FSC Whitepaper | 1

Deutsche BankGlobal Transaction Banking

Supply chain for long-term sustainable growth:How corporate treasurers can use Financial Supply Chain programmes to enhance supply chain health while optimising working capital

Contents

1. Introduction 3

2. Thebenefitsofmanagingthefinancialsupplychain 6

2.1. Accessing cheaper, more secure capital 7

2.2. Lowering operating costs 7

2.3.Theone-daybenefit 8

2.4.Managingrisk 8

2.5. Maintaining supply chain health 9

2.6.Supportingcorporategrowth 9

3. Implementing the optimal solution 12

3.1.Client-specificsolutions 13

3.2. Supplier Finance and Accounts Receivable Finance 14

3.3. Making the commitment 15

4. Corporate responsibility 17

5. Conclusion 18

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1. Introduction

Intheaftermathoftheglobalfinancialcrisis,theroleofthecorporatetreasurer has evolved considerably. No longer seen as a “cost centre”, the treasury is now regarded as a “value creator” and the treasurer a pivotal figureinproactivelymanagingthefinancialhealthofacorporate.Withinthisnew role, working capital has become the lifeblood of the organisation.

Without adequate and free-flowingworkingcapital,treasurers are forced to seek alternative resources for short-term funding; resources which are often costly and detrimental to the balance sheet.

Nonetheless, the importance of working capital was largely under-appreciated until two relativelyrecentdevelopments.Thefirstwasthe2008globalfinancialcrisisandthecontinueduncertainty in its wake, which impacted bank lending and liquidity sources. This threatened to bringcommercialflowstoagrindinghalt.

The second has been the rapid growth of emerging (and intra-emerging) market trade, extending supply chains to distant and unfamiliar locations. This inevitably increases risk, and has highlighted the need for liquidity bufferscapableofabsorbingsupplychainshocks. Fresh upheavals in the form of socio-political unrest have only added to the pressures placed on supply chains.

The obvious solution is, of course, to improve working capital by seeking better payment terms. But this throws up an additional concern: the fundamental contradiction between buyer and supplier objectives.

This DPO/DSO tug-of-war between counterparties has weakened supply chains at a time when strong relationships and strategic cooperation are more important than ever.

For treasurers, this combination of factors crystallised two key realisations. Firstly, they must ensure liquidity sources are sustainable in the long-term, even during economic upheavals. This put working capital into the spotlight as an internal – and therefore controllable – source. Secondly, any improvements in working capital cannot come at the expense of supply chain stability, meaning treasurers must circumvent the traditional DPO/DSO disconnect. And this has led to a dramatic increase in the popularity of financialsupplychain(FSC)management.

1DaysPayablesOutstanding(DPO):Theaverageperiodforafirmtopayitsinvoicestoitscreditors(typicallysuppliers)2DaysInventoryOutstanding(DIO):Theaverageperiodforafirmtoconvertinventoryintosales3DaysSalesOutstanding(DSO):Theaverageperiodforafirmtocollectcashfromitssales

DSODPODays Payable Outstanding1 Days

Sales Outstanding3

DIODays InventoryOutstanding2

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Figure 1 - Working Capital Trends Average DPO and DSO for Top 10 Fortune 100 Companies55

42

33

44DPODSO

30

45

28

49

28

53

26

50

45

40

35

30

25

20

2009 2010 2011 2012 2013

Source: Fortune Magazine, 2009–2013 annual filings for top 10 Fortune 100 companies excluding financial institutions

Working capital concerns have already been translated into action, with the cash conversion cycles of Fortune 100 companies showing slow but steady improvement during the period 2009-2013. But this is merely the top market-leading segment of a much larger corporate picture, and corporates of all sizes should look to follow this lead by fully leveraging FSC programmes.

Corporates of all sizes could look to follow this lead by fully leveraging FSC programmes

53Average DPO in 2013

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2.Thebenefitsofmanagingthefinancialsupplychain

This rise in popularity of FSC solutions stems from their capacity to not only provide access to sustainable working capital but reduce operating costs, strengthen risk mitigation, enhance supply chain health and support expansion.

Pre-crisis,sucharangeofbenefitsmeantinterest in FSC solutions was already growing organically.Buttheglobalfinancialcrisiscatalysed interest by underscoring the importanceofthewiderfinancialecosystem.Corporates began to look beyond their immediate environment to assess their relationships with, and reliance on, trading partners, as well as their supply chains’ end-to-endoperationalefficiencyandfinancialstability.

