Unlocking the Value through Supply Chain Finance Erste Group Banca Comerciala Romana Mannheim, 3rd of May 2012

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1 Unlocking the Value through Supply Chain Finance Erste Group Banca Comerciala Romana Mannheim, 3rd of May 2012 Valentin Galatanu Executive Director Transaction Banking

2 Unlocking the Value through Supply Chain Finance 1. Working Capital company s view 2. Working Capital and Supply Chain 3. Supply Chain Work 2

3 Unlocking the Value through Supply Chain Finance 1. Working Capital company s view 2. Working Capital and Supply Chain 3. Supply Chain Work 3

4 Company s Main Goal for Working Capital Strategy Ensure liquidity 37 Ensure liquidity 0 37 Release of tied-up working capital 21 Release of tied-up working capital Cost control 15 Cost control Ensure financial flexibility 14 Ensure financial flexibility Preservation of capital 11 Preservation of capital Protect company credit rating Other 0 2 Protect company credit rating Other Liquidity key objective (in 2010 poll was not included); NA and Western Europe companies are ahead in implementing strategies to release working capital Companies with T/O up to 1 BLN USD have their focus split between top 2 items Source: Financial Supply Chain Survey, 2011; gtnews 4

5 Challenges in achieving company s Working Capital Strategy Forecasting and reporting 42 Forecasting and reporting Relevant measurements for different parts of the organisation 21 Relevant measurements for different parts of the organisation Inter-departmental communication 13 Inter-departmental communication Appropriate incentives for different parts of the organisation 11 Appropriate incentives for different parts of the organisation Follow-up on performance 11 Follow-up on performance Other 2 Other Geography plays a role: Asia-Pacific, CEE & Middle East/Africa position high & ahead forecasting versus other challenges Bigger is the company, bigger challenges to measure performance of the constituent parts Source: Financial Supply Chain Survey, 2011; gtnews 5

6 Opportunities to improve performance in company s financial supply chain finance Negotiation of of commercial and and payment payment terms terms Improve internal operation by moving from manual to automatic Customer collection handling Negotiation of of commercial and and payment payment terms terms Improve internal operation by moving from manual to automatic Customer Customer collection collection handling handling Sourcing 31 Sourcing Customer invoicing 29 Customer Customer invoicing invoicing Supplier payment handling Supplier invoice handling Supplier payment handling Supplier Supplier invoice invoice handling handling Reconciliation Dunning Dunning 4 19 Reconciliation Dunning Opportunities primarily within client focused processes (item 1 & 3); Second preferred choice referes (not considered in 2010) e-invoicing is perceived (by small companies) as an option to improve processes, be more efficient Source: Financial Supply Chain Survey, 2011; gtnews 6

7 Main risks faced in financial supply chain management Counterparty risk - customer 46 Counterparty risk - customer Liquidity risk 43 Liquidity risk 0 43 Foreign exchange (FX) risk 41 Foreign exchange (FX) risk Counterparty risk - supplier 39 Counterparty risk - supplier 6 39 Operational risk 37 Operational risk Other 36 Other 4 36 Political risk Sovereing risk Political risk Sovereing risk High up the ranks liquidity risk, was not considered in 2010 reflecting the environment in which we operate; Sovereign risk is on the back of the mind; Other risks: covers a lot of items, however they are external and difficult to control (i.e. commodity prices, regulatory Compliance, technology disruption, fluctuating markets, etc.) Source: Financial Supply Chain Survey, 2011; gtnews 7

8 Supply chain breakage and its impact on companies My organisation My organisation has has not a had supply a supply chain breakage chain breakage event event Delay to projects/ strategy implementation Loss of of customers Highest cost of capital Compliance failure Damage to brand/reputation Loss of of key suppliers Reduced share price Other My organisation has not had a supply 42 chain breakage event 42 Delay to projects/strategy implementation 22 Delay to projects/ 22 strategy implementation Loss of customers Highest cost of capital Highest cost of capital 13 9 Compliance failure Damage to brand/reputation 10 7 Damage to brand/reputation 9 8 Loss of key suppliers Reduced share price 9 7 Reduced share price 6 Other None-of the above None- of the above Source: Financial Supply Chain Survey, 2011; gtnews 8

