Supply Chain Finance Planning PDF

What is supply chain? We can nd suppliers, manufacturers, logistics and retail. (SMLR). We can nd these elements in every supply chain. Tt’s very important to consider the speci c role of single units of a supply chain and all the supply relations....

What is supply chain? We can nd suppliers, manufacturers, logistics and retail. (SMLR). We can nd these elements in every supply chain. Tt’s very important to consider the speci c role of single units of a supply chain and all the supply relations. SUPPLY CHAIN FINANCE: we speak about a set of techniques and tools to optimize the supply chain value and working capital, based on a collaboration approach that each operator of a general supply chain must share. we refer to the nance applied to the supply chain management, relation between my company and all kind of nancial operators, rstly banks. But there are several kinds of nancial operators, such as the ntech operators that connect the technologies company and nancial companies. SCF helps buyers and suppliers by offering exible payments terms and nancial options. In general while SCM deals with the operational and logistical management of the supply chain. SUSTAINABLE SUPPLY CHAIN FINANCE: SSCF focuses on integrating sustainability criteria into nancial practices to promote more responsible business practices, and integrate also environmental, social and governance into scf practices. Focus on working capital NOWC NOWC it’s the di erence between total current activities (cash, receivables, stocks) and total of currents liabilities (m/L term debts, equity and current trading debts) gives us the net operative working capital NOWC, that is a pillar of SCF. NOWC helps companies to understand if their liquidity can cover their operating expenses without relying on long term debt or equity ( equity = equity capital = capitale proprio ) >>> Perspectives of supply chain nance: There are 3 di erent perspectives: 1) Supply chain perspective = referred to nancial aggregates ( like cash) and also sical components like stocks + xed invetsement. Goal= smooth and cost e ective supply chain that support the overall business strategy. es: Corneliani and Lensing are investing in xed assets to provide sustainable textiles with an innovative supply chain management and stock management (just in time that reduces the timing). Di erence btw reverse logistics ( consumer to produces ) and direct logistic ( producers- consumer ). 2) Innovative nancial perspective = focused on nancial component + sical components. It’s a new and creative way to achieve nancial goals, so alternative funding resources, investing in sustainable reasonable projects etc. it’s focused on long term value creation and innovative solutions to nancial challenges. Improve liquidity through creative strategies and dynamic discounting 3) Traditional nancial perspective = focused only on nancial components of WC such a revenue, pro t and ROI. goal= ensure the company’s nancial health and performance. >>> Main categories of supply chain nance services providers( fornitori) Different ntech operators ( ntech operators = help business and companies to manage their nancial aspect ). SCF providers can generally be categorised into 4 types based on their primary roles and the value they o er in nancing supply chain activities: Financial services providers: can be divided into traditional or SCF pure players ( ntech companies that provide to the sc operators special services; es: Findinamics). They support large companies with offer nancing option like trade loans etc. SCF pure players instead are specialised companies focused on SCF solutions. Logistics services providers LSPs: worldwide logistic operators that integrate their core business in other business. They simplify their logistics services. These operators usually fi fi ff fi fi fi fi fi fi ff fi fi ff fi ff fi fi fi fi fi fi fi fi fi fi fl fi fi fi ff fi fi fi fi fi fi fi fi  act in the logistic area, but now they are operating also to optimize supply chains, connecting buyers and suppliers. Es ups or dhl Trade platform providers: providers that use platforms or marketplaces to simplify supply chain nance transactions between buyers, suppliers and nancial institutions. >>> New kind of operators FinTech-start up innovative: cash seeker = ricercatori (1) , cash exploiter(2), working capital broker ( 3), compass (4) 1) cash seeker focuses on helping companies especially smaller businesses, they simplify the access liquidity quickly and easily through some instrument 2) cash exploiter assist companies in optimising the cash they have available by maximising returns to create additional value 3) wcb acts as an intermediary to connect businesses needing working capital with various nancing options. 