This marks a shift from pre-crisis days when FSC solutions were predominantly spearheaded by banks. Today it is corporate treasurers who are pushing for further innovation, with multinational corporates, in particular, demonstrating greater appetite for strategic solutions.

In response to increased demand, leading banksaredevelopingtheirFSCofferingsbycreating user-friendly packages designed to support even the most geographically-disparate and complex of supply chains. They are also encouragingamorerefinedemploymentofFSC tools to extract greater value. This begins with building a comprehensive business case oncostsandbenefitsofanFSCprogramme.

FSC programmes have many advantages for both the corporate and the supply chain as a whole. They can:

– provide additional and sustainable working capital (by reducing CCC through increasing DPO and reducing DSO) at a lower cost than alternative funding sources,

– lower operating costs throughout the supply chain by reducing the total cost of funding,

– bolster supply chain stability by reducing counterparty risk, improving transparency, ensuring prompt settlementandfuture-proofingagainstinterest rate increases,

– improve supply chain relationships by introducing a ‘win-win’ solution for trading partners with attractive payment terms and access to additional credit, and

– offerbenefitsduringacquisitionsand mergers by strengthening acquisition bids (by increasing the proportionofcashoffered)andextendingtheefficienciesofonecorporate to the other.

A number of top international banks have reported a surge in demand for FSC solutions, leading to a doubling in volume in the period 2009-2011

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“Post the acquisition, Senior Management put a growing focus on working capital as a source of free cashflowtorepaydebt”. - SAB Miller

2.1. Accessing cheaper, more secure capital The primary incentive for FSC adoption is access to cheaper and more secure capital. Treasurers need to harness internal liquidity sources more effectivelybyimprovingtheircashconversioncycle (CCC – see Fig. 2), but must do so in a manner that strengthens trading relationships.

A corporate implementing FSC (and thereby circumventingthetraditionalDPO/DSOconflict)can extend payment terms and unlock idle capital without disadvantaging its trading counterparty. Such capital is not only cheaper than other sources of funding but actively strengthens the supply chain by creating benefitsforbothbuyerandseller.

By reducing the need for external borrowing, FSC schemes can also improve balance sheet health.FSCfinancingisnottypicallyincludedin calculations of key credit-rating metrics such as debt/EBITDA and is therefore preferable to alternative sources of debt for corporates seeking to improve their credit rating.

2.2. Lowering operating costsFSC schemes can also lower operating costs across trading counterparties and decrease the cost of goods sold. This is achieved by reducing the total cost of capital through leveraging the most credit worthy counterparty and sharing thebenefitsacrossthesupplynetwork.

Consider global drinks manufacturer A buying supplies from smaller packager B. Deploying asupplierfinanceprogramme,PackagerBcan sell its receivables from Manufacturer A and thereby obtain cheaper funding thanks to Manufacturer A’s higher credit rating. This will reduce Packager B’s overall costs and lowers the price of packaging for Manufacturer A resulting in a win-win scenario.

Similarly, FSC schemes can exploit (to mutual benefit)thearbitragebetweencorporates’respective interest rate environments (for example, a higher interest rate in an emerging market country and a lower one in a developed market country), resulting in increased margins for one and reduced unit costs for the other.

Figure 2 - Cash conversion cycle

Cash

Inventory/APSales/AR

Day sales outstanding

Days payable outstanding

Days inventory outstanding

TheCCC=theflowofcashasitisconvertedthroughinventory and accounts payable (AP), sales and accounts receivable (AR) and back into cash. This is measured by Days Payables Outstanding (the time it takes to pay suppliers), Days Sales Outstanding (the time between selling and being paid by buyers) and Days Inventory Outstanding (the time to turn inventory into sales), meaning CCC = DSO + DIO - DPO. The shorterthecycle,themoreefficientacorporate’soperations, so treasurers must seek to increase DPO (extending the payment conversion period) and reduce DSO (ensuring incoming payments are received and processed as quickly as possible) if they are to unlock previously idle pools of liquidity.]

