UNIT 6 – Supply Chain Finance Flashcards
SCM/ Logistics, Finance
Operating flows (related to net income) and financial flows (non-current liabilities/ long-term debts and equity) are inextricably (inseparable) linked to each other:
1. Order to Cash Cycle: Order -> Delivery -> Payment
Goal: minimize days sales outstanding (DSO) waiting days to receive cash
2. Forecast to fulfil cycle: Align order planning with purchase planning
Goal: Minimize days inventory held (DIH) days to sell inventory average
3. Purchase to Order Cycle: Purchase -> Warehouse -> Payment
Goal: Maximize days payable outstanding (DPO) days to pay bills to creditors
4. Credit to Interest Cycle: Align financing cash flows with operating cash flows
Goal: minimize interest payments
C2C:
SCM and logistics contribution to financial management, when…
- Cash flows are accelerated: money flows back into the company sooner, so the need of pre-financing is reduced.
- Net cash flows are increased: Revenues are increased and/or cost are reduced, leading to an overall increase in cash.
- Risk associated with cash flows are reduced: volatility and vulnerability of cash flows is reduced.
- > The financial perspective to SCM (SC finance) focuses on a collaborative management of cash flows (timing, amounts, risks) across SC partners.
–SCM and net working capital
NWC=Current assets-current liabilities (short term payments)
How much liquid capital is maintained to operate a business and how able is to meet short-term obligations? A positive NWC has the inconvenience that it has to be financed at a cost. For that, managers try to optimize capital efficiency and minimize NWC, since it is necessary, but also expensive.
–Through which components SCM can influence working capital (NWC)?
- Accounts receivables (current assets)
- Inventories (current assets)
- Account payable (current liabilities)
- -> A change in NWC has a direct effect on the level of cash in company: increase of NWC means cash outflow, and decrease means cash inflow.
Cash-to-cash (C2C) cycle?
Also known as the working capital cycle. Time period between cash payment to suppliers for inventory and receiving cash from customers. It is this time gap that creates the need for working capital.
Days working capital (DWC)?
How many days it takes for a company to convert its working capital into revenue. Increase of DWC means sales decreasing or is taking longer to collect payables. DWC gap can not be bridged, companies often pre-finance operating cycle with capital, that must be available to keep business going
Optimizing C2C across the SC
It have to help to simply shift net working capital from one partner to the next.
This requires collaborative efforts of SC partners:
-Operations-related: align order and delivery cycles; reduce order fulfilment times through improved info exchange, employ collaborative product management systems; automate and standardize interfaces. -> SCM
-Finance-related -> SCMAC
The Supply chain finance (SCF) eco-system:
- Businesses: The partners engaging in collaborative SC activities.
- Financial institutions: like banks as intermediaries for SCF solutions.
- Non-bank SCF providers: corporations have stablished specialized subsidiaries.
- SCF solution providers: Develop and run IT systems and open platforms for SCF
- Other SCF players: such as logistics service providers (LSP), consultants, etc.
Finance related C2C Instruments
- Reverse factoring: An arrangement where the customer guarantees to pay to the supplier, independent of supplier’s future actions or financial condition.
- Dynamic discounting: Discount for paying earlier to supplier. The seller/supplier avoid costly loans and customer harness customer’s strong liquidity.
- Capital assets financing/leasing: The buyer supports the supplier by financing some of their capital costs, e.g. through initial purchase and subsequent leasing to supplier.
Reverse factoring:
Through reverse factoring the supplier profits from the buyer’s superior creditworthiness, transaction is facilitated through open SCF platform. This includes an intermediary (bank) for payment obligation
Dynamic discounting:
This works flexible credit facility for the supplier. Cash discount are not fixed, but buyer defines interest rate and informs supplier about this option. Coordination through system abut early payment date and discounted amount.
Capital assets financing:
Big buyers can finance project-specific equipment and machinery for their suppliers.
Supplier retains ownership in the asset. Supplier must pay recurring leasing fee for the asset.
Supplier capital requirements are reduced and financing cost can be lower.
