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Similaire à APICS Presentation 4-18-2016
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APICS Presentation 4-18-2016
- 1. SUPPLY CHAIN FINANCE: OPTIMIZING THE CASH TO CASH CYCLE. PRESENTED BY: KRISTIN BURKE, BRANDON LEVAN, GARRET WERKHEISER 4/18/16 Professional Development Meeting
- 2. WHAT IS SUPPLY CHAIN FINANCE (SCF)? ”The use of financing and risk mitigation practices and techniques to optimize the management of working capital and liquidity invested in Supply Chain processes and transactions” –Supply Chain 247
- 3. WHY THE NEED FOR SUPPLY CHAIN FINANCE? • Cash on hand can be tight and getting more may be expensive. • Suppliers want to be paid sooner. • Buyers are increasing credit/payment terms. • Competition between global Supply Chains instead of company to company. • According to the Hackett Group, ”67% of suppliers to the world’s largest companies are still submitting invoices manually with little or no automation.”
- 4. WHAT IS THE OVERALL GOAL OF SCF?
- 5. COMMONLY USED SUPPLY CHAIN FINANCE METRICS: • Working Capital as a percentage of sales • Cash to Cash Cycle: • Days Sales Outstanding (DSO) • Days Inventory Outstanding (DIO) • Days Payable Outstanding (DPO)
- 7. WORKING CAPITAL Working Capital = Current assets – Current liabilities
- 8. WORKING CAPITAL TRADEOFFS BETWEEN RISK AND PROFITABILITY • Positive working capital: • Accounts receivable and inventory exceed accounts payable • Negative working capital: • Accounts payable exceed accounts receivable and inventory Positives Negatives Positives Negatives
- 9. CASH TO CASH • Made up of: • Days Sales Outstanding (DSO) • ((𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 ÷ 𝑅𝑒𝑣𝑒𝑛𝑢𝑒) × 365)) • Days Inventory Outstanding (DIO) • ((𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ÷ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑) × 365)) • Days Payable Outstanding (DPO) • ((𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 ÷ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑) × 365)) 𝐶𝑎𝑠ℎ − 𝑡𝑜 − 𝐶𝑎𝑠ℎ = 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 − 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
- 10. “A 25% reduction in the C2C cycle of the average manufacturing company leads to an increase in the enterprise value of approximately 7.5%” – Hoffman & Belin
- 11. HOW DO LARGE COMPANIES GAIN AN ADVANTAGE? • Leveraging days payable • Comparing against industry averages • Look holistically at the Supply Chain • Identify objective measures
- 12. AVERAGE CASH-TO-CASH CYCLES (2010-2015)
- 13. BEST IN CLASS C2C -2015
- 14. HOW TO IMPROVE WORKING CAPITAL • Enforced DPO extension • J.I.T. and other inventory reduction strategies • More education about DSO
- 15. LEVERAGING FREIGHT SPEND TO BENEFIT THE CASH-TO-CASH CYCLE • Shipping to or through a traditional distribution: • ”Currently 60% of companies utilize this model. Two years ago that figure was 75%-85%...” – Aberdeen Group • Shipping direct to customer: • “Currently 61% of companies utilize this model. Two years ago it was fewer than 50%. This represents a significant increase and we expect this trend to continue” –Aberdeen Group
- 16. LET’S DO AN EXAMPLE A firm’s balance sheet and income statement show the following: A/R $10,000,000 Avg. Inv. $15,000,000 A/P $10,000,000 COGS $45,000,000 Net Credit Sales $90,000,000 Calculate Working Capital Requirements Calculate DSO DIO DPO C2C Reset to the original values. Suppose a customer that currently paid in 40 days and represents 10% of A/R requests a change in payment terms to 60 days. What is the change in Working Capital Requirements? Change in DSO? Change in C2C? Suppose you decide to reduce safety stock on several A-category SKUs and replenish more frequently instead. For a particular SKU with an average stock value of $500,000 and 30 days, what is the effect on Working Capital Requirements, DIO, and C2C if you drop safety stock from 15 days to 5 days?
- 17. Safety avg = 30 reorder @20 avg = 20 Net Change in DIO for this SKU = -10 Days Safety reorder @10
- 18. THE FUTURE OF SUPPLY CHAIN • Integrating control of financial flow with that of physical flows • Optimizing the chain of payment • Implementing financial solutions such as financial intermediaries
- 19. INNOVATIVE SUPPLY CHAIN SOLUTIONS • Invoice discounting • Purchase order/ invoice data management • Bank assisted open accounts • Financial intermediaries
- 20. FINANCIAL INTERMEDIARIES: • Can also be called payment factory • “A payment factory refers to an organization establishing a central hub to gain a degree of central control and management over the processing of previously decentralized payment flows”
- 21. WHY CHOOSE A PAYMENT FACTORY? • Increased standardization and efficiency • Increased visibility and control • Lower overall costs
- 22. QUESTIONS?
