Origin.
Invoice
Approval
100
Payment
Released
130
Event
Notification
Supply Chain Finance Platform
Bank presents
early payment
option to supplier
Supplier
Supplier accepts
option for partial
early payment
Buyer
Financier
Slide 31
May 9, 2008

Part 2 Export Triggered Finance Opportunity
Purchase
Order
Manufacturing
& Assembly
Inspection
& Export
Ocean
In-Transit
Import &
Customs
Ground
Transit
Warehouse
Receiving
Invoice
Delivered
15
45
50
80
85
90
95
Quality Inspection
Certificate from
Buyers Local
Agent in Region.
Electronic
Confirmation of
Export from Port
of Origin.
Invoice
Approval
100
Payment
Released
130
Event
Notification
70% of Purchase
Order Value
Transferred to
Supplier
Supplier
Buyer
Financier
Slide 32
May 9, 2008

Part 3 Buyer Receipt Triggered Payment
Purchase
Order
Manufacturing
& Assembly
Inspection
& Export
Ocean
In-Transit
Import &
Customs
Ground
Transit
Warehouse
Receiving
Invoice
Delivered
15
45
50
80
85
90
95
Quality Inspection
Certificate from
Buyers Local
Agent in Region.
Electronic
Confirmation of
Export from Port
of Origin.
Event
Notification
Event
Notification
Invoice
Approval
100
Payment
Released
130
Electronic Proof
of Delivery from
Buyers
Warehouse
Phase 1
Phase 2
30% of Purchase
Order Value
Transferred to
Supplier
Supplier
Buyer
Financier
Slide 33
May 9, 2008

Multi-Stage Example Part 4 - Buyer Payment at Term
Purchase
Order
Manufacturing
& Assembly
Inspection
& Export
Ocean
In-Transit
Import &
Customs
Ground
Transit
Warehouse
Receiving
Invoice
Delivered
15
45
50
80
85
90
95
Quality Inspection
Certificate from
Buyers Local
Agent in Region.
Electronic
Confirmation of
Export from Port
of Origin.
Event
Notification
Event
Notification
Invoice
Approval
Electronic Proof
of Delivery from
Buyers
Warehouse
100
Payment
Released
130
Payment
Approved and
Release by Buyer
Phase 1
Phase 2
Remaining 30% of Funds

Released to Supplier
Supplier
70% of Funds
Released to Supplier
100% of Funds
Release to
Financial
Institution
Financier
Slide 34
Buyer
May 9, 2008
Starting a Program
Slide 35
May 9, 2008
Benefits Achieved from SCF

Aberdeen Research State of the Market 2008
Level of Activity in SCF

26% - No
Action Taken
Benefits Achieved
15% - Actively
using SCF
Lower unit costs of

procured goods
57%
Lower risk in
supplier base
48%
Extended payment
terms (DPOs)
33%
Lower production
costs
52%
Lower days sales

outstanding
43%
Improved business
continuity
40% Investigating
SCF
18% - Plans
in Place for
SCF
38%
Trade financing at
lower rate
Slide 36
43%
May 9, 2008
Should you Create an SCF Program?

Considerations for You
Accounting Treatment A/P
versus Short Term Debt
Credit Rating as compared to
Supplier Community
Funding Sources Internal
versus Banks & Specialists
Opportunity Cost of Credit Lines
and Cash versus Others
Vendor Considerations
Global Footprint in Locations
Suppliers are based
Legally authorized to Factor in
Suppliers Country
Understands Taxes owed on
Factored Invoices
Financial Resources to Fund
Your Program
Slide 37
May 9, 2008
Bank Services
Slide 38
May 9, 2008
Banks focus on Supply Chain Finance

Declining Use of Bank Instruments
for International Settlement
2005
2006
2007
Letter of Credit
2008
2009
Declining Trade Revenues Need to

Be Offset with New Services
2010
2005
2006
2007
2008
Traditional
Trade Finance
New Mechanisms
Slide 39
2009
2010
New Working
Capital Services
May 9, 2008
Landscape of Banking Services
Slide 40
May 9, 2008

Post-Shipment Scenario
Financing based upon the credit
rating of the buyer.
Buyer using good credit to provide
low cost financing to suppliers.
Can be a competitive differentiator
in battle of supply chains.
Reverse Factoring
Financing buyers A/P versus
suppliers A/R
True sale of suppliers receivable
Recourse solely back to buyer
Required date and dollar certainty
from buyer on invoices
Slide 41
May 9, 2008
Thank You
Slide 42
May 9, 2008

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Supply Chain Finance

IAPP Maryland DC Chapter Meeting

Supply Chain Finance (SCF)

What is Supply Chain Finance?

Introduction to Supply Chain Finance