SUBMITTED TO:

SUBMITTED BY: Ammar Mubeen Cheema

ENROLLMENT NO # 01-396192-003

CLASS: MS. SCM – Fall 2019

Solution:
In April 2013, P&G made a variety of changes to its supply chain protocols including extending
payment terms for suppliers. The objective of extending its payment terms was to generally, give
P&G more time to pay its invoices to suppliers. More specifically the new terms would give
P&G on average 75 days to pay invoices to suppliers which is significantly above the industry
standard. This change would allow P&G to increase its overall cash flows by having more cash
on hand that can be put toward paying off other short-term liabilities or long-term debt. This
increased cash flow would also help P&G stay competitive with other Consumer Packaged
Goods firms who are forced to pay their invoices in shorter time periods (around 30-45 days),
and help P&G improve Total Shareholder Return by using these additional funds to potentially
invest in positive NPV projects. When analyzing these terms, it might seem unrealistic that any
supplier would agree to getting paid later with no benefit. P&G was aware of this and
implemented a Supply Chain Financing (SCF) program at the same exact time as the new
payment terms. This new program would help mitigate the impact of the extended payment
terms by providing P&G’s suppliers with early access to capital via designated partnered banks.
Question # 2
What was the likely impact of the new payment terms on P&G’s financial statements and
its funding needs? On Fibria’s financial statements and funding needs?

Solution:
The new payment terms for P&G are going to have a great impact on both the company’s
financial statements and the ability to manage funding needs. The company is going to have an
increase in cash that is going to have a positive impact on the company’s balance sheet.
Additionally, P&G is going to have an increase in cash flow, which will result in more cash on
hand. With the new payment terms, P&G will have additional working capital that will ensure
the company has the ability to meet all financial needs. The ability to receive payments quickly
and pay accounts payable in seventy-five days ultimately leads to P&G being one of the best in
the industry and consistently having the ability to turn a profit.
In addition to the program being beneficial for P&G, the supplier, Fibria, receives benefits that
ultimately supports the company's financial statements and ability to operate and manage cash.
Four benefits that help Fibria include greater flexibility, a healthier balance sheet, access to
capital, and visibility. By having a decrease in the levels of receivables, Fibria would require less
financing and their balance sheet is likely to decrease with the reduction of debt. Additionally,
Fibria will also have the opportunity for a new banking relationship with a global bank that can
offer lines of credit and other banking services. The payment terms allow Fibria the ability to
enhance the company's cash flow management by having timely notification of approved
invoices.
Question # 3
Why did P&G launch the Supply Chain Finance (SCF) program in April 2013, along with,
the new payment terms? How does the SCF program work and what are the benefits? Is
the SCF financing rate competitive?