- 23. WORKS CITED Ball, B. (2016). The Importance of Working Capital in the Supply Chain. Aberdeen Group. Hoffman, E., & Belin, O. (2011). Supply Chain Finance Solutions: Relevance-Propositions-Market Value. London, New York. Jordan, J. (2012). Payment Factories: different ways of achieving payment efficiency . Citi Transaction Services. Mayer, A. (2012). Supply Chain Metrics That Matter: The Cash-to-Cash Cycle. Supply Chain Insights. Mazars. (2012). Supply Chain Finance: The Key Link to an Efficient Supply Chain. Mazars. Supply Chain 247. (n.d.). Retrieved March 14, 2016, from International Chamber of Commerce New Supply Chain Finance Terminology: http://www.supplychain247.com/article/international_chamber_of_commerce_new_suppl y_chain_finance_terminology Thomas, B. (2016, February 12). Forbes- Entrepreneurs. Retrieved from Why Payment Factories Are Threatening To Cut Banks Out Of The Supply Chain: http://www.forbes.com/sites/theyec/2016/02/12/why-payment-factories-are- threatening-to-cut-banks-out-of-the-supply-chain/2/#3727b0941c1a
Notes de l'éditeur
- Supply Chain Finance: Includes: necessary flows by finance providers Integral component of Supply Chain Management and can be facilitated/enabled by enterprise technology. Not a new topic Significant part at the intersection of Supply Chain Management and trade finance. Companies try to take their own approaches to SCF and attempt to mend it to benefit their firm the most Many organizations are seeking innovative solutions to better their supply chain finance SCF becomes more important with the rise in the global need for management of supply chains. Allows top level management to identify the amount of working capital within the organizations assets and the amount tied up in the cash to cash cycle. Role of SCF is to optimize cost of capital in the supply chain. Accomplishes this by: Aggregating, packaging and utilizing data generated during supply chain activities and gearing the info toward the physical control of goods. Coupling data with the goods allows firms to lower financial risk With lower risk: more capital can be raised and more capital can be raised at lower rates. (Mazars)
- Why the need for Supply Chain Finance Businesses do not have much cash on hand to work with: Suppliers want to be paid sooner: Buyers are increasing credit/payment terms: Competition between global Supply Chains instead of company to company competition:
- Recently that has changed to focus on working capital as manufacturers, as a result of outsourcing, have shifted to managers of networks who purchase more from others. This has increased the percentage of capital deployed in working capital compared to fixed assets. The overall goal of Supply Chain Finance and Supply Chain Management overall is: Increase the overall economic value add On the top side: Companies want to increase sales while lowering cost of goods sold Increasing gross margin while lowering total expenses Raise operating profits while minimizing taxes All of those goals combined increase net profit. On the bottom side: Reduce the investment deployed to generate operating profit. Notice the investment is not a direct dollar for dollar. It is adjust by the cost of the capital, which is represented by WACC and would vary by company depending on their ability to issue debt, equity, borrow, etc. Many strategies that target each area, but there is not a one size fits all and each strategy must be aligned to each companies strategy. Talk about how those objectives might conflict with something else that is important on the "top side" of EVA. For example, increasing A/P by paying suppliers later might actually increase COGS or threaten availability of supply by altering the priority the suppliers pays to your account.
- Supply chains are often evaluated on: Terms of cost Customer service Manages how well firms manage customer relationships. Create strategic partnerships with priority for your most important suppliers and customers Management of inventory Forecast accuracy Indicates how well companies manage demand and minimize error on execution of strategy. Best in class firms have a 20 point advantage compared to the industry average. Laggards (underachievers) in this category have a whopping 75% error rate More costs Lowers reputation Working capital management is not equally as important in all instances. When working capital as a percent of total capital is deployed (there isn't much fixed asset investment), WC is high relative to expenses such as transportation. Or the cost of capital is high then WC MGMT becomes very important. When things such as cash are cheap, it takes a back seat. Total logistics costs Used as an indicator of how well companies manage their extended/complex network. Best in class firms are on average 25% better – Aberdeen group All of those metrics are combined together in order to evaluate overall supply chain performance Cash conversion cycle: Relates to the competitive advantage that best in class firms hold with regard to inventory and asset management
- When we think about the importance of measuring and managing the metrics previously shown, APICS SCC’s SCOR model considers the key supply chain performance attributes to be reliability, responsiveness, agility, costs, and asset management. So, how profitably can the chain source, make, and deliver; how reliable, responsive, and agile is your chain; and how efficiently can you manage your assets to generate the above. Notice if you drop to the Level 1 metric, Cash-to-Cash is one of them. So, let’s see what the Cash-to-Cash cycle captures, why it is important, and how it operates. We’ll start with working capital because the C2C is really a measure of days of working capital requirements.
