MAKING EXPORT FINANCE SUPPLY CHAIN EFFECTIVE & EFFICIENT – LIVE CASE

*Prepared by Prof. Harkirat SinghProfessor & Consultant

IIFT, New Delhi

ABC & Co. is a manufacturing unit and SME involved in export of ladies garments to an African country. Company is supplying garments to one big buyer with an arrangement of single supply order equivalent to USD 100,000 per shipment on regular basis.

BUSINESS MODEL

Foreign buyer had a business model to supply garments to African retailers with 90 days credit period. Foreign buyer conveyed price rigidity in export proposal which meant once price would be fixed thereafter it will not be changed under any circumstances. Buyer ensured no restriction on shipments but with restriction of price rigidity. The offer was lucrative to the company at that point of time and made all efforts to maintain export performance.

ROLE OF TREASURY

Company was exporting to wholesale buyer but after sometime found shortage of cash. Management of the company asked the Treasury Department to find out solutions to overcome cash problem and to create sustainability in export business model. Management of the company found that at that time sustainability in business could be created with financial restructuring and created action group consisted of treasury, purchase, sale and logistic managers. Treasury was given the main responsibility for developing strategy to make export finance chain effective and efficient. Group focused to find out financial issues and develop requisite strategy for growth with high profitability with less capital and low cost.

EXISTING EXPORT CHAIN ANALYSIS

Group felt the need to analyze the existing export chain and working capital requirements of the company, to understand export finance supply chain. Company was availing pre and post shipment finance from bank at concessional interest rates in Rupees to meet financial requirements. On critical analysis of existing export chain, group found that company was keeping high stock of raw material to maintain export quality and to avoid shortages. Raw material was arranged from old vendor from South India.

Working capital funds required to complete the existing export chain with buckets of cash, raw material, stock in process, finished goods and export bill receivables were mentioned in fig. 1 and table 2 (Annexure – I).

Treasury observed that the existing export chain and working capital requirements were not creating sufficient cash surplus for growth of the business. Moreover, due to price rigidity cash inflows remained constant and were not increasing in consonance with cash outflows.

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IMPROVEMENTS

Treasury took decision to improve the existing export chain to enhance profitability and to reduce cost of funds. Following improvements were implemented in existing export chain:

Stock of raw material was reduced from 3 months requirement to one month requirement, by locating new suppliers, close to the unit with new vendor agreements.

Instead of using scissors, textile cutting second hand machine was purchased to cut 20 layers of textile at a time. Moreover, training programme for labour conducted to improve skills and to create motivation. Sessions were conducted in evening on alternative days with refreshments. Extra working hours were given to labour due to increase in production.

Logistics Manager with the help of clearing and forwarding agent arranged space for export consignments to Africa efficiently, reducing the time from 3 months to 45 days.

Group recommended to the management to negotiate for price enhancement and in case of price rigidity stand by buyer, the credit period be negotiated to reduce from 90 days sight to 60 days that too from date of shipment. Foreign buyer refused to increase price but accepted the reduced credit period starting from date of shipment.

Treasury started hedging the export payments.

The revised export chain along with funds requirements are shown in fig. 4 and table 5 (Annexure – II) respectively. Improvement in export chain released funds by unlayering the money from various buckets of export chain.

ROLE OF TREASURY IN GROWTH

Company planned to expand business in other African countries, because of its acquired experience and vast potential for ladies garments. For expansion, surplus funds were required which can only be created from improvements. Firstly, management tried to get higher price but failed due to price rigidity. Secondly, company also started negotiation with buyers in other African countries for business development. Company felt the need to generate more funds from the business to exploit new markets and expand international business.

INNOVATION BY TREASURY

Treasury of the company advised to the management to demand advance payment of 50% against each export order from the buyer. Since buyer did not want to increase price but agreed to give advance of 20% with each order. Treasury also negotiated USD loan from the bank based on LIBOR rate instead of availing export finance in Rupee. These innovations in working capital of export chain unlayered the funds from export chain table 6 (Annexure – III).Improvements and innovations recommended by treasury resulted in unlayering of funds from export chains. The comparative results due to financial restructuring strategies are shown in table 7 (Annexure – III).

Improvements in financial areas of the company by the treasury created extra funds for development of international business.

ISSUES FOR DISCUSSION

What are the learning points from the live case! What type of financial restructuring were recommended by the treasury and results thereof ? Recommend further improvement of the export finance supply chain of the company for

further growth in international business.