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Anadditionalkeybenefitisenhancedtransparency. Without FSC schemes, buyers may be unaware that suppliers are already discounting their receivables, depleting potential credit lines for the buyer. Secondly, this discounting might entail higher operational costs for suppliers’ as performance risk is being priced into the discount rate due to the absenceofconfirmedpayment.Finallythisfeeds through in the form of higher unit costs for the buyer. With greater visibility, treasurers can gain a better understanding of their trading network, more easily determine the cheapest, mostefficientandrisk-aversemeansoffundingfor the supply chain as a whole, and reduce operating costs across the board.

2.3.Theone-daybenefitIn order to measure the true value of FSC created additional capital (and thereby assess a solution’s optimal deployment), a treasurer can drill down into a 24-hour timeframe and calculate the worth ofoneday’scashflowimprovement(seeFig.3).

This is useful both for articulating the actual improvement in working capital and for comparing alternative external liquidity sources to ensure maximum value is extracted. The figurecanbeconvertedintoan“appliedworth” of replacing funding at higher costs (e.g. funding from short-term debt, a Revolving Credit Facility or commercial paper) or in terms of returns and share prices (as freed capital is released back to shareholders, increasing shareholder earnings and value).

In 2014, a large chemical company increased cash from operating activities by more that €1bn due largely to reducing the amount of funding required in its working capital cycle

Figure 3 - ‘One-day metric’ calculation

Calculatingoneday’scashflowimprovementis relatively simple. To calculate the monetary benefitofonedaylessofDSO,divide1by365andthenmultiplybytotalannualsales.Inpractice, this division is simply pro-rating the totalannualsalestoreflectsalesperday.Forevery one day decrease in DSO, the corporate wouldgeneratethatamountincashflowbenefit.Similarly,tocalculatethevalueofone day of extended DPO, a treasurer would divide1by365andmultiplybytotalcostofgoods sold. This pro-rates the total COGS toreflectpurchasesperday.Foreveryone

day increase in DPO, the corporate would generatethatamountincashflowbenefit.Acorporate’s total daily improvement would be the sum of DSO and DPO improvements.

While other timeframes are also in use – and some corporates, in a position to do so, may drill down into greater detail than 24 hours – the one-day measurement is an undoubtedly useful unit as a means of articulating the actual improvement in working capital.

1 / 365 x Sales =Valueof1-dayDSO

1 / 365 x COGS =Valueof1-dayDPO

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Treasurers should select the most appropriate quantifierfortheirparticularcompanystructure,key performance indicators and strategic ambition. These should be used as a means of benchmarking working capital improvements, efficiencyandeffectivenessagainstsimilar-sizedsector peers.

2.4. Managing riskThe third advantage of FSC management ties in with the more strategic role of treasurers. As they look beyond day-to-day concerns to longer-term goals, so too can FSC solutions help “future-proof” against long-term risks.

Interest rates provide a case in point. Before 2008,thesewererelativelyhighinanumberof developed markets. While currently very low, or even negative, when they return to pre-crisis levels they will create a new risk for buyers who sought the lowest possible unit prices. Suppliers’ operational costs (in particular funding the receivables period that corresponds with buyers’ payment terms) will rise parallel to borrowing rates. Buyers face either a cost risk thanks to the correlative rise in unit prices, or a sustainability risk if they reject such rising prices and consequently harm supplier relationships.

In short, buyers may face a stark choice between disappearing margins and restricted access to their supply of goods. Any impact on marginswillhaveadominoeffectonreturnoncapital employed (ROCE) and shareholder value. Yet further squeezing suppliers’ margins would compound the risk of suppliers going out of business or seeking alternative trading partners.

By using an FSC scheme, corporates can protect themselves from increased funding costs by securing internal, interest-free sources ofliquidity,whilemitigatingtheeffectsofaninterest rate rise on the supply chain. Through increased visibility, a buyer will gain greater awareness of the cost of capital throughout thesupplychain.Andbyofferinganalternativesource of funding to suppliers at the buyer’s lower rate of borrowing, corporates can side-step the blow of soaring interest rates.

2.5. Maintaining supply chain healthWiththesefunding,costandriskbenefitsinmind, such programmes naturally improve the health of the overall supply chain. Treasurers who prioritise long-term sustainability of the financialecosystemarelikelytoenjoygreater,moreethicalbenefitsinthelong-run.Certainly,the economic gains generated by correctly implemented FSC schemes can be shared alongthesupplychain,replicatingthebenefitsacross trading counterparties rather than straining relationships.

