Introduction. Why a book on supply chain finance?

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1 Introduction Why a book on supply chain finance? From our experience of and research into supply chain finance (SCF) many issues, questions and opportunities have been raised. Here is a sample: Although elements of SCF are not new, eg factoring, innovative companies are adopting a big picture, an end-to-end approach bringing new opportunities and new challenges. SCF is an increasingly important subject not least because of ever-extending supply chains in an environment of restricted supply of credit in various geographies. SCF can build collaboration, improve relationships and enhance trust between supply chain partners as well as improve financial performance. Organizations need to understand and align the end-to-end physical, information and financial flows. SCF needs a common definition, language and terminology. There appears to be a gap between the theory and the practice of SCF. Who should own SCF within an organization? SCF impacts on the financial performance of supply chain partners positively or negatively and so the initiating organization s reputation. SCF solutions need to be tailored to the individual organization s circumstances. So the rationale for the book is to enable professionals, practitioners, academics and students to gain greater insights and to understand the opportunities and challenges of adopting SCF approaches. As our marketing describes: Inside a company Financing the End-to-end Supply Chain provides readers with a real insight into the increasingly important area of supply chain finance. The book provides

2 2 Introduction a clear introduction, demonstrating the importance of the strategic relationship between supply chain and financial communities within an organization. It contains vital information on how supply chain finance is operationalized and put into place. It is written in a user-friendly style and links together treasury, banking, procurement, supply chain, systems, IT and key stakeholders. Across companies Financing the End-to-end Supply Chain will help senior supply chain and procurement practitioners to build collaboration, improve relationships and enhance trust between supply chain partners. With its combination of theory and practice it tackles vital issues including physical, information and financial flows and tailoring supply chain finance to individual organisations circumstances. Recognizing that supply chain finance means different things in different countries, the authors also consider various initiatives to harmonize and develop cross-border financing from the World Bank and other institutions, as well as including an agenda for national and international policy makers. Industry-wide Financing the End-to-end Supply Chain offers a mix of academic and industrial expertise and is written by three authors who are experts in the field. The book contains ground-breaking research and data from the Supply Chain Finance Community, Cranfield School of Management and St Gallen University. Who should read this book There appears to be a paucity of published material in traditional book form and the predominant source of information in the book genre seems to be trade promotional literature. So this is a book for: professionals working in supply chain management, operations, logistics, procurement, information systems and finance functions such as management accounting, treasury and AR/AP in all business sectors; the banking community, including the newly emerging alternative finance providers;

3 Introduction 3 government, regulatory bodies and professional communities; lecturers teaching modules on logistics and supply chain management, procurement, business management, banking and financial, supply chain finance; students studying logistics and supply chain management, procurement, finance, management accounting, business management, banking and financial services. The authors Three of us have written this book: two are currently working in universities and one is an independent consultant. All of us have worked with and learned from many, many industry executives, fellow academics and literally hundreds of students and post-graduate researchers. We thank them all and apologise that there are too many to mention here. Simon Templar Simon started his career in accounting with British Telecommunications (BT) and qualified as a management accountant in 1990s. He worked for 14 years in a rapidly changing business in various management roles within BT. Taking a career break in 2001, he came to Cranfield University to study for his MSc in Logistics and Supply Chain Management and stayed in academia. In 2013 was awarded his PhD in the field of transfer pricing and internal markets. During his 14 years at Cranfield Simon has taught, researched and consulted in the area related to supply chain management and management accounting and the emerging topic of supply chain finance. Simon has authored and collaborated on a number of journals, conference and practitioner papers associated with his research interests. Simon is Fellow of the Chartered Institute of Logistics and Transport and a founder member of the Supply Chain Finance Community. Erik Hofmann Erik Hofmann (Dr rer pol, University of Technology, Darmstadt, Germany) is Vice President of the Chair of Logistics Management as well as a senior lecturer at the University of St Gallen, Switzerland. His primary research focuses on the intersections of logistics and SCM on one side, and finance and performance as well as strategy issues on the other side. He has published in