- Working capital can have a large impact on value depending on the portion of capital deployed on it. Working capital: Important indicator of efficiency in the supply chain Defined by current assets – current liabilities In most cases, working capital refers to a length of time usually a year or less. Current assets: Mainly made up of inventory, accounts receivable, and cash/bank balances Current liabilities: Made up of accounts payable, notes payable, current accruals, and current liabilities Overall, working capital is the part of current assets that has to be financed with interest bearing capital Lowering working capital: Can be achieved by reducing: cash, inventory, or accounts receivable while increasing current liabilities. Optimizing these has a direct impact on the bottom line! Managing working capital: You want to minimize capital tied up in a firms turnover process. Reducing accounts receivable and inventory, while extending the accounts payable.
- Positive working capital: Positives: Strengthens liquidity because current assets can be easily converted to cash. Lowers risk Negatives: Harms profitability by having a high capital commitment Leads to higher inventory and financing costs Negative working capital: Positives: Lower funding costs Increases profitability Negatives: Risk and inefficiency. Potential loss of production Not enough inventory may create dissent between you and the customer May harm growth Harm creditworthiness Does not help refinancing (Springer)
- Cash to Cash: Days Sales Outstanding (DSO) The number of days that a company takes to collect payments from its customers Days Inventory Held (DIH) The time in which the stock of raw materials, work in progress (WIP) and finished goods are converted into product sales Days Payable Outstanding (DPO) The number of days it takes a company to pay its suppliers Cash to Cash Cycle: Compound metric Combination of the 3 ratios above The three ratios are made up of: Inventory management Supplier contracts Cash in the customer relationship Customer relationship management is huge when it comes to trying to better your C2C cycle. The shorter the cycle, the better! It is better to have a smaller number because companies can then operate with less cash tied up in operations. Use the money to benefit them more: Invest in R&D Invest in other product areas Invest in other businesses Give money back to shareholders Use the Apple example for DIO and how quickly they can turn over inventory: Get the data put in the example.
- How do large companies gain an advantage? Leveraging days payable: In maturing industries such as commodities or products that are relatively simply to re-create, companies have lengthened the days of payables. It improves the cash-to-cash results, but can impact the overall resiliency of the supply chain. Probably not the best for long term growth, but companies still do it. Comparing against industry averages: Finding those companies that are leaders in Supply Chain efficiency. Companies often compete in many industries and in each industry there are many limitations and challenges Therefore, know your industry and dive into the overall industry averages. Try to be the best in class by being innovative or offering something that competitors cannot currently match. Look Holistically: As previously mentioned, the c2c cycle is made up of three parts: DSO, DIO, DPO. Companies have decided to look at the larger picture and try to dive into all three metrics. Each company may have a different strategy to look at the c2c cycle, so there is not one size fits all. It comes down to the famous “It Depends” answer. Identify Objective Measures: Many large companies look at a variety of metrics; however, in some cases, the metrics that they look at are subjective. Metrics that are subjective include: on-time delivery, forecast accuracy. Not a great method because metrics can be inflated or skewed for personal gain. Large companies find objective data that is timely, accurate, and relevant for their business.
- Cash to Cash Cycle averages: Look at each industry and notice how many of them try to lower the cash to cash cycle from year to year. Medical devices has a huge C2C cycle and it has gotten larger since 2000. Why? Medical devices have a large amount of labor put into them Longer lead times due to higher capabilities of the machines Huge money makers for companies and take a great deal of time to assemble. Talk about the averages over time
- Best in class companies: According to the Aberdeen group, “Best-in-Class companies have a cash-to-cash cycle this is half as long as that of their competition”. Having a faster C2C cycle: Provide funding for acquisition Provide funding for capital equipment Reduce the dependence on borrowing Fewer Interest payments and lower debt ratio for companies.