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Annexure – ISTUDY OF EXISTING EXPORT CHAIN OF THE COMPANY

3 months 21 days

Bucket 1 Bucket 2 Bucket 3

Upper Portion Money Layered Horizontal Line

Lower Portion

3 months usance 3 Month

Bucket 5

Bucket 4 EXISTING EXPORT CHAIN FIGURE NO. 1

Existing export chain had following financial structure:

Bucket Average Period of Stock in the Bucket

Money Layered in Bucket Cost of Money Layered@ 7.5% p.a.

Raw Material 3 Months RM = 30,00,000 56250Stock in Process(Semi finished Goods)

21 days RM = 6,99,999.9920% ME = 1,39,999.99

8,39,999.98

3,624.65

Finished Goods & Consignment in Transit and Warehousing

3Months RM = 30,00,00020% ME= 6,00,000

5% PC = 1,50,000TC = 1,00,000

38,50,000

72,187.50

Export Receivables 90 days + 20 NTP =110 daysInterest Rate @ 7.5% p.a.

USD 100,0001USD = 45 INR

45,00,0001,01,712.33

Total 1,21,89,999.98 2,33,774.48

TABLE NO.2RM = Raw MaterialME = Manufacturing Expenses PC = Packing Charges also includes local transport charges NTP = Normal Transit Period by FEDAI applicable to Indian Bank on export bills.TC = Local Transport Charges

Annexure – II

1 month 15 days3

Cash Raw Material Stock in process (semi finished goods)

Export bill receivable

Furnished goods & export consignment in transit, warehouse

and custom clearance

Bucket 1 Bucket 2 Bucket 3 (Funds in USD) (Funds in USD) (Funds in USD)

45 days

60 days Bucket 5 Bucket 4 (Funds in USD) (Funds in USD)

INNOVATIVE EXPORT CHAINFIGURE NO. 4

CALCULATION OF MONEY LAYERED & COST OF IMPROVED EXPORT CHAIN

Improved export chain had following financial structure:

Bucket Average Period of

Stock

Money Layered Money released as compared to Existing Chain

Cost of Money Layered @ 7.5%

p.a.Raw Material 1 month RM = 10,00,000 20,00,000 6,250Stock in Process (Semi Finished Goods

15 days RM = 5,00,00020% ME= 1,00,000

6,00,000

2,39,999.98 1,849.32

Finished Goods & Consignment in Transit & Warehousing

45 days RM = 15,00,00020% ME= 3,00,000

5% PC = 75,000Actual TC = 1,00,000

19,75,000

18,75,000 18,261.99

Export Receivables

60 days interest @ 7.5%

USD 100,000IUSD = 45 INR

45,00,000 nil 55,479.45

Total 80,75,000 44,14,999.98 82,200.76

TABLE NO. 5

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Cash Raw Material Stock in process

Export bill Receivable Furnished Goods

Annexure – III

CALCULATION OF MONEY LAYERED & COST OF INNOVATIVE EXPORT CHAIN

Innovative export chain had following financial structures: Exchange Rate USD = 45

Bucket Average taken to Period Stock same

as in previous chain

Money Layered in USD Money released in rupees as compared to

improved chain.

Cost of Money Layering @ 2.5% p.a. in

USDRaw Material 1 month RM = 10,00,000

or $ 22,222.22Advance 20% of order = $20,000.00

Balance = $2,222.22

20% of advance order 9,00,000

$4.63

Stock in Process (Semi finished goods)

15 days cost As per improved

chain

Cost of = 6,00,000Stock in process

or $13,333.33

_______ $ 13.70

Finished Goods Stock in Transit & warehousing

45 days costAs per improved

chain

Cost of finished 19,75,000

Stocks in transit & Warehousing or

$43,888.89

_______ $ 135.27

Bill Receivable 60 days from bill of lading

As per new arrangements

Export Bill $ 100,000 _______ $ 410.96

Total $159,444.24 or 71,74,990.80

9,00,000 $ 564.56 or 25,405.20

TABLE NO. 6

COMPARATIVE FINANCIAL EFFICIENCY OF EXPORT CHAINS

Export Chain

Total Money Layered

Money Unlayered

Interest Cost of Money Layering

Interest Cost Saving from previous chain

Existing Export Chain

1,21,89,999.99 Nil 2,33,774.48 Nil

Improved Export Chain

80,75,000 41,14,999.99 82,200.76 1,51,574.48

Innovative Export Chain

71,74,990.80 900,000 25,405.20 56,794.80

TABLE NO. 7

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