FSC management removes the tension between buyers’ desire to extend payment terms and suppliers’ wish to reduce them, replacingitwithamutually-beneficialsolutionthat is also compliant with regional laws protecting suppliers.

2.6.SupportingcorporategrowthFinally, FSC solutions bring additional strategic value by supporting corporate growth through mergers and acquisitions. Undoubtedly, an acquiring corporate with FSC-bolstered cash flowswillbeinastrongpositiontooutbidrivals.

Furthermore, following an acquisition or merger, any FSC programme can promote synergiesbyenablingtheefficienciesenjoyedby the utilising corporate to be replicated by the lessefficientpartner.Improvedcashgenerationcan increase the potential value that can be extracted from the target corporate.

In terms of deleveraging, improvement in working capitalefficienciescanpermanentlyreducetheamount of capital or funding required. And if the working capital cycle is cash positive, it can increase the amount of cash produced, which can, in turn, be used to repay debt. By using this cash to eliminate debt from its balance sheet, a corporate can attain a higher credit rating and this canbeleveragedbytheweakerfirm.Similarly,if the credit rating of the corporate without an FSC programme is higher, the advantages can bemagnifiedbytheFSCprogrammetotheadvantage of the whole supply chain. Further synergies can also be achieved by on-boarding thetargetfirm’ssuppliers.

In short, buyers may face a stark choice between disappearing margins and restricted access to their supply of goods

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Working capital characteristics by industry Figure 3 - WorkingCapitalispartofyourstrategy.Bystudyingpeersandcompetitors,youcanunderstandcurrentprofitabilityand improvement opportunities.

0 50 100 150 200 250 300

DSO

0 200 400 600 800

DIO

DPO DWC(CCC)

0-50 50 100 150 200 250 0 200-200-400-600 400 600 800 1000

Food & tobaccoHealthcare ConsumerEnergy Capital goodsConsumer durables Automobiles

Transportation Telecommunications SemiconductorsSoftware & servicesUtilities Pharmaceuticals Media

HouseholdMaterials

Retailing

Icons

Industry minimum Industry maximum

1st Quartile Median 3rd Quartile

0 50 100 150 200 250 300

DSO

0 200 400 600 800

DIO

DPO DWC(CCC)

0-50 50 100 150 200 250 0 200-200-400-600 400 600 800 1000

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Working capital characteristics by industry Figure 3 - WorkingCapitalispartofyourstrategy.Bystudyingpeersandcompetitors,youcanunderstandcurrentprofitabilityand improvement opportunities.

0 50 100 150 200 250 300

DSO

0 200 400 600 800

DIO

DPO DWC(CCC)

0-50 50 100 150 200 250 0 200-200-400-600 400 600 800 1000

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Is FSC the right solution for you? Treasurersmustfirstconsidertheircurrentsituation,requirementsandthescaleofthevalueproposition. Key questions to consider include:

– Is there a size and credit-rating advantage over trading counterparties?

– How would this source of funding compare to alternatives in terms of cost and sustainability?

– TowhatdegreewillcashflowbeimprovedifthevalueofDPOorDSOimprovesfromlessthanindustryaverage to “best in class”?

– How hard would this be to achieve with regards to roll-out costs and stakeholder buy-in?

– Whatisthelikelihoodofsuppliersadoptingaprogrammeandhowcanitbedesignedtobebeneficialforbothbuyer and supplier?

If the answers validate the deployment of an FSC scheme, the next step is to identify the appropriate solution in order to extract maximum value.

3. Developing an optimal FSC solution

FSC solutions vary from Supplier Finance and Accounts Receivable Finance to Distributor (or Channel) Finance, all of which serve to protect supply chain relationships.

Considerations when deciding to implement an FSC solution

– What are the key strategic objectives (e.g. grow in Emerging markets, become market leader in EMEA, etc.)

– Whatarethekeyfinancialobjectives(e.g.Freecashflowgeneration,Dividendpayments,maintaincreditratingetc.)

– Definetheworkingcapitalobjectivesbasedontheabove(e.g.Networkingcapital/salesratio,cashflowfromworkingcapital)

– Whataretheleversandtoolstoachievetheabovegoals–Role,Responsibilities,Policies,Systems,Processesandfinancingproducts

– Understandthecashflowandworkingcapitalcyclesincluding:

– The relative characteristics of your organisation vis a vis other member of the value chain e.g. relative credit strength versus customers and suppliers

– Key funding drivers and requirements

– Develop a portfolio of tools to achieve working capital targets

– Build a vision, target operating model, business case and high level implementation roadmap setting out how the working capital targets will be achieved

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3.1. Individualised solutionsFirst and foremost this requires looking at fundingrequirements,industry-specificparametersandthenatureofthefinancialecosystem.

