Lecture 4 Jan H Jansen Email janjansenhannl Lectures period 1 or 3 Lecture Topic Preparation 1 Introduction SCF amp Elements of SCF SCM Purchase APS ERP and ICT 2 Financial ratios ID: 805375
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Slide1
IntroductionSupply Chain Finance (SCF)Lecture # 4
Jan H JansenE-mail: jan.jansen@han.nl
Slide2Lectures period 1 or 3LectureTopicPreparation
1
Introduction SCF & Elements of SCF:
SCM, Purchase, APS, ERP and ICT
2Financial ratiosAssignment 1Annual reports 2016 & 2017 Unilever, Philips & HeinekenThe Power of SCF3DuPont Analysis & ValueAnnual reports 2016 & 2017 Unilever, Philips & HeinekenAssignment 2Case study KPN4Working Capital Assignment 3Case study SCF EU5Working Capital ManagementDynamic DiscountingAssignment 4Case study ACCAStandard definitions for Techniques of SCFEBA SCF6SCF instrumentsIntroduction The Cool ConnectionCool connection round 1Assignment 5Standard definitions for Techniques of SCFEBA SCF7Risk management in SCFCool connection round 1 (evaluation)
Slide3RecapLecture 3
Slide4Source: http://primerevenue.com/wordpress/wp-content/uploads/2014/11/Royal-KPN-Supply-Chain-Finance-Case-Study.pdfQuestions ?
Slide5Operating cycle and Cash Conversion Cycle
(Arnold, 2008)
(Berk, 2007)
Slide6Shareholder ValuemodelRappaport, A. (1998) Creating Shareholder Value: A Guide for Managers and Investors. Free Press: New York
Slide7Slide8Assignment 3
Slide9Lecture 4
Slide10Supply Chain Finance: How it all fits together (developed by
JH Jansen)
Slide11Conceptual model SCF for WCM in SMEs
Slide12The role of an IT Platform
Slide13Slide14EVA™
Working
Capital
Slide15Supply Chain Finance Cube model (Pfohl H.-C. e., 2009)
Slide16Working capital (static definition)Sales € 6.000.000,00 Costs of Goods Sold
€ 4.200.000,00
Debtors (AR)
€ 500.000,00
Creditors (AP) € 233.600,00 Inventory € 700.000,00 Cash & Cash Equivalents € 200.000,00 Other Current Liabilities € 180.000,00 Calculate: WoCa, NWC, OC and CCC1 year = 360 days
Slide17Working capital (static definition)InventoryCreditors (AP)Debtors (AR)Other current liabilitiesCash & cash equivalents
Current AssetsCurrent Liabilities
Slide18FinanceSCFWoCa € 1.400.000,00
€ 1.200.000,00 NWC
€ 986.400,00
€ 966.400,00
DaysVelocityCollection period AR (DSO)3012Inventory period (DIO)606Payament period AP (DPO)20,018,0 Operation Cycle (OC)90Cash Conversion Cycle (CCC)70,0
Slide19Components of InventoryRaw materialsWork in processFinished goodsGoal = Minimize amount of cash tied up in inventoryTools used to minimize inventory
Just-in-time (JIT)Lean manufacturing
Slide20Net Working CapitalAssetsLiabilities & Net Worth
Cash
Accounts receivable (A/R)
Inventory
Current assetsAccounts payable (A/P)Short-term debtCurrent liabilitiesNWC = ( A/R + Inventory ) - A/PNote that NWC is not the same as Current assets & Current liabilities.
