Procurement & Payables: An Analyst Perspective on the Future of B2B Payment and Working Capital Management
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B2B payments and working capital management are increasingly intertwined as companies look to their payables to drive strategic value. Both Procurement and Finance are turning their attention to new payment, working capital management, and supply chain finance strategies. In this session, analysts from McKinsey and Chainlink will share research and perspectives on the changes, challenges, and opportunities that companies face with these new strategies. This session is sponsored by Discover, SAP Ariba's partner in developing and delivering the award-winning innovation AribaPay.
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Procurement & Payables: An Analyst Perspective on the Future of B2B Payment and Working Capital Management
- 1. Procurement & Payables: An Analyst Perspective on the Future of B2B Payment and Working Capital Management Jason Hanson, Partner, McKinsey & Company Bill McBeath, Principle Analyst, Chainlink Research Scott Pezza, Sr. Consultant, SAP Ariba / March 15, 2016 Public
- 2. © 2016 SAP SE or an SAP affiliate company. All rights reserved. 2© 2016 SAP SE or an SAP affiliate company. All rights reserved. 2Public Scott Pezza Sr. Consultant, SAP Ariba Jason Hanson Partner, McKinsey & Company Bill McBeath Principle Analyst, Chainlink Research Public
- 3. © 2016 SAP SE or an SAP affiliate company. All rights reserved. 3© 2016 SAP SE or an SAP affiliate company. All rights reserved. 3Public Session agenda Welcome and Introduction to AribaPay T-Mobile â A Procurement view of Payment 487 Consulting â A Supplierâs Perspective on Payment Panel Discussion / Q&A
- 4. Jason Hanson Partner, McKinsey & Company
- 5. U.S. B2B Payments Overview March 15th, 2015 Jason Hanson, Principal, McKinsey & Company
- 6. McKinsey & Company 6| Domestic B2B payables is a $30T payment flow; ~$6T (30%) of those payables are financed in some fashion SOURCE: McKinsey Payments Map, Federal Reserve, IRS Corporate Tax Returns, U.S. Census Facilitated financed payables 4.23.7 Intra- company transfers2 33.5 B2G tax payments True domestic B2B payables Govât and NPO spending1 21.1 Paid at maturity Financed payables 7.4 9.3 Domestic business and govât payments 79.2 Value of U.S. imports 3.6 Value of U.S. exports 3.0 Domestic and internat- ional payments 85.8 Non- facilitated buyer funded discounts 7.9 29.0 1 Federal, state, and local government and nonprofit spending 2 Includes payments from zero balance, sweep, cash concentration, and controlled disbursement accounts which are not true B2B spend 2013 Domestic and international payments, USD trillions
- 7. McKinsey & Company 7| 07 U.S. B2B EMEA B2BPayment Instrument SOURCE: McKinsey U.S. Payments Map, Release Q1-2014 Continued opportunity for electrification in the U.S. market 3% 71% 5% 13% 3% 5%0% 1% 0% Check 23% 60% Other (Debit, Book Entry, Prepaid) Wire Transfer Cash 16% Credit Card ACH
- 8. McKinsey & Company 8| The order to payment process is complex Procurement / Purchasing Order Receipt / Processing Accounts receivable Accounts payable 1 Purchase order sent to supplier Buyer Supplier 2 P.O. data sent to AR for credit evaluation / invoicing 3 Invoice sent to buyer 4 P.O. data sent to AP for reconcilement Payment sent to supplier 5 Goods / services sent to buyer 6 Supply Chain Management EIPP space Simplified order-to-payment process
- 9. McKinsey & Company 9| AP processes challenges Vendor Negotiation Ordering Accounts PayableProcurement A/R âȘ Manual processes / exceptions rates lead to longer cycle times â higher labor cost, missed discounts, and late fees â Errors lead to overpayments â Paper makes auditing more difficult â Paper processes tend to drive paper payments âȘ Lack of integration with AP can lead to poor tracking of vendor compliance with negotiated terms 2 âȘ Lack of visibility / unpredictability into the paper oriented order-to-pay cycle leads to working capital inefficiencies1 3 Purchase Order (PO) Matching Invoice Receipt Exceptions / Research Payment Approval Payment Origination