Funding requirementsThe working capital cycles of corporates vary substantially, from extremely lengthy cycles that leave a funding gap to cash-generative short cycles. Funding requirements also vary.

Airlines are usually exceptionally cash-generative but have a key funding requirement: to ensure cash is readily available to protect against rare but costly event risk. Despite havingaself-fundingcycle,anairlinemayfindthis requirement is best met by generating additional cash through improved working capitalefficiency.

An auto-manufacturer may also have a cash-generativeworkingcapitalcyclebutdifferentfunding requirements. Here the treasurer may consider how long-term investments might be fundedthroughworkingcapitalefficiencies.FSC solutions might also be aided by a more efficientapproachtopayments,suchasusinga centralised treasury to make payments at the latest possible moment (i.e. extending DPO).

Ontheflipside,acash-strappedcorporatewitha positive working capital cycle may wish to reduce its funding gap. A shipbuilder might have a very high working capital funding requirement, meaning its treasurer must calculate whether an FSC solution would offergreatervaluethanborrowingagainstabond, commercial paper or Revolving Credit Facility. While such alternative sources may appear cheaper, the additional leverage on the corporate’s balance sheets could have a detrimentaleffectonitscreditratingandcostof funding.

Inshort,treasurers’firstconsiderationshould not be the amount of cash needed to supplement the working capital cycle, but the purpose for which it is needed. And a corporate’s own funding requirements are only part of the journey; the needs of the wider supply chain must also be taken into account.

Industry typeIndustry-specificparametersareanotherconsideration. Take the retail industry, for example, characterised by large concentrated buyers working with a fragmented supplier base. Suppliers tend to be small and therefore experiencedifficultyinaccessingliquidity,incurring proportionally higher costs of capital. Meanwhile, large creditworthy buyers enjoy lower costs of capital, meaning there is much value to be gained through FSC; indeed, it is the retail industry that pioneered the use of supplierfinancing.

In contrast, the technology industry comprises large original equipment manufacturers (OEMs) thatwieldsignificantpoweroversmallerdeviceand electronic chip makers. Accounts Receivable schemes arose out of the need to bridge the gap between OEMs’ desired payment terms and the amountoftimesmallerbuyersneededtofinanceworking capital.

Financial ecosystem Lastly, treasurers must consider the nature of their home and growth markets. For example, mature corporates in developed markets are facing increased competition from fast-expanding multinationals in emerging markets that often use capital and funding more efficiently.Thisisbecausetheyarefreefromlegacy challenges, organisational siloes and operational cost bases. A European MNC may make most of its revenue in home markets and be looking to invest in China, for example, to grow its revenue base – but unless it optimises workingcapitalefficiency,itshomemarketshare may be threatened by Chinese corporates with streamlined working capital models.

For corporates selling into emerging markets, Accounts Receivable schemes are more popular. This is because corporates that are highly reliant on thinly-capitalised distributors can only take on limited risk. Accounts Receivable schemes minimise counterparty risk through the introduction of a bank’s intermediary role, thereby stabilising supply chains.

In order to understand their funding, industry and ecosystem characteristics, treasurers must ensure they have access to expert consultation and guidance. Only with specialist support can an optimal and individualised solution be developed.

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3.2. Financial Supply Chain solutionsTherearetwowaystofinancethereceivablesof a supplier – Supplier Finance and Accounts Receivablepurchase.Akeydifferenceisthatsupplierfinancesolutionshaveconfirmationfrom the buyer giving them visibility over their credit lines while lowering cost as a result of reduced performance risk.

A“best-fit”solutionisonethatdoesnotsimplysuit an individual corporate’s needs but also, crucially, achieves broader “buy-in” from trading counterparties. This is particularly important for Supplier Finance programmes involving more drawn-out implementation phases.

On the other side of the equation is Accounts Receivablefinance.Treasurersneedtoconsiderif working capital can be improved by selling accounts receivable to an FSC provider, acceleratingcashflowandreducingexposureto counterparties.