4) compass is role of guide, using data to drive companies toward optimal nancial decisions. >>> New kind of operators and emerging roles In the modern supply chain nance landscape, logistics service providers (LSPs) are expanding their roles beyond traditional transportation and warehousing. They are integrating nance and technology solutions to support various aspects of supply chain nance, optimizing working capital. Here are the emerging roles and services that LSPs, from 2PL to 4PL/LLP, are adopting: 1. Logistics Service Provider (LSP) Types - 2PL (Second-Party Logistics): Providers that own and operate speci c transport assets like trucks, ships, or warehouses. They typically focus on moving goods from one location to another without broader supply chain integration. - 3PL (Third-Party Logistics): Full-service logistics providers o ering end-to-end solutions, including warehousing, distribution, and order ful llment, but not owning the products or materials. - 4PL (Fourth-Party Logistics) or LLP (Lead Logistics Provider): Operates as a strategic partner overseeing the entire supply chain on behalf of the client, coordinating between 3PLs and other suppliers to provide a fully managed supply chain service. 2. Trading Credits/Debts Optimization: they are Logistics providers that optimize the credit terms and debt management of companies within the supply chain. Primary Objective is improve working capital for both buyers and suppliers by extending or consolidating credit terms. 3. Monetization of Stocks: using inventory as a nancial asset, LSPs provide solutions that allow companies to monetize stocks in warehouses or distribution centers. Primary Objective is Enable companies to generate liquidity by securing nancing against stored inventory. 4. Asset Financing: Asset-based nancing solutions tailored for logistics, providing companies with options to nance transportation equipment, warehouses, and other logistics assets. Primary Objective is help logistics companies and their clients acquire or lease essential logistics assets without heavily impacting working capital. Logistic services providers: How to participate and the types of asset nanced -Collaborators (stocks) -Joint venture (stocks and trading credits/debts) -Spin o ( xed assets) Alone ( xed asset, stocks and trading credits/debts) Italian players are most of all nancial operators; foreign players are most of all provider B2B and pure player SCF. fi fi fi ff fi fi fi fi fi fi fi fi fi ff fi fi fi fi fi  FINANCIAL PROFILING Cash to cash cycle C2C: Internal processes and in particular the timing to deliver and sell the nished product on the market. C2C Measures the time required to transform cash out ows paid to suppliers into cash in ows collected from customers. ( tempo necessario af nché soldi spesi per produrre ritornino con vendite ) Main elements of C2C: -Timing input costs and its transformation in revenues -Liquidity available in the supply chain, evaluate the cash of the general supply chain, not only the internal activities but all the general relations inside the sc -Costs of necessary liquidity: external loans and solution for the supply chain nance that the company has to evaluate in term of costs. Formula: C2C CYCLE= DSO + (timing production cycle) – DPO DSO = Days Sales Outstanding: net trading credits (net) * 365 / revenues ( ricavi). The average timing in which the company receives the credit from the client. Timing production cycle = total time required for production timing production activity + DIH Days Inventory Holding(DIH) = Inventoryt / Revenues * 365. It represents the average time in which the company maintains the stock inside the timing production cycle, so The time before the company sells the nished product, starting from the raw materials. DIH It refers to two di erent steps: inventory and stocks once the company bought materials and production activity when the company starts the production process and employes raw materials. Days Payable Outstanding: trading debts (average per year) * 365/ COGS DPO refers to average time it takes the company to pay suppliers. regarding the payment of all raw materials, services, resources or buying activities. DPO measures the time between “buy” activity and “pay” moment >>> COGS= cost of goods sold = beginning inventory + purchases – ending inventory. Basically, it is the total cost of the nish product sold. Why we have to evaluate the c2c when we talk about scf? It’s important for the optimization of the overall aggregate of working capital, and the most important element of wc is cash. To identify the speci c solution in optimizing the working capital inside the supply chain, we have to analyze every operator and side of supply chain. aggregates in the gure: 1. DPO, which measures the time between “buy” activity and “pay” moment (towards suppliers). The average timing in which the company must sustain the cash out ow. fi fi fi fi fi fl fl fi fi fl ff  2. From the time T1 (when I receive the raw materials) to the selling, we have the timing production cycle, the period in which I stock the raw materials and employ all the materials in production process. The time production cycle is higher compared to the DPO, because I will pay raw materials before the time I will sell the nished product. 