- How to improve working capital: Enforced DPO extension In most cases, strong buyers use their weight to try and create more bargaining power. Try to enforce late payment clauses with less powerful suppliers. Ex: Wal-Mart and Apple Tradeoffs: Lowers the relationship between buyer and supplier Working capital shifts toward the beginning of the supply chain Suppliers would have a higher weighted average cost of capital J.I.T. and other inventory reduction strategies: Having lean-six sigma or J.I.T inventory reduction strategies in place will lower stock levels and cost. Tradeoffs: In an unexpected demand rise, inventory is depleted and not as agile as some competitors May lose sales May cause increase transportation costs for expedited orders. More education about DSO: In most cases, strong suppliers use their leverage to make smaller suppliers pay earlier. Tradeoffs: Lowers the relationship due to the imbalance of power Working capital is shifted down the supply chain Buyers face liquidity constraints High refinancing costs Overall: There is not a one size fits all approach to improving working capital. As always, some strategies may work better for others based on their corporate strategy. In most cases, companies try to due what is best for them rather than understanding the supply chain from end to end They do not do what is optimal, and just shifting the burden hurts the overall supply chain. Optimal solution: Coordinate and cooperate- have a strong buyer-seller relationship
- Interesting new way to look at lowering the cash cycle: Most companies often go right to their inventory and try to reduce it in order to increase working capital. – This is nothing new! A new way to lower your company cash cycle: Leveraging freight spend! Utilizing Freight Audit and Pay (FAP) services: Provides an increase to working capital for both the shipper and carrier. According to the Aberdeen group, “Freight spend itself commonly ranges from 3%-12% revenue” Using a third party for the settlement process: A trade finance solution that solves problems for shipper and the carrier Why is this a great option to help your C2C? Most negotiations with the carriers, when handled directly: Cover payment terms Cost of service being contracted When a bank offers trade financing, the payment discussions can be eliminated! Carrier gets paid immediately or within a few days Shipper can extend their DPO The overall result: Carriers get paid faster Higher amount of working capital for shipper: Can extend credit terms with suppliers Can do this without negotiating new rates Stress is mitigated Automation streamlines the process and eliminates costs with billing errors, late payments, collections, and reconciliation.
- Answers: WCR: $15,000,000 DSO ($10,000,000/$90,000,000)*365 = 40.6 DIO ($15,000,000/$45,000,000)*365 = 121.7 DPO ($10,000,000/$45,000,000)*365 = 81.1 C2C = 40.6 + 121.7 – 81.1 = 81.2 3. $500,000/30 = $16,667 stock value per day. Reduction of 10 days of inventory is -$166,667., meaning Average Inventory as a whole goes down to ($15,000,000-$166,667) $14,833,333. Working Capital Requirements will drop by $166,667, too. The new DIO is 120.3 and the new C2C is 79.8, a reduction of 1.4 days. 4. Value of A/R associated with customer = ($10,000,000 * 10%) $1,000,000. A/R per day for that customer is $25,000 ($1,000,000/40). Increasing terms by 20 days will increase A/R by ($25,000 * 20) $500,000, and increase Working Capital to $15,500,000. The new DSO is 42.6 and the new C2C is 83.2, an increase of 2 days. So, agreeing to the request will require an additional $500,000 of working capital. Another option would be to go through an SCF solution, allowing the customer to pay later but the supplier to collect earlier (and hence actually reduce A/R instead of increasing!). Let’s take a look at some of these types of options and think about when they might make sense.
- The future of supply chain: Integrating control of financial flow with that if physical flows Achieved through better coordination of information throughout the supply chain. Requires synchronization between operational processes and KPI’s. The goal of integrating flow throughout the supply chain must include: Changing indicators that monitor overall company performance Sales and Operations planning To simulate the impact on revenues, costs, margins and cash flow Effective flow of information: Forecasts, inventory, orders, etc. Implement new systems (oracle, dynamics, sap) Optimizing the chain of payment Implementing financial solutions such as financial intermediaries
- Innovative supply chain solutions: Invoice discounting: Alternative way of drawing money against invoices Businesses retain control over administration of their sales ledger An agreement may be in place where an organization pays a fee to the invoice discounter- usually a percentage of the value of invoices or a fixed fee. Purchase order/ invoice data management: Allows banks to provide strong offerings that are aligned with a companies strategic view Bank assisted open accounts: Eliminated bank exposure fees that a customer would typically pay with letters of credit, while providing benefits similar to letters of credit Based mainly on purchase orders and is issued like letters of credit.
- Increased standardization and efficiency Ability to become consistent in payment processing Enables automation Less manual activity Ultimately lowers cost Reduce banking relationships Work with only a few financial institutions instead of many Can cut the overall costs for the firm Standardization of payments The intermediaries can confirm exchange rates and ensure money transfers are successful Increased visibility and control: Visibility Optimizes liquidity Ensures payments are made In a timely manner Hands off approach Easier Reporting For tax and regulatory purposes Information is stored centrally A reduction in payment fraud Processes are almost full proof Control processes are implemented Betters cost negotiation between suppliers and customers Lower overall costs for both sides: Lower costs: Lower transaction cost Improved consolidation of payments Funds are utilized more effectively Funds invested elsewhere (Jordan, 2012) What are the benefits: Buyer: Reduce cost of goods purchased Reduce DPO Stable supply base Reduce cost of payment processing Seller: Reduce DSO Become flexible Predict cash flows Creates visibility Bank: Stronger relationships Increased bottom line from an end to end perspective Lower capital requirements (Mazars), (Ball)