Even with the right solution, achieving maximum value requires careful and well-planned implementation. While the “win-win” rationale for FSC programmes has become more widely appreciated, further take-up will only occur if treasurers fully understand what it takes to embark on such schemes.

Figure4-SupplierFinanceworkflow

1

4

5

9

2

3

6

7

8

10

Purchase order

Discount re

quest

Email notifi

catio

nPO/Invoice matching

Buyer

BuyerAccount

BuyerAP Dept.

Supplier Finance Portal

“SF Provider”

Supplier

SupplierBank

Electronicfile

Buyer pays on maturity

Non-discounted maturity payment

Discounted payment

Goods/Services

Invoice

Figure5-AccountsReceivablePurchaseworkflow

Cash

Seller

Obligors

Purchaser(Bank)

Collection account

Payment

Accounts receivable

Retained interest (if any)Good

s/S

ervi

ces

Paym

ent

ob

ligat

ion

s

– Seller sells its accounts receivable to Purchaser for cash

– Purchaser of the accounts receivable takes the Obligor risk of non-payment

– Purchaser retains recourse against Seller for dilution (i.e. any non-credit reduction of accounts receivable)

– Obligors pay into a designated collection account (existing collection accounts may be used)

– Obligordoesnotalwaysneedtobenotifiedoftheaccountsreceivable sale

– If the purchaser’s advance rate on the receivables is less than the face value of the accounts receivable then the differencewillberemittedtothesellerwhentheObligor(s)make payments

– Buyer receives invoices for goods delivered by supplier

– BuyerapprovesinvoicesandnotifiesSFProvider

– SF Provider posts invoices on supplier-accessible web portal where they can be paid out before due date at a discount

– Buyer pays SF Provider at due date based on newly agreed supplier payment terms

A“best-fit”solution is one that does not simply suit an individual corporate’s needs

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3.3. Making the commitmentUncertainty regarding programme costs, particularly around implementation, constitutes the highest barrier to broader market adoption. This is particularly true of Supplier Finance schemes due to their relatively complex implementation. While Accounts Receivable financingcanbecommencedinashorttimeframe, Supplier Finance programmes may incur direct costs stemming from changes to IT infrastructures, formats and processes. Specialist global providers can provide valuable support here, both to integrate IT processes andsuccessfullynavigatedifferinglegalandaccounting structures.

More daunting and less tangible is the potential cost and time involved in securing internal buy-infromteamsacrossdifferentdepartments,from IT and procurement to accounts payable, treasury and legal. All stakeholders need to be aligned in their thinking, with implementation handled as a company-wide project.

Furthermore, participation of trade counterparties must also be guaranteed. This requires education, negotiation and encouragement, as well as taking people outside of their comfort zones. Members of the procurementteammustdiscussfinancingtermswiththeirsuppliersandgeneratesufficientinterest to pass on to the corporate’s partner bank, which will complete supplier onboarding.

And while costs are inevitably incurred, the vast majority of corporates will discover that thebenefitsoutweightheconcerns.However,to ensure such costs are kept to a minimum, and the process is streamlined, treasurers need to have a detailed and carefully-considered implementation plan.

It is vital to devise a clear set of timeframes, workstreams, delineated responsibilities and key performance indicators at the outset of the project. While these factors will vary from corporate-to-corporate, and industry-to-industry, an example breakdown of responsibilities and timeline would be as follows:

Corporatesshouldexpecttheirbanktooffersupport on a number of levels, from practical solutions and assistance (around structural changes, perhaps) to more educative elements. The right bank will deliver not just innovative solutions that support connections and unlock value throughout supply chains, but also invaluable expertise by delivering training to procurementstaffandguidingcounterpartiesthroughout the process.

Checklist: Best Practice for Working Capital Management

1 Ensure working capital targets are aligned and embedded within individual performance objectives, including procurement and sales

2 Create a strategic and targeted approach to supplychainfinancingincluding payables, receivables, inventory andcapexfinancing–offbalancesheet,operating leverage