3. Once I sold the nished product I will receive the payment in another time: the DSO, in which I obtain the cash in ow from the selling activity. The period between the time the company pays the raw materials and the moment in which it receives the payment: the cash conversion cycle that represents the period in which the company transform the cash out ow paid to the suppliers in the cash in ow received form the customers. The stock of raw materials and nished product is in the timing production cycle, that’s why the cash conversion cycle represents the general scheme to evaluate the situation of working capital of a general supply chain. So, the scf solutions operates in two different aggregates: stock and cash. To have a greater level of stock inside the supply chain isn’t always a positive situation, because stocks represent a cost, a cost to maintain the materials in the supply chain. At the same time stocks represent a several level of risk inside the sf. For this reason, the sc solutions can optimize stocks and improve the cash balance inside the supply chain. fl fi fl fi fl fi  Financial pro ling Using the cash conversion cycle I could have 3 di erent pro les 1) the buffer pro les that refers to a speci c sc in which there is a high seasonality level. Es: agriculture, the supply chain of a speci c industry and each operator of it focuses on stocks optimization solutions. Sc solution to optimize the stocks according to seasonality of the speci c industry. Both cash and stocks have the same importance for all operators of sc. 2) Distribution intensive: focus on the reduction of nowc solutions 3) Cash generation: There’s a focus on the retailers: negative nowc. Innovative solutions. Regarding the 3 di erent perspectives of scf that we’ve seen last lecture, we can nd some Solutions of scf to optimize cash and stocks regarding the overall net operative wc: Innovative nancial perspective and traditional perspective= cash optimization Supply chain perspective extended to stocks= optimize both cash and stock. The NOWC doesn’t represent a positive area because the extend of the NOWC could be + or -, it depends upon a speci c situation, in the slide our company is nancing the area of nowf recurring to medium-long term debts. All the operating activities must be covered with current debts not M-L term debts. These last ones should be used to cover the xed assets. Often, companies are in di culty because they cover the operating activities with long term debts, a typical situation in which the supply chain nance solution must be used to optimize this area of nowc and this kind of situation. The bene ts of supply chain nance solution - nancial: regarding to working capital optimization and reduction; improve the nancial balance inside SC. Optimize the cash balance and inventory. -economic: about the improvement of the pro t connected to the lower costs after the nancial solution. So, the solution can bring lower costs and speci c discounts in payments for the buyer. (es: advanced payment) all this improves the pro t. -strategic: rebalancing the economic and nancial resources in the supply chain and reduction of the risk of nancial crises: with scf solution I have more chances to get over the crisis -supply chain ef ciency: reduction of wc requirements thanks to the collaborative approach. -reduction of the rating risks linked to the greater quantity of information inside the sc. This allows the company to obtain more loans, facilities. Role of blockchain inside the SC What is blockchain? Blockchain is a speci c technological way to manage the relations inside a speci c SC in a decentralised approach, the focus of a blockchain technology. Bc is a speci c type of database that is Decentralized approach refers to the fact that there’s not a central authority that allows the di erent relation and exchanges inside the sc, anyone can participate and transact on the ledger. Centralised approach: Data resides on a centrally owned database controlled by a company. You ultimately have to trust that this company is doing things correctly and in your interest. (Bank, Government, University, Utilities) “BT” blockchain technologies have applied in the rst time in the crypto market, in other words BT manage the di erent relations between buyers, banks, customer, nancial operators. Each relation (es: buyers and suppliers) is traced in a speci c network and Once the relation is traced in the B, it can’t be changed. The BT guarantees improve the unchangeable situation and prevents risks connected with the change of the relations, deals and agreement. fi ff ffi fi fi fi fi fi fi ff ff fi fi fi fi fi fi fi fi fi ff fi fi fi fi fi fi fi fi fi fi fi fi fi  Smart contract: digital agreement managed using the BT. it de nes the terms, which are unchangeable. We cannot consider the bene t of BT unconnected with scf solutions. A smart contract is an agreement between two people in the form of computer code so it automatic action. SCs run on the blockchain, so they are stored on a public database and cannot be changed. The transactions that happen in a smart contract are processed by