Supply Chain Finance

1
Supply Chain Finance

• BAFT Presentation
• April 2007

Michael Durbin
2
Supply Chain Finance Bank Perspective

• How we became engaged
• How we frame/view the solution
• Overview of the solution
• State of the market

3
Supply Chain Finance

• How we became engaged
• Retail clients focused on supply chain and
  inventory efficiencies
• Focus Physical flows
• Diminishing returns
• Whats next?
• Two trends unfold
• Sourcing alternatives
• Looking at financial flows

4
Supply Chain Finance

• Financial Flows
• Fees
• Economic Costs (Cost of Capital)
• How we frame the solution - ROIC Example

5
Supply Chain Finance

• How we frame the solution Trade Payables
  Finance
• Financial Supply Chain Web Portal
• Communicates invoice status
• Establishes date dollar certain obligation of
  payment
• Certainty allows for accurate risk based pricing
  and trading of obligation

6

• Financial Supply Chain Today

• Vendor fulfills PO and invoices Buyer for 1MM
• Vendor provides terms of 90 days but has no
  visibility to payment date or amount
• Vendor hedges to offset this uncertainty
• Vendor underwrites Buyer risk
• Vendor finances 1MM for 90 days at a cost of
  9.5
• Capital cost of holding Buyer risk 23,424 or
  2.3 of the invoice amount

• Buyer (investment grade company) receives goods
  and invoice
• 90 days hence, remits payment for 1MM

Suppliers
7

• Opportunity Enabled by Information/Technology

• Vendor fulfills PO and invoices Buyer for 1MM
• Vendor provides terms of 90 days
• Vendor views web portal for future payment detail
• Vendor elects to sell payment obligation to
  National City
• Vendor receives immediate cash at a discount
  based on Buyers risk profile

• Buyer (investment grade company) receives goods
  and invoice
• Buyer remits invoice approval and payment
  instructions to Web Portal
• 90 days hence, remits payment for 1MM through
  Web Portal (payment cleared to National City who
  bought obligation)

Suppliers

• National City views payment obligation on Web
  Portal
• National City evaluates and values risk of Buyer
• National City, via Web Portal, offers to buy
  payment obligation at a discount rate of 6.5.
• National City electronically pays Vendor 1MM
  less a 16M discount fee or 1.6 of invoice

8
Supply Chain Finance
Chain Collaboration
Trade Payables Finance Web Portal

• Opportunity Enabled by Information/Technology
  Trade Payables Finance
• In prior example, chain enhanced by 75bps in
  capital efficiencies
• Hedging needs eliminated through transparency of
  information
• Information and technology enabled efficient
  measurement and pricing of risk
• Vendor achieves flexible, efficient, off-balance
  sheet financing
• Allows vendors to compete on production
  capabilities not financing capacity
• Fosters collaboration within the chain as all
  members benefit from pulling costs out of chain
  vs. shifting within chain

9
Supply Chain Finance

• State of the market
• Emerging/evolving solution
• Economics are real
• Opportunities for efficiency will drive to
  tipping point