Supply Chain Financing Dale S Rogers Ph D

Supply Chain Financing Dale S. Rogers, Ph. D. W. P. Carey School of Business Arizona State University January 25, 2017 We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. 1

Main Ideas • Procurement Organizations need to be better educated on SCF • Supplier Development with SCF • How SCF programs work – Funding • Amount of variability in the Fintechs • Accounting Treatment (Alcoa Case) We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Supply Chain Flows Product Flow Financial Flow We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Information Flow

Supply Chain Finance is: 1. Using the supply chain to fund the organization, and 2. Using the organization to fund the supply chain. We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Supply Chain Financing Fund the Growth We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Fund the Growth • Firms are looking to an efficient and effective supply chain to fund the growth of the company. • Companies cannot only be dependent on revenues and financial management to grow profit. We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. 6

Sources of Operating Capital: An Example Pricing Functional Savings Supply Chain Savings We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. SKU Rationalization Mix Management

Reasons for Increases In Cash Holdings Inventories have fallen Cash flow risk for firms has increased R&D expenditures have increased. Capital expenditures have fallen We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Supply Chain Finance (Reverse Factoring) Pays in 90 days Bank 3 PL sells accounts receivable to bank and receives payment in less than 30 days Manufacturer Uses Manufacturer’s credit rating Transportation Provider (Carrier) Pays in 30 days 3 PL Pays Immediately We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Customer

Timeline Bank pays the 3 PL pays the Transportation Carrier 0 days 30 days Manufacturer pays the Bank 60 days We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. 90 days

Supply Chain Finance Agrees to SCF Arrangement Aggregator Supplier can choose to receive payment as early as 2 days after the invoice has been approved. Supplier Submits invoice to Aggregator Manufacturer Or wait 90 Uses Manufacturer credit rating We empower supply chain professionals with profound discovery, days powerful connection, and clear foresight. Bundle of Manufacturer receivables as DTC notes Bank 1 Bank 2 Bank 3

Timeline Aggregator sends money to bank(s) Delivery of Product product received Invoice sent to Manufacturer day 0 Aggregator sends Aggregator Invoice sells notes money to supplier approved to bank(s) day 8 day x day 10 We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Manufacturer sends money to Aggregator day 90

List of Largest Banks Participating in SCF We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Fintech Firms Firm Ariba Basware Specialization Supply Chain Financing and Dynamic Discounting Procure-to-Pay Platform Comments Unit of SAP, that is providing a complete procure-to-pay capability Firm Prime Revenue A Finnish software company selling enterprise software for financial processes, purchase to pay and financial management. C 2 FO Exchange. Similar concept to Priceline only based Dynamic for early payment of receivables. Discounting/ear Target market is SME firms. ly payment. GT Nexus / Supply chain Merged with Trade. Card, another Taulia Infor collaboration provider of Supply Chain Finance platform with solutions. And it was recently some CF acquired by Infor, a provider of functionality. cloud-based software for Textura businesses. Orbian Supply Chain Early Fintech company that Financing started originally as a JV between SAP and Citibank. They finance Trax the purchases of the receivables with financial partners under Clearstream, with Euroclear, anddiscovery, DTC We empower supply chain professionals profound noteforesight. issuances under nopowerful connection, and clear purchase agreement. Specialization Supply Chain Financing and Dynamic Discounting Comments Technology platform that is widely considered to be the most robust. Their software can help analyze firm spend and provide a strategy to optimize payment terms based on multiple benchmarks and supplier characteristics. Technology includes payment terms optimization. Also, in addition to SCF can help firms do dynamic discounting. Supply Chain A procure-to-pay platform that is Financing and independent of ERP software Dynamic firms or banks. They are able to Discounting provide flexible options for buyers and sellers. Supply Chain Concentrates on the construction Financing industry. Value proposition for general contractor is higher quality process. Logistics Receives, standardizes, transaction risk normalizes, and corrects logistics management data, and general invoice risk and data. They are able to provide an refining. agreed upon risk score for each

SCF Funders Name Advance Global Capital Apex Peak Specialty Funding SMEs in the emerging markets throughout the world Funding for SMEs throughout Singapore and in South Africa Greensill Capital Principal investor group specializing in structured trade finance, working capital optimization, specialty financing and contract monetization Gem. Corp Countries UK Singapore Australia, UK, and US Investment Fund focused on emerging UK markets in Africa, Asia, and Europe across sectors and asset classes Propel Provides Working Capital Solutions, such South Africa as Supplier Finance and Receivables finance to firms in African countries Tower Trade Supply Chain Finance and IT services for Switzerland Group companies in Ireland, South Africa, Spain, Switzerland, UK, and the US We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Dynamic Discounting • Offering of early payment discounts on approved invoices awaiting payment. • Buyers have option of choosing an APR • Supplier invoices discounted based on a sliding scale derived from the number of days supplier is paid early. • Types: – Early Payments – Extended Discount Term – Dynamic Payment Terms (ASAP) We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