4 4 Introduction several operations management journals, for example Production Planning & Control, Journal of Business Logistics, International Journal of Physical Distribution & Logistics Management, International Journal of Operations & Productions Management, Supply Chain Management: An International Journal. He is author/co-author of over 20 books and monographs, including Supply Chain Finance Solutions, The Supply Chain Differentiation Guide, Performance Measurement and Incentives Systems in Purchasing and Ways Out of the Working Capital Trap. Erik Hofmann is a board member of the International Supply Chain Finance Community. Charles Findlay Charles graduated from the University of Oxford with a degree in Engineering Science and then spent five years with GEC as an industrial engineer working in various manufacturing industries in Europe and the United States. Following an MBA from London Business School, he joined Andersen Consulting, now Accenture, first in the Strategy practice, then running the UK Supply Chain practice and finally helping set up the Procurement outsourcing business. For the last few years he has worked as an independent consultant, an angel investor in early stage technology companies and a founder member of the Supply Chain Finance Community. Publications include: Logistics Research Network (2012) Current supply chain finance practices ; Buying Professional Services (2010) case study contributor; Achieving Supply Chain Excellence through Technology, vol 5 (2003) European Supply Chain Management Characteristics and Challenges and vol 2 (1999) A Quick Start to eprocurement Savings. The Supply Chain Finance Community The SCF Community (SCFC) is for those interested in understanding, developing and promoting supply chain finance aligning and integrating the flows of finance and the flows of physical goods or services in extended, or end-to-end, supply chains. The SCFC aims to: create linkages across existing organizations and associations to collate and consolidate common reference models, specifications, standards and best practices;

5 Introduction 5 refine and build cross-functional metrics, baselines, benchmarks and relative perspectives; contribute to research, conferences, consultations and publications. The SCFC membership includes users, suppliers, advisers, consultants, analysts, academics, trade associations and professional bodies in the field. In particular, it is important to link across the finance, banking and supply chain (manufacturing, logistics and procurement) functions. The SCFC will help create a network of experts and leaders in the subject whose members will benefit from: insights into a relevant and dynamic area of change; a cross-functional, holistic perspective; the forum to discuss and debate specific opportunities and challenges, a Voice of the Customer ; the opportunity to undertake or commission research. The SCFC is a not-for-profit organization and is funded by its members and sponsorship of specific activities such as research or publications. Contents After this introduction, the book is divided into three parts: the past, the present and the future. Within these three parts, there are nine chapters. Below is a list of the chapter titles and then there is a short description of each. We recognize that few will read the whole book and we hope this points you to the most productive areas. In this vein, we have also tried to make each chapter self-contained so there is some overlap and repetition in content, although at different levels of detail. Part 1: The background 1 Supply chain management and financial performance 2 The big issue working capital management 3 Supply chain management evolution Part 2: The current practice 4 The concept a case for supply chain finance 5 The ecosystem organizations involved in supply chain finance 6 The value proposition options for supply chain finance 7 Implementation bringing SCH programmes to life

6 6 Introduction Part 3: The future 8 Global context cross-border issues for supply chain finance 9 The next thing new frontiers for supply chain finance Part 1: The background Chapter 1: Supply chain management and financial performance This chapter supports the premise that there is a fundamental relationship between an organization s management of its supply chain activities (external and intra) and the financial performance of the business. This impact, of SCM performance on overall business financial performance, forms the basis for the discussion in the next chapter, which focuses on one component of that financial performance working capital (WC). Subsequent chapters then describe SCF s potential impact on both WC and overall supply chain competitiveness and, using the arguments in this chapter, on overall firm performance. The chapter will: identify the impact that supply chain management decisions have on the financial statements of the organization; explain the relationship between supply chain management decisions on measures of firm performance; introduce a set of financial frameworks that are used in business to illustrate the impact that supply decisions have on the financial performance of a business. Chapter 2: The big issue working capital management This chapter explores why working capital management is a big issue in business. It builds on the first chapter by looking specifically at working capital within the overall financial situation of a company; the relationship between the financial statements (income statement and balance sheet) that were introduced in the previous chapter with the financial ratios used to measure liquidity and working capital management. The chapter also identifies initiatives corporates can introduce to improve their working capital and finally sets the scene for analysis of the impact, both benefits and costs, of supply chain finance (SCF) in subsequent chapters. The chapter will: identify the demand for liquidity and working capital management; recognize financial ratios used to manage liquidity and working capital;

7 Introduction 7 describe the components of a working capital cycle; identify the initiatives organizations use to manage working capital components; explain the limitations of working capital management performance measures; recognize the need for financially sustainable supply chains. Chapter 3: Supply chain management evolution This chapter explores the evolution of the physical supply and then looks at relationship between the physical, information and financial flows that exist within an organization s supply chain operation. The chapter introduces six supply chain finance (SCF) schools of thought that are shaping the SCF landscape. The chapter will: describe the evolution of supply chain management; explain the need to manage the physical, financial and information flows associated with the supply chain; identify the interfaces between the three flows; describe a typical purchase to pay process; explain the impact of cash flow on working capital management and the financial performance of a business; identify the six SCF schools of thought. Part 2: The current practice Chapter 4: The concept a case for supply chain finance Supply chain finance (SCF) has so far been acknowledged as an approach that mainly benefits the participants inside a certain (dyadic) business relationship, which leads to a win win situation (WWS) for both the suppliers and the buyers. We now would like to examine if there really is a case for supply chain finance; and if so, how it looks. The chapter will: identify the transitional stages of SCF; consider the relevance of various characteristics of SCF; show the relevance of SCF; introduce the new role of financial service providers and SCF platforms; explain the concept of multiple-win situations.