Slide21Inventory turnover6Days of inventory (DII)
60,0Payabbles turnover
18,0
Days of
creditors (DPO)20,0Receivables turnover12,0Days of debtors (DSO)30,0Operating cycle90,0Cash conversion cycle70,0
Slide22Operating cycle and Cash Conversion Cycle
(Arnold, 2008)
(Berk, 2007)
Slide23Working capital (dynamic definition)Cash to Cash Conversion Cycle:CCC = (DIO – DPO) +DSODIO = Days In Inventory Outstanding
DPO = Days Payable Outstanding (Creditors or AP)DSO = Days Sales Outstanding (Debtors or AR)
Slide24Operating and Cash Cycles time
Operating Cycle
Cash
Conversion Cycle
PriceQuoteOrderPlacedOrderShippedPaymentReceivedInputsReceivedAccountsReceivablePeriodQuotationPeriodInputSourcingPeriodAccountsPayablePeriodt0t1t2t3t4t5InventoryPeriodCashPaymentfor InputsCashSettlementReceived
Cash
Outflow
Cash
Intflow
Slide25Factors that shorten the cash cycle?Changing inventory policy (JIT)Inventory turnoverIncreases cash flowLower carrying costsShortening AR (debtors)period (discount)Receivables turnoverTight credit policyHow to handle bad debts
Extending AP (Creditors) period (negotiation)COGSInventory
Begin
End
Slide26SCF: Using the C2C variables to strengthen the supply chain
(Source: Randall & Farris II, 2009, Int Journal of Physical
Distribution $ Logistics Management
)
Sub-componnet supplierInstruments for Measuring and Testing of Electricity and Electrical Signals (SIC 3825)Component manufacturer Semi-conductors (SIC 3674)OEMRadio and Television Broadcasting and Communications Equipment (SIC 3663)DPO (AP)141.0 days49.0 days59.3 daysDSO (AR)68.6 days29.4 days57.1 daysDIO207.9 days83.1 days28.3 daysC2C135.5 days63.5 days26.1 days
Slide27Terms of SaleTerms of Sale - Credit, discount, and payment terms offered on a sale.Example -
5/10 net 30
5
- percent discount for early payment
10 - number of days that the discount is availablenet 30 - number of days before payment is due
Slide28Terms of SaleA firm that buys on credit is in effect borrowing from its supplier. It saves cash today but will have to pay later. This, of course, is an implicit loan from the supplier.We can calculate the implicit cost of this loan
Slide29Example: Terms of Sale (EAR)On a €100 sale, with terms 5/10 net 60, what is the implied interest rate on
the credit given?
Slide30Case SCF EUSource: http://ec.europa.eu/DocsRoom/documents/13408/
Slide31Slide32Slide33Do we agree with this definition of SCF?Supply Chain Finance constitutes an arrangement between a buyer, a supplier, and a financial intermediary where the credit standing of the buyer is leveraged to improve the working capital position of a supplier. Typically, such arrangements involve a large, financially strong company that is supplied by several SMEs and innovative start-ups, and a financial intermediary – often a bank.
Slide34SCF instrumentsDPO extendingDynamic discountingRisk reduction
Slide351 DPO extendingThe first line of reasoning is one of working-capital improvement by extending a buyer ’ s Days Payable Outstanding (DPO). Extending DPO by a buyer is an easy and straightforward benefit for the buyer, as for each day the buyer does not pay an invoice, he earns interest on the retained sum in capital. Supply Chain Finance in this case functions as a way to extend DPO without violating the EU directive on combatting late payment in commercial transactions, and without overly distressing suppliers.
Slide362 Dynamic discountingIn the second line of reasoning, Supply Chain Finance arrangements serve to negotiate a price discount from suppliers. In some cases, this discount can be as high as to have the buyer fully benefit from any cost savings generated by the arrangement. In such a scenario, the supplier agrees to the arrangement for fear of losing future business. Leveraging the credit standing of the buyer, the Supply Chain Finance arrangement allows the supplier to access capital at a significant lower cost, decreasing risks on supplier default and subsequent disruption of the supply chain.
Slide373 Risk reductionThe third line of reasoning focusses on decreasing risk in the supply chain and tying strategically important suppliers to the buyer. Supply Chain Finance arrangements then are geared to help suppliers have their invoices paid in as little time as possible, without any negotiated discounts or extended payment terms from the side of the buyer. In this scenario the buyer bears most of the costs associated with the management of the arrangement. However, the risks that through Supply Chain Finance are mitigated for buyers and sellers do not disappear. In essence, they are transferred to the financial intermediary, often a bank.
Slide38Advantages SCF for SME’sAn SME or start-up supplier that needs to wait a large number of days before receiving payment on an invoice effectively has the invoice sum unavailable to its financial operations until the invoice is settled. This has a negative effect on the working-capital ratio of the supplier (see above), and imposes financial risk on the supplier.
Slide39Added value of SCF for SME’sAn important success factor for a Supply Chain Finance arrangement to work is to understand the position of suppliers and to gain their trust. As it is almost in all cases the buyer that together with a financial intermediary sets up the Supply Chain Finance arrangement, suppliers that are approached to participate in the arrangement fear to be taken for a ride. In the world of finance, and especially in buyer-supplier relationships, introduction of new financial arrangements do not usually lead to mutual benefit. The win-win-win aspect of Supply Chain Finance does not always appear immediately apparent to approached suppliers.
Slide40