HOW DOES IT FIT WITH OTHER EARLY PAY PROGRAMS? THEY COMPLEMENT EACH OTHER PERFECTLY SPEND LEVELS Accounts Payable Value Buyer push = SCF $50 M+ Buyer extends DPO = C 2 FO everything in between = P-Cards less than $1 M Supplier p ull Buyer generates profit SCF Cards C 2 FO Supplier Size Larger We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Smaller

TOGETHER THEY HELP ADDRESS ALL PARTS OF THE SUPPLY CHAIN AND MAJORITY OF VALUE OPPORTUNITY IS IN MIDSECTION OF SPEND Typical spend distribution of Fortune 500 company Spend Value APR Capital Cost APR SPEND $M $X 0 70% $35 60% $30 50% $25 40% $20 30% $15 20% $10 10% $5 $0 Largest Supplier 250 SCF 500 750 1, 000 1, 250 C 2 FO We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. 1, 500 1, 750 2, 000 0% Smallest Supplier Cards Source: Bavelos Group, 2015

E-Payables P-Card EPayable s Virtua l Card We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Ghos t Card

E-Payables – P-Cards Buying Firm Chief Purchasing Officer Supplier Firm Retail Commercial Tie Cards Co-Branding Fraud Security Rebates Bank Card Issuer Processor Master. Card Visa We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Bank

SCF vs. E-Payables • SCF brings CPO and CFO together. The tension used to be on CPO focusing on price and CFO on working cap. • SCF for core suppliers, large volume of money, frequent transactions. • P-card (or virtual card) more for lots of SME suppliers. We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Supplier. Pay Pledge We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Working Capital Average WC Required Monthly Payments Average WC Required Weekly Payments We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Ti m e

0 -20 -40 -60 We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. 7/5/1905 12: 00 AM 7/4/1905 12: 00 AM 7/3/1905 12: 00 AM 7/2/1905 12: 00 AM 7/1/1905 12: 00 AM 6/30/1905 12: 00 AM 6/29/1905 12: 00 AM 6/28/1905 12: 00 AM 6/27/1905 12: 00 AM 6/26/1905 12: 00 AM 6/25/1905 12: 00 AM 6/24/1905 12: 00 AM 6/23/1905 12: 00 AM 6/22/1905 12: 00 AM 6/21/1905 12: 00 AM 6/20/1905 12: 00 AM 6/19/1905 12: 00 AM 6/18/1905 12: 00 AM 6/17/1905 12: 00 AM 6/16/1905 12: 00 AM 6/15/1905 12: 00 AM 6/14/1905 12: 00 AM 6/13/1905 12: 00 AM 6/12/1905 12: 00 AM 6/11/1905 12: 00 AM 6/10/1905 12: 00 AM 6/9/1905 12: 00 AM 6/8/1905 12: 00 AM 6/7/1905 12: 00 AM Cash Conversion Cycle Apple 100 80 60 40 20 Apple

Further Explanation • http: //financing. supply We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

End Of Presentation Extra slides follow We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Payments Purchase Requisition Purchase Order We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. • • • Check ACH VCA Wire Transfer Fed. Wire

SCF vs. E-Payables • SCF brings CPO and CFO together. The tension used to be on CPO focusing on price and CFO on working cap. • SCF for core suppliers, large volume of money, frequent transactions. • P-card (or virtual card) more for lots of SME suppliers. We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Fees $ Transaction Size $7, 255. 22 ts n i o P s si 13 a B 0 120 Basis Points + $40 Fees We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

0 -20 -40 -60 We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. 7/5/1905 12: 00 AM 7/4/1905 12: 00 AM 7/3/1905 12: 00 AM 7/2/1905 12: 00 AM 7/1/1905 12: 00 AM 6/30/1905 12: 00 AM 6/29/1905 12: 00 AM 6/28/1905 12: 00 AM 6/27/1905 12: 00 AM 6/26/1905 12: 00 AM 6/25/1905 12: 00 AM 6/24/1905 12: 00 AM 6/23/1905 12: 00 AM 6/22/1905 12: 00 AM 6/21/1905 12: 00 AM 6/20/1905 12: 00 AM 6/19/1905 12: 00 AM 6/18/1905 12: 00 AM 6/17/1905 12: 00 AM 6/16/1905 12: 00 AM 6/15/1905 12: 00 AM 6/14/1905 12: 00 AM 6/13/1905 12: 00 AM 6/12/1905 12: 00 AM 6/11/1905 12: 00 AM 6/10/1905 12: 00 AM 6/9/1905 12: 00 AM 6/8/1905 12: 00 AM 6/7/1905 12: 00 AM Cash Conversion Cycle Apple 100 80 60 40 20 Apple