9 Unlocking the Value through Supply Chain Finance 1. Working Capital company s view 2. Working Capital and Supply Chain 3. Supply Chain Work 9

10 Working Capital Determined by 4 indicators: Stocks (DIO) Clients + Cash Working Capital Clients (DSO) + Suppliers Stocks Cash Suppliers (DPO) 10

11 Working capital, supply chain and financing means Source suppliers Negotiate terms Order Delivery goods + invoice Check goods Payment Reconcile Payment Purchase to Pay (P2P) Buyer Buyers extend DPO to optimize WoCa Time Supplier needs cash for current activities Supplier Invoice Reconcile collection Collection due Date Delivery + issue invoice Warehouse Manufacture Receive order Order to Cash (O2C) Financing Methods Invoice Financing Inventory Financing Supplier Financing 11

12 Working Capital and supply chain correlation Working Capital Supply chain events Invested Capital Working Capital Financing Payment risk Stocks (DIO) + Clients (DSO) Suppliers (DPO) Holding costs warehousing, moving, insurance Obsolescence, theft Forecasting accuracy Sourcing, delivery time Bad debt Follow-up calls for payments Proof of receipt Correct invoicing terms Performance due to non-payment Exchange rate changes Discounts not taken Late payments; subsequent orders delayed Correct invoicing terms Payment penalties Performance risk Invested Capital Order Accept ance Manufacturing Raw material Subcontractors Finalize order Delivery/ Invoice Working Capital Financing Manufacturing Raw material Subcontractors Warehousing Warehousing Time Payment Time Order Accept ance Finalize order Delivery/ Invoice Payment 12

13 Unlocking the Value through Supply Chain Finance 1. Working Capital company s view 2. Working Capital and Supply Chain 3. Supply Chain Work 13

14 Supply Chain Finance program Program payables overview Purchase to Pay (P2P) Source suppliers Negotiate terms Order Delivery goods + invoice Check goods Time Day 1 Day 3 Day 3/4 Maturity Day Supplier Payment Reconcile Payment Time 14 Goods/Invoices Status invoices via web Request for discounting via web Discounted payment Invoice discount request electronic file Invoice discount confirmationelectronic file Direct Debit maturiry date Buyer Supplier

15 More powerful than web MIAG partnership cross-sell opportunities new customers onboarded provide value added services develop new products/services Seller/Supplier improved cash-flow Off-Balance sheet financing immediate access to cash Lower financing costs Ensures growth Risk mitigation & Balance sheet management Lower Costs/ Risks in supply chain Optimize working capital Enhance supplier relationship management Improvements in ACCT payables efficiencies & reducing admin. costs Use financial strength as competitive advantage Strengthen liquidity across the supply chain 15

16 Supply Chain Finance Real Value Risk Management. Reduces counterparty risk (customer / supplier) Improves liquidity risk Reduces operational risk Reduces Interest rate risk Reduces Foreign Exchange risk Funding & Balance Sheet Management Provides/ extracts liquidity from SC structures Improves cash flow More efficient funding structure; Frees up credit lines to support growth/improve cost structures Improve financial ratios (reduces WACC) Services Automation in A/R, A/P increasing efficiencies Ensures visibility on payment flow Settlement services Enhanced settlement/ reconciliation services Improved client services/ after sales services Revenue growth Capital utilization Profitability FINANCIAL PERFORMANCE 16

17 Future is now Factoring Reverse Factoring PO Based Finance Inventory Finance Invoice Financing Buyer Purchase order Purchase materials Manufacture Warehouse Shipping Warehouse /Client side Goods/ invoice delivered Goods accepted Invoice approved Payment released Supplier Supply Chain Finance Portal E-invoicing Direct Debit at maturity date Automated reconciliation for A/P Advance discounted payment to supplier Release of rest of funds Automated reconciliation for A/R 17

18 Questions? 18

19 BCR Contact Valentin Galatanu Tel.: Web: BCR Bd. Regina Elisabeta nr 5 RO , sector 3, Bucuresti, Romania 19

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