the blockchain, which means they can be sent automatically without a third party. This means there is no one to rely on! The transactions only happen when the conditions in the agreement are met — there is no third party, so there are no issues with trust. Advantages Cost-effective > Smart contracts can replace agents that mediate agreements in cases where agreement terms can be observed publicly and digitally. Timesaving > Due to intermediaries and paperwork of traditional contracts, it takes time to nalize an agreement. Since smart contracts eliminate the need for intermediaries, they can be completed faster. Secure > Blockchain technology makes transactions more secure due to its decentralized structure Accurate > Since smart contracts are written as computer code, there will be fewer parties to make manual mistakes during the process of contract preparation. Hashing Cryptographic process that creates a unique “digital signature” for each block of data recorded in the blockchain. - This ensures the security and immutability of the data: once recorded, a transaction cannot be changed. Primary tools of supply chain nance are designed to optimise working capital and improve ef ciency of transactions btw buyers and suppliers. Main solutions of Supply Chain Finance (CASH OPTIMIZATION) Traditional nancing solution of NOWC 1. Factoring FACTORING: is the most applied solution to optimize the cash ow inside supply chain in a speci c relation between buyers and suppliers. The aim of FACTORING is to create the better condition to the suppliers to manage the cash ow, by anticipating the payment FOCUS: payment terms agreed Factoring allows the partners to create procurement relations. ( fornitura) fi fi fi fi fi fl fi fl fi  The supplier sends invoice (fattura) to the factor, an operator between the two parts, he is a specialized operator inside supply chain who can optimize the cash ow inside the SC and manage in the right way the nancial needs. - Factor pays in advance the seller (for a percentage), compared to the original payment terms, so he has to anticipates money. He operates to anticipate the suppliers the number of raw materials resources compared to the original terminal T2 - Buyer pays the factor at the deadline of invoice - seller sells in T1 and receives the payment in T2. At the end when the buyer pays the total invoice to the factor, this one will pay the remaining amount to the suppliers. In average, from the “buy” moment to “pay” there are from 30 to 60 days to pay. The buyer pays the cost of the services to the factor, which is represented by a % on the total amount of the invoice. The aim of FACTORING is to create the better condition to the suppliers to manage the cash ow, by anticipating the payment. Factoring operates in one of the di erent aggregates of WC. 2. Invoice discount The same mechanism of factoring, but the invoice discount is managed by a bank and not by a factor. The invoice discount solution operates as well in cash optimization. 3. Forfaiting (Export) Forfaiting is an additional scf solution in the international procurement relation, es: between exporters and importers. After the deal agreement between these two parts, the exporters (suppliers) contacts his bank for the advance payment to obtain it; the payment is guaranteed by a speci c bank that operates in particular in this kind of international operation. Once the bank receives the request, it evaluate the market risk and the rating of the importer and then gives the payment. fl fi fi fl ff  Differences between Factoring and Forfaiting - forfaiting is for speci c international operation. - The amount that nancial operator anticipates in factoring is 75-80%; forfaiting 100%. - Credit rating assessment: factoring expresses a rating in case of failure of the buyer instead, in forfaiting the operation is based on rating assessment of the importer’s bank’s reliability (quindi a dabilità della banca non dell’impresa). - regard the kind of the services, the factor o ers credit management and other services, while forfaiting doesn’t o er other kind of services. 4. Reverse Factoring It’s the same mechanism of the factoring, the di erence relates to operators that requests the solution. While in the factoring the solution is activated by suppliers, in reverse factoring is activated by the buyer. In speci c SC in which the buyers represent the most important operator. Reason for the buyer: he wants to generate special condition for its suppliers and maintain a good level of relation with them. [Collaborative approach] Innovative nancing solutions of NOWC 1. Dynamic Discounting Dynamic discounting represent an innovative supply chain nance solutions. There is in this case a speci c platform that link supplier and customer, usually platforms are managed by ntech companies. At the same time the buyer can pay in advantage the invoice through the platform ( for this reason it’s called dynamic solution ( days of anticipation) and the customer can agree a speci c discount with the buyer. There is a double bene ts: - suppliers receives in advance the payment compared the original deadline - buyers receives a discount. 