Cash Conversion Cycle CCC = DSO + DIO – DPO • Days Sales Outstanding (DSO): the number of days needed to collect on sales. • Days Inventory Outstanding (DIO): how many days it takes to sell the inventory. • Days Payable Outstanding (DPO): the company's payment of its own bills. We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Further Explanation • http: //financing. supply We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Funder Solutions We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

-20 6/ 05 1 9/ 19 2: 0 0 0 6/ 11 5 1 : 00 2 AM /1 90 : 00 6/ : 00 13 5 1 2: AM /1 00 90 6/ 15 5 1 : 00 2 AM /1 90 : 00 6/ : 5 0 17 0 12 AM /1 90 : 00 6/ : 5 0 19 0 12 AM /1 90 : 00 6/ : 5 00 21 12 A /1 : 0 90 0: M 6/ 00 23 5 1 2: A /1 0 90 0: M 6/ 00 25 5 1 2: AM /1 00 90 6/ 27 5 1 : 00 2 AM /1 90 : 00 6/ : 5 0 29 0 12 AM /1 90 : 0 5 7/ 0 1 1/ A 19 2: 0 0: M 05 00 7/ 1 3/ A 19 2: 0 0: M 05 00 7/ 1 5/ A 19 2: 0 0: M 05 00 12 A : 0 0: M 00 AM 7/ 19 6/ Cash Conversion Cycle Apple 100 80 60 40 20 0 -40 We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. -60 Apple

Equity Cash Sources of Capital Supply Chain/ Operatin g Capital We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Debt

Pricing Function al Savings Sources of Operating Capital Supply Chain Savings We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. SKU Rationaliza tion Mix Manage ment

Buyer Goods/ Services 30 days after close of billing cycle (average of 45 days) Supplier 2 days after card has been processed Payment Card Issuer Proces sor Retail / Fraud Commercial Security Tie Cards Rebates We Co-Branding empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Merchant Acquirer

Day 45 Day 0 -50 BP Buyer 50 BP Profit Day 2 -200 -250 BP BP BP Transmitt Acquirer er: Bank (or Master. Ca CITI Bank Seller other rd, Visa, institution) etc. 20 20 BP BP 80 BPRisk Mgt. We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

SCF Provider Agrees to SCF Arrangeme nt Supplier can receive early payment of approved invoice Provider Submit s approv ed invoice Supplier Pays in 90 days Buyer Or wait 90 days We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Finance receivabl es Uses Buyers’ credit rating to assess risk Syndica te/ Consorti um of Banks Bank Funder

Identify SKU / Supplier Procure-to-Pay Commercial Credit Card Request Goods / Send PO Receive Invoice Fintech Supply Chain Finance Approve Invoice Dynamic Discounting Receive Goods Payment Document Management / We empower supply chain professionals with profound discovery, Analytics / Reporting powerful connection, and clear foresight. Financing Banks Specialize d Providers Others: Pension Funds, Insurers, Mutual Funds

Purchase Volume Commercial Card We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Supplier Size

Purchase Volume Dynamic Discounting We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Supplier Size

Largest Purchase Volume Smallest Reverse Factoring We empower supply chain professionals with profound discovery, powerful connection, and clear foresight. Smalle Supplier Size Larg

Cash Conversion Cycle CCC = DSO + DIO – DPO • Days Sales Outstanding (DSO): the number of days needed to collect on sales. • Days Inventory Outstanding (DIO): how many days it takes to sell the inventory. • Days Payable Outstanding (DPO): the company's payment of its own bills. We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Sources of Data • Income Statement: – Revenue – Cost of Goods Sold (COGS) • Balance Sheet: – (Average) Accounts Receivable – (Average) Accounts Payable – (Average) Inventory • The number of days in the period (year = 365 days, quarter = 90) We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Days Sales Outstanding (Average) Accounts Receivable/ Revenue per day • Choices: – Accounts Receivable – AAR = (beginning AR + ending AR) / 2 – Time average of AR We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Days Inventory Outstanding (Average) Inventory / COGS per day • Choices: – Inventory – Average Inv. = (beginning Inv. + ending Inv. ) / 2 – Time average of Inventory – De-inflate COGS? We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.

Days Payable Outstanding (Average) Accounts Payable / COGS per day • Choices: – Accounts Payable – AAP = (beginning AP + ending AP) / 2 – Time average of AP – De-inflate COGS? We empower supply chain professionals with profound discovery, powerful connection, and clear foresight.