Solution:
P&G simultaneously launched the SCF program in April 2013 with the new payment terms to
allow both P&G and its suppliers to receive their preferred payments terms. There were two
objectives in mind when designing the SCF program. The first was to allow P&G to pay its
invoices, on average, 75 days after receiving an invoice. The second, was to allow P&G
suppliers to get paid as soon as possible, which could be as early as 15 days. P&G achieved both
of these objectives using a SCF bank as an intermediary. Through these objectives, three
contracts were formed between all the parties. The first was a commercial contract between
P&G and its supplier. This specified the goods to be exchange and the payment terms. The next
contract triggers the SCF program and it is a service contract between P&G and the bank. It
specifies payment terms for P&G’s invoices or accounts payable. The last contract is of a
financing nature and is between the supplier and the bank. It states that the SCF bank has the
right, not obligation, to purchase the supplier’s P&G receivables at price minus a fee, if the
supplier requires advanced payment of the receivable.
Another way to think about the SCF program is to draw upon the factoring lesson Professor
Walsleben presented in class. The SCF program is like factoring in that a supplier wishes to cash
in a receivable early through a financier. However, instead of the supplier initiating which of the
receivables are to be paid early, the buyer (P&G), chooses which invoices they will allow to be
paid early by the financier. From this selection, the supplier can then specify which of the
invoices they would like to be paid early. For this reason, the SCF program is also known as
reverse factoring because it is the buyer, not the supplier, that starts the factoring process.
In short, the key benefits of the program included the following;
• By enrolling in the SCF program, suppliers could get paid for approved invoices as soon as 15
days
• Greater flexibility of payment option. Suppliers could choose to be paid on day 15 or day 75
depending on their cashflow needs
• Healthier balance sheet as suppliers would now have lesser account receivable and would not
have to borrow to funds thereby reducing debts in their financial statement
• Access to capital as the SCF program provided cash stream without burdening the supplier’s
existing credit lines
• Visibility with timely notification of approved invoices which enhances supplier cash flow
Question # 4
P&G claims that the SFC program is a win-win program. Is it true? Does anyone lose?
Solution:
P&G claims the SCF program is a win-win-win because all three parties’ benefit. P&G can pay
its invoices on longer payment terms, up to 75 days. Fabria receives the money from the
invoices in as little as 15 days and benefits from a lesser deduction because the interest is based
off of P&G AA- rating rather than the suppliers’ cost of funds. Lastly, the financing banks also
benefit because they collect the interest/take a deduction from the invoice as compensation for an
advance of funds to the supplier. After 75 days, or whenever the payment terms are set to, the
bank is paid in full from P&G for the invoice.
There are potential losses the financing bank may face. Some risks that arise in any factoring
situation are fraudulent invoices and failure of payment. However, since the SCF involves
reverse factoring, many of these risks are mitigated. For example, since P&G selects the
invoices to be given to the bank, the supplier cannot fraudulently report invoices that don’t exist.
Also, P&G’s AA- rating, ensures to a higher degree that payment will be made to the financing
bank, therefore reducing the risk the bank takes on when offering advanced payment to the
suppliers.
As alluded to early, the SCF rate is competitive because it is based off P&G’s AA- rating as
opposed to the supplier’s cost of funds. The SCF financing rate is 1.30% whereas the assumed
supplier financing cost is 3.50%.
Question # 5
Should Fibria continue to use the SCF Program?

Solution:
Fibria should continue to use the SCF program offered by P&G for a multitude of reasons. The
first being that Fibria’s days of sales outstanding decreased from nearly 80 days to just below 40
days after participation in the SCF program. This means that Fibria is getting paid sooner, and
therefore has more cash on hand to utilize. Fibria also saw an overall decrease in their cash
conversion cycle due to the drop-in days of sales outstanding. Having a smaller cash conversion
cycle allows Fibria to better forecast their short-term cash flow because it is more predictable.
Also, Fibria receives a reduced cost of financing since the interest rate is based off of P&G
rather than their own cost of funds. Fibria uses 1.30% rate instead of the 3.50% rate they would
receive for equivalent financing based off their own rating. The use of the lower rate has had a
direct impact on Fibria’s income statement. In 2013, Fibria’s interest expense was R$ 479, but
in 2014 in decreased to R$ 385 and R$ 356 in 2015. A decrease in interest expense correlates to
an increase in operating income, thus giving Fibria more money in the bottom line. Overall,
Fibria should stay in the SCF program because it offers greater liquidity and lower funding costs.
Question # 6
In general, should large buyer pay smaller suppliers with extended terms? What is the
argument for having P&G pay its A/P quickly?
Solution:
Generally, it is beneficial for large buyers to pay smaller suppliers with extended terms.
Extending terms ultimately leads to larger companies having more operating working capital and
the ability to meet all financial needs. Additionally, when large buyers extend terms, it leads to a
decrease in interest charges and penalties that may be associated with late payments. Large
companies such as P&G and Walmart have been famous for removing roadblocks in supply
chain management and creating a system to meet all financial needs. P&G has an excellent track
record with paying its accounts payable within the terms. Additionally, the firm has great
relationships with smaller suppliers because they have a system to consistently pay on time
which results in the company having an excellent track record. Since P&G has a system put into
place that allows them to collect receivables immediately, there could be an argument by small
suppliers that they would like to receive their accounts payable as soon as possible. P&G is a
great example of how large companies should manage their working capital management in
order to ensure the company's supply chain is working efficiently as possible.