2. Reverse factoring Advanced The same of reverse factoring, now there is a speci c digital platform managed by ntech companies. Also, there is a share of information in the platform, each operators shares some knowledge of their management. The supply chain solution bene ts the cash ow optimization and increases the information inside the SC. Focus on the relationship between the operators. ffi fi fi fi fi ff fi fi fi ff ff fi fi fi fl fi fi  3. Clearing house Clearing houses are operators that connect suppliers and buyers to manage their relationship and the nancial ow. CH activities: Balancing the nancial ows, guarantee the nancial ows, provides rating information. If my company needs to activate a loan in short terms or medium-long, the CH is able to activate this kind of services. And in some cases, the CH is able to guarantee the nancial ow. All this is connected to a special service fee. 4. Invoice auction: some suppliers could sell its invoices with speci c auction session ( asta ). In which participate di erent operators interested in buying some invoices with a speci c discounting %. It creates speci c relations with buyers, I could buy the invoices of a suppliers towards Barilla, to create a relation with Barilla when I’ll receive the payment from Barilla. The Reason is to speculate on the value at the origin VS the discounted amount. 5. Purchase order nance Same mechanism of factoring, the di erence is connected to a document. In factoring the payment in advance is based on invoices after delivering, in this case is based on orders. I can activate my production process once I receive order from the buyers. Orders as a guarantee. Used in fashion industry where the processes start form order received from retailers. Usually, the fashion producers need money to activate the production process, so this solution can cover these needs. fi fl fi ff fi fi ff fl fi fl fi fi fl fi  6.Inventory nance It refers to speci c short-term loans, based on inventory. In food industry, like for Parmigiano Reggiano, the producers have an important inventory for the aging process. This kind of nished product stays in the company in a very long time. That’s why the producer could activate this solution asking a short-term loan or medium. The nancial operator evaluates the nished product, and the will activates the loan. Producer in this way can increase the value of product in time. 2 bene ts: possibility for the producer to receive cash with a loan and stock management bene t. (BOTH CASH AND STOCK OPTIMIZATION) Collaborative solution for stocks optimization 1. Vendor Managed inventory We are talking about a very important solution based on the collaborative approach. Vendor, suppliers and buyers share several sets of information about stocks of the retailer. The shop gives information about its stocks, so the suppliers will be able to propose to the retailers a speci c order. The suppliers don’t receive the order from the retailer, it is the supplier that make orders for the retailer. It is the supplier that manages the process based on a set of information that the retailer shares. That is a strategical relationship between suppliers and buyers based on a speci c deal. Main Reason of this: optimize the stock and inventory inside the SC, not cash! ( Il fornitore non aspetta che il rivenditore decida quando e quanto riordinare, ma monitora da solo e lo rifornisce secondo necessità ) 2. Consignment stock Vendor managed inventory with property transfer at the time of sale to the nal customer. Partnership is based on the information shared. The supplier delivers in advantage the goods to buyer. And when the retailer sales the goods to his customer there will be the payment. The retailer can return the goods if unsold. The retailer has the property of the goods only in the moment of selling. There’s a bene t for the retailer because the solution minimizes the risk of good unsold. The WC is improved considering the inventory stocks management and the cash optimization. [ È un metodo in cui il fornitore consegna beni al rivenditore o al distributore ma la proprietà dei beni rimane con il fornitore no a quando non vengono venduti al cliente nale quindi il fornitore continua a possedere l’inventario no al momento della vendita] fi fi fi fi fi fi fi fi fi fi fi fi fi fi 3. Drop shipping We have 3 di erent operators: customer, e-commerce and supplier. So we consider online operation, the customer pays to the e-ecommerce operator and then the online platform will ask to suppliers to deliver the goods sold from the customers. Es: Amazon. The goods are stocked by the supplier not the e-commerce: the delivering process is activated when the suppliers received the order form the e-commerce platform and when the customer pays the amount of money. There’s the separation of sales and production activities “Showcase e ect”. 