Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the...

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Supply Chain Finance The Li & Fung Management Book Series Winnie Lo December 2015

Transcript of Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the...

Page 1: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Supply Chain Finance

The Li & Fung Management Book Series

Winnie Lo December 2015

Page 2: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

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?

o Supply chain structure o Benefit-sharing &

compensation mechanism o Policy & regulatory

environment o Upstream & downstream

networks o Credit history

…and more…

o Healthy supply chain ecosystem

o Checks and balances o Self-liquidating o Informatization o Design of total

financial solutions

VS

Key drivers of the development of

supply chain finance in CHINA

o Reinvention of business models in China’s banking industry

Characteristics of supply chain

finance

o Modern supply chain

o Letter of credit vs. open account o Different risk control levels

o Individual vs. Collaboration

o Total financial solutions

o Partial vs. comprehensive information

Risk factors Risk management

o Trade globalization

o Demand from SMEs

o Release of working capital

00110001 0010010

o High growth SMEs

o Big data

Differences between trade finance &

supply chain finance

Key takeaways

Page 3: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Key drivers pushing forward the development of supply chain finance

• Trade globalization has given rise to new trade financing models

• China’s SMEs show huge appetite for supply chain finance solutions

• Commercial banks reinvent their business models

– Interest rate margins have been shrinking along with financial market liberalization in China

– Homogenous competition among banks is eroding the profitability of the industry

– As financial reform deepens in China, more and more well-established large enterprises are opting for direct financing by issuing stocks and bonds

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Page 4: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Definition of supply chain finance

A management process that integrates logistics and business

operations with financial management initiatives to closely link

buyers, sellers, third party logistics service providers and financial

institutions with the ultimate goal of facilitating cash flow and

supply chain operations.

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Sellers

Buyers 3rd party logistics

service providers

Financial

institution

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Characteristics of supply chain finance

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RISK

00110001

0010010

• Modern supply chain management as the guiding principle of supply chain finance • Financial service providers can estimate

the future cash flows generated by less liquid assets* and financial risk through assessing the entire supply chain ecosystem

• Big data holds the key to unlock the potential of increasing amounts of data available to supply chain • Increasing supply chain visibility • Reducing supply chain risk • Enhancing demand-planning capabilities

• High growth SMEs are the key targets of supply chain finance service

• Supply chain finance strives to release working capital tie-up in less liquid assets • Supply chain finance service providers

offer customized financial solutions to fulfill different needs of supply chain players, and to simultaneously facilitate supply chain collaboration and reduce operating cost

* Less liquid assets: inventory, prepayment, account

receivables

Page 6: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Trade finance vs. supply chain finance

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Trade finance model

Supply chain finance model

• Letter of Credit • Open account

• Loose in risk control • More stringent risk control This model takes into account the

stability of cooperation between

upstream & downstream players

• Generally led by commercial banks Commercial banks need to

evaluate each deal

• Commercial banks offer collaborate with logistics and insurance companies to provide services

• Single trade process • ‘End-to-end’ financial solutions covering the production, supply & sales processes

• Partial information about the supply chain operations

• Obtain comprehensive information about the supply chain processes

The most common

settlement method

Risk control level

Role of commercial

bank

Coverage

Information

Page 7: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Views toward SMEs

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Supply chain finance service

provider

Traditional credit service provider

Individual SME…

Insufficient information disclosure

High credit risk

Moral hazard

Poor cost benefits

Through supply chain collaboration,

Compensated by transaction information of supply chain lower information cost

Stringent screening efforts by upstream and downstream players arguably lower credit risk

Reputation and exit cost considerations lower moral hazard

Digital technology and outsourcing reduce cost

Page 8: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Four forms of supply chain finance

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3 2 1

Distribution Inventory Production Procurement

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Supply Chain •Long years of cooperation •High level of trust

Enhancing cash flow efficiency Enhancing long term supply chain value

Page 9: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

3 categories of supply chain finance risk factors

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Supply chain finance service provider

External risk factor • Economic cycle • Policy & regulatory environment • Upstream &downstream networks • Industry environment • Market analysis • Product nature