8 8 Introduction Chapter 5: The ecosystem organizations involved in supply chain finance The aim of this chapter is to identify the different types of organizations involved in SCF and to describe their roles, capabilities and motivations. Given the multi-functional nature of SCF, we will also explore the components within a typical user organization that are required to agree, approve, implement and operate SCF. The objective is to provide a framework or checklist so that readers can engage with appropriate organizations and the functions within them, which fit with their situation and their requirements. Who are they? What do they do? Why? And how are they linked? The chapter will: identify the different types of organization involved in SCF; describe their roles, capabilities and motivations; explore the components within a typical user organization. Chapter 6: The value proposition options for supply chain finance This chapter outlines the different supply chain finance programmes available in practice. We take the consolidated experiences of a number of SCF case examples to explore the comparative benefits, costs and risks. The overall case for SCF has been developed in Chapter 4 and a number of examples of the different options are described and justified. The aim of this chapter is to identify and characterize the different SCF value propositions for a specific organization and situation, in other words answering the question of which one do we implement and why? As with other chapters, we focus on the case for reverse factoring (RF) as this is the most common solution, but include approaches that cover most SCF solutions. Finally, there is a key consideration, the accounting treatment, which needs to be understood. This is covered at a summary level but will require expert input based on the specific situation. The objective is to provide a source of information to guide readers towards the most appropriate approaches for them and, based on this analysis, develop the outline and structure of a business case. The chapter will: identify the different SCF options; understand their cost, benefits and risks; explore the criteria to select an appropriate solution.

9 Introduction 9 Chapter 7: Implementation bringing SCH programmes to life The aim of this chapter is to explore the enablers and inhibitors to implementing supply chain finance programmes and establish best practice guidelines for successful implementation. As described in earlier chapters there are many forms of SCF and, as in other chapters, we will focus on reverse factoring, the most common form. However, we will describe approaches that apply to all forms unless there are particular reasons to make points about specific types of SCF programmes. The objective is to prepare the reader to implement an SCF programme by describing the challenges and providing checklists and guidelines taken from both the successful and the less successful initiatives. The chapter will: share the enablers and inhibitors to implementing SCF; describe guidelines to follow, based on prior experience; propose a risk management approach. Part 3: The future Chapter 8: The global setting cross-border issues for supply chain finance Since the early 2000s, companies have tried to optimize the flow of information and goods or services in more and more cross-border supply chains due to increasing competition driven by the megatrend of globalization. The world is becoming a smaller place, information is more easily accessible and, therefore, transparency is higher. Moreover, market barriers have been lowered resulting in a higher level of worldwide competition. Companies have started to focus on their core competencies, outsourcing more and more, working closer together. These developments are not without consequences. Hence, supply chains must work in an international setting, while setting global standards on one hand and considering domestic specifications on the other hand. The chapter will: show opportunities and challenges of SCF in China s financial system; introduce the reader to Islamic financing and its opportunities within SCF; explain SCF solutions in Western countries and the efforts that these countries make to support small- and medium-sized enterprises (SMEs). Conclusion: It s a complex world out there!

10 10 Introduction Chapter 9: The next thing new frontiers for supply chain finance The last chapter of our book addresses factors and developments that have the force to affect supply chain finance (SCF) in a sustainable manner. These factors include risk management, tax avoidance, corporate social responsibility (CSR) and of course new technologies. They not only impact SCF, but their importance is also increasing considerably. Metaphorically speaking, risk management can be described as the uncertain side, tax avoidance as the dark side, CSR as the bright side and new technologies as the tech side of the future of supply chain finance. The chapter will: identify risks in supply chain finance settings; consider organizational behaviour in financing and when it might become tax avoidance; show the connection possibilities of corporate social responsibility and supply chain finance; introduce the blockchain as a new industry-disrupting technology for supply chain finance. Glossary of terminology For a glossary of commonly agreed terms and definitions, we refer the reader to the Supply Chain Finance EBA European Market Guide. Version 2.0 (Euro Banking Association, June 2014).