4. Cooperative planning forecasting replenishment CPFR It’s the most collaborative solution within the supply chain. Not only the information are shared, but all the plan of the supply chain management. This solution could be in di erent level of advancement. Both suppliers and retailer share their plans and forecast sales ( vendite programmate ). In some cases, they share all business plan or suppliers and buyers de ne together a speci c business plan. Same business managed together in a collaborative perspective. The forecast planning is useful to de ne the material replacement program of the retailer, the forecast sharing enables suppliers to de ne their material requirement program. All these solutions are based on a collaborative approach and on the information shared. All the SCF operators that intermediate manage the information platform. Today we talk about platform economies that use information. CPFR could be in: - basic form: limited number of processes, data and shared information - developed: important quantity of data and exchange information between two partners of supply chain, with the use of technological platforms - advanced: there is a total planning sharing around an overall business plan. Preordered to athe forecast system and planning the material replenishment program (MPR) and stocks ff fi fi fi ff ff fi  This kind of partnership could be managed with the owners sharing not only with the company, but there are also a lot of agreement solution to manage this relation. The SCF perspective in a collaborative approach improves the SC visibility for all the actors and operator involved in a speci c SC. It’s very in collaborative solution to optimise the stock. Blockchain allows the strategic planning, visibility refers to the knowledge shared around the entire supply chain. We talk about information asymmetries that reduce the transaction costs. Supplier has all the information, while the retailer hasn’t. In a speci c procurement relation, the supplier has a greater level of advantage compared to the retailer. This highlights the importance of information and knowledge in SC for all the operators. The real option to create a competitive and sustainable advantage is to procure a several quantities of information. Harmonization of informative system among organizations of SC. When we talk about supply chain nance, we must refer to SUSTAINABLE SUPPLY CHAIN FINANCE (SSCF): collaborative approach that integrates nancial and operational practice with sustainability principles (like ESG’s). The aim is to enhance the overall performance and resilience of SC. SSCF seeks to make substantial impact on the broader external environment by in uencing industry standards and fostering a culture of sustainability across the entire supply chain network. This approach drives progress towards sustainable development goals, ensuring the long-term success and viability of global supply chains. SSCF is about: -Impacts of sustainability in SCF solution: impacts of WC optimization strategies on the environment and social context. -Economics and nancial advantages for the operators who adopt sustainable strategies in their relationship with suppliers and other partners, such as banks. ES: ENI is carrying an important project of sustainable supply chain solution with FinDynamic, which is giving some advantages to its suppliers regarding payment in advantage or special rewards. All the ENI suppliers adopted di erent green solution in their business. Like investment in energy-e cient; circular economy principles. -Financial consequences of “sustainable” strategies and operations. Firstly, the impact on costs or processes. How the processes of each operators modi ed when implementing sustainable solution. - last , companies must integrate environmental and social strategies (ESG criteria) into their supply chain management strategies to ensure that nancial bene ts translate into tangible sustainability outcomes (social context and environment). ffi fi fi fi ff fi fi fi fi fi fl  The integration of sustainability into supply chain nance brings signi cant bene ts for 1. For BUYERS: they can achieve sustainable goals, enhance security, and relationships with suppliers become more strength. They manifest a tangible dedication to corporate social responsibility (CSR), fostering a competitive edge and elevating corporate reputation. 2. For SUPPLIERS: Sustainable Supply Chain Finance enables access to greater working capital, improves relationships with customers, and quanti es e orts made to adopt sustainable practices. SSCF solutions provide suppliers with the opportunity to receive tangible rewards for improving their sustainability performance. 3. For BANKS and, in general, for nancial operators (FinTech): the expansion of the sustainable supply chain nance market represents a crucial business opportunity. However, it also introduces new competitive challenges, especially when compared to FinTech companies. In addition to the nancial bene ts derived from interest rates, fees, and other nancial mechanisms, this involvement provides banks with access to detailed data on the sustainability of supply chains. fi fi fi fi fi fi fi ff fi fi