3 Create clear processes to assess working-capital-to-income-statementtrade-offs

4 Create centrally-approved policies for payment/credit terms and payment methods/collection channels

5 Ensure supply chain financeisfullyintegrated with cash management and cashflowforecastingprocesses

6 Implement country-specificFXandcashsolutions for emerging market jurisdictions

Figure6-ImplementationResponsibilities

FSC provider

Implementation Project Manager

– Overall Project Management

– Directly Manages the Anchor Workstream

– Communication Model

– Legal Documentation

– All Anchor Setup Tasks

Client Integration Consultant

– Consultant to Integrate Solution

– File Formatting

– Delivery Channel for File

– Testing and Initial Production Support

Supplier On-boarding

– Manages the Supplier Workstream

– Supplier Analytics, Calling, Documentation and On-boarding

– Training on Platform

Technology – Enablesfiletobeused

– Production Support

Customer Service – Dedicated Service Manager

– Service Involvement with Implementation Ensures a Smooth Transition to Production

Buyer

Project Lead – Main Contact Responsible for Project

– Task Escalations and Communication

Treasury – Legal Documentation

– Account Opening

Accounts Payable – InvoiceWorkflowandAnalysis

– Agree on Payables File Content

– Testing

Procurement – Supplier Selection

– Supplier On-boarding Support

IT – File Format and Transfer Mechanism

– Testing

– Established Connectivity Channel

– Consolidates Data to Send

Figure5-AccountsReceivablePurchaseworkflow

Cash

Seller

Obligors

Purchaser(Bank)

Collection account

Payment

Accounts receivable

Retained interest (if any)Good

s/S

ervi

ces

Paym

ent

ob

ligat

ion

s

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Both from the notion of company values and from the perspective of commercial sustainability, shoring-up points of vulnerability and treating suppliersfairlyhasreputationalbenefits.

Corporates and banking partners executing FSC schemes are engaged in ethical and sustainable business practices. While the battle to widen margins has encouraged some corporates to squeeze their suppliers, those with FSC programmes are able to support their suppliers, whether globally or closer to home. Rather than abusing their strengths, corporates can – and should – wield it to fortify their supply chain, improving payment terms both for themselves and their suppliers. It is this holistic approach, ratherthanmaximisingcashflowsatacosttotrading partners, that constitutes “best-practice”.

Overdue payments weaken supplier and supplychainhealth,aproblemreflectedbythe laws of countries, such as France and Australia. The responsible buyer is concerned not only with their own corporate health, but that of the supply chain as a whole.

When correctly applied, FSC ensures mutual benefits,safeguardingsupplychainhealth,strengthening trade and supporting the “real” economy.

The results of this are harder to quantify than a one-day measurement of working capital improvements, but it is increasingly important that corporates extend payment terms in a responsible manner to ensure long-term sustainability, avoid reputational risk and comply with local laws.

4. Corporate Responsibility

AfurtherbenefitofFSCschemes–andonethatgoesbeyondday-to-dayoperational concerns – is their contribution to corporate social responsibility (CSR). CSR has come to the forefront of FSC management thanks to the rise of emerging markets, SME suppliers, and an economic environment that has tightenedmarginsandleftinsufficientpoolsoffundingforgrowth.

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Suchbenefitsmaynotbeimmediatelyapparent in year one. But if treasurers approach these schemes armed with granular metrics regardingthebenefits,enablingthemtomeasure and recalibrate their programmes, each day gained for buyer and supplier can be a calculated success.

Certainly, the take-up of FSC programmes has been promising. Yet there is further value to be unlocked. Corporates must now investigate the next stage of FSC schemes by looking beyond initial implementation to roll-out far-reaching solutions, and to explore more precise and innovativeapplications.Itisonlybyrefiningandhoning their use that treasurers will be able to maximisethebenefitsforthewholesupplychain.

As an industry, we are ready to graduate to the next stage. The banking sector has learnt more about bringing FSC value to corporate clients, not just through innovation but in further developing the application of such solutions. Corporates also better understand

the possibilities and pitfalls and should now ensure they are deriving maximum value from their FSC programmes.

Astradeflowsshiftandeconomicupheavalscontinue, it is only through collaboration and the implementation of intelligent solutions thatsupportnotjustindividualfirmsbutentirefinancialecosystems,thatthevalueofglobaltradewillbefullyharnessedforthebenefitofall.

5. Conclusion

FSCschemesarenotashort-termfixforboostingprofitsbutanarchitectureforlong-termandbroad-basedgains;extendingfundingbenefitsandlowering operational costs to improve supply chain health.

“We will remain focused on cost and cash management, both to support the progress we have made in managing our investment in working capital and to realise the full earnings potential of our business.” - Monsanto

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