Internal risk factor • Supply chain structure • Supply chain processes • Supply chain management components • Goal alignment between supply and

demand sides • Benefit-sharing & compensation mechanism • Length of cooperation between supply chain

members

Principal risk factor • Resource & capacity • Financial conditions • Credit history • Trading background • Operating conditions • Capacity to fulfill supply chain

obligations

Page 10: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

5 principles in supply chain finance risk management

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1 Building a healthy supply chain ecosystem, which - enables supply chain

players and the financial service providers to work together on collaborative planning, forecasting, and process management to mitigate risk, and

- facilitates the effective launch of supply chain finance solutions

? Establishing a system of checks and balances

Transactions must be self-liquidating. The future cash flows generated from supply chain operations provide the source of repayment

Informatization facilitates up-to-date and accurate information exchange, both internally and externally

Careful design of supply chain finance solutions to mitigate risk and uncertainties

The separation of approval and operational processes

The separation of transactional and logistics monitoring processes

The separation of powers in the organizational

structure

Business units and corporate

HQ set up committees to

review different projects Insurance

coverage Guarantee by stakeholders

Mutual agreement on

the undertaking of

supply chain responsibilities

Holding risk reserves for

high-risk businesses as a

buffer

$

2

3

4

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FORTHCOMING SERIES

Page 12: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Supply chain finance innovations in manufacturing industry

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Process-oriented

supply chain

finance

Traditional

manufacturing

and supply

Integrated supply

chain finance

Supply chain

finance for the

customization of

technology and

products

Integration of production process

Pro

prie

tary

te

ch

no

logy &

pro

du

cts

Lenovo

SJET

New hope

Liuhe

2

* With case studies

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Supply chain finance innovations in trade and distribution industry

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Market-oriented

supply chain

finance

Traditional

distribution

service

Integrated supply

chain finance

Logistics-oriented

supply chain

finance

Collaborative commerce and

market expansion capability M

ark

et p

en

etr

ation &

se

rvic

e c

ap

ab

ility

YH Global

Onetouch

Eternal

Asia

3

* With case studies

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Supply chain finance innovations in logistics industry

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Knowledge-based

local/ regional 3PLs

Asset-based local/

regional 3PLs

Knowledge-based

national/ global

3PLs

Asset-based

national/ global

3PLs

Physical asset Professional

knowledge L

oca

l/ r

eg

iona

l N

ation

al/ G

loba

l

CMST

Company M

Hongxin Service

innovations

Traditional logistics finance

Geographical expansion

Service innovations

4

* With case studies

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Supply chain finance management of commercial banks

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Information-

oriented supply

chain finance

Traditional

trade

financing

Integrated supply

chain finance

Multi-national

supply chain

finance

Level of cross-industry penetration

& data integration L

eve

l o

f re

gio

na

l b

usin

ess inte

gra

tio

n

Citibank,

HSBC

Ping An Bank

JP Morgan

Chase

Cross-industry database

construction

Internationalization & business integration

5

* With case studies

Page 16: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Supply chain finance innovations in e-business

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Supply chain

finance

innovations in

e-commerce

Supply chain

finance

innovations in

e-collaboration

Supply chain

finance

innovations in

e-procurement

Tader Coal

JD.com

Alibaba

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* With case studies

Page 17: Supply Chain Finance - fbicgroup.com Chain Finance.pdf · - enables supply chain players and the financial service providers to work together on ... and supply Integrated supply chain

Source

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Song Hua is a Professor of supply chain management at

the School of Business, Renmin University of China. He is

also a market research and regulative expert at the

Ministry of Commerce, the Assistant Secretary General of

the Chinese Society for Management Modernization, and

the Chairman of the Beijing Modern Institute of

Enterprises Research. His main research interests include

service supply chain, inter-firm relationships, and supply

chain flexibility.

Prof. Song has published over 60 papers in refereed

conferences and journals including Asia-Pacific Journal of

Management, Transportation Journal, Decision Sciences,

International Journal of Operations and Production

Management and Chinese Management Studies.

This report is based on the book “Supply Chain Finance”, written by Prof. Song Hua.

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Contacts

Management Theories and Business Models

Winnie Lo

Research Manager

Tel: (852) 2300 2488

Email: [email protected]

Fung Business Intelligence Centre 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong Tel: (852) 2300 2470 Fax: (852) 2635 1598

Email: [email protected] http://www.fbicgroup.com/

© Copyright 2015 Fung Business Intelligence Centre. All rights reserved.

Though the Fung Business Intelligence Centre endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. Fung Business Intelligence Centre and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document.