- 10. McKinsey & Company 10| AR challenge â separate information flows Accounts Payables Payment Network Payables Automation Platform Accounts Receivables Invoice Data Receivables Automation Platform A/R Matching Match Separate flows of payment and invoice information necessitates an A/R matching function that adds to the complexity of the network system InvoicePayment Payment Data
- 11. McKinsey & Company 11| Benefits of improving B2B payments Buyer side (A/P) Supplier side (A/R) âȘReduction in wholesale lockbox costs â electronic invoicing and payment alleviates the need for wholesale lock-box âȘLabor cost savings â a streamlined invoice creation and P.O. matching âȘBetter terms for receivables factoring â«Greater visibility provided to the lender / guarantor can reduce factoring costs â«Reduce DSO â«Better liquidity âȘLabor cost savings â reduction of data / invoice entry âȘSpend management â consolidated views of all spending activity to reduce expenditure âȘDiscount management â greater visibility allows buyers to take more discounts âȘMore advantageous trade finance terms â greater visibility provided to the lender / guarantor can reduce financing costs âȘReduction in payment costs â check processing and postage costs
- 12. McKinsey & Company 12| Real savings potential SOURCE: McKinsey U.S. Payments Map, expert interviews 78 3 5-10 Wire2 40-50 $45-$60 Check $50-$65 <1 25-35 ACH $30-$45 <1 <1 25-35 5-10 Accounts receivableSeller1 Accounts payableBuyer1 Delivery time and informationTransaction costs and soft costs 1 Includes float/working capital considerations 2 Illustrative, wire transfers typically used for large infrequent payments (average value estimated at $60,000) USD per transaction, assuming average transaction size of $3,000 âȘT+1-2, but with limited accompanying data in addenda records/email âȘT+0, with limited accompanying data in addenda records/email âȘT+4-5, with limited accompanying data âbelow the perforationâ
- 13. Bill McBeath Principle, Chainlink Research
- 14. Working Capital and Supply Chain Finance Unlocking Strategic Value for Procurement, Supply Chain, and Finance Professionals Bill McBeath Chief Research Officer, ChainLink Research
- 15. Agenda âą The Working Capital Tug-of-War âą Full Lifecycle SCF and Networked Platforms âą Receivables Financing âą Benefits of SCF âą Ownership and Capabilities
- 16. Working Capital
- 17. Working Capital Working Capital = Current Assets â Current Liabilities APAR Inventory DSO DPODIO Cash Conversion Cycle = + â
- 18. The Working Capital Tug-of-War DSODPO
- 19. Late Payments Source: D&B 2013 Payment Study
- 20. Holding-the-Bag Quotient âą HBQi = Inventory âą HBQc = Cash âą HBQa = Assets PartnersTradingofBurdenAverage BurdenFirmsIndividual HBQ ïœ 1.00.50.1 1.5 2.0 BalancedâFree Rideâ âHolding-the-Bagâ Source: ChainLink Research
- 21. Consequences of Burden-shifting âą Supplierâs cost of capital/ access to capital âą Supplierâs financial health and viability âą Supplierâs speed of execution
- 22. Decreased Costs Source: ChainLink Research Suppliers Cost of Borrowing With Traditional Financing Increased Returns Buyerâs Typical Returns from Cash on Hand Cost for Supplier / Returns for Buyer w/ Network Approach Traditional Approach Holistic SCF via Network-Platform Traditional Approach0%-1% 3%-5% 10%-15%+ TypicalArbitrage Opportunity Traditional Loans, Factoring Arbitrage Opportunity âąLocal / In- country Lenders âąLimited bi- directional visibility âąHigh rates
- 23. Various Production Milestones Blanket or Master P.O. Issued Material Release or Individual P.O. Issued Delivered to Buyer or VMI Hub Invoice Approved by Buyer Goods Shipped Payment by Buyer, per Terms Pulled from VMI Hub In-transit Financing VMI Financing Receivables Financing Pre-shipment Financing Source: ChainLink Research Full Lifecycle Supply Chain Financeâ Across the Procure-to-Pay Lifecycle
- 24. Various Production Milestones Blanket or Master P.O. Issued Material Release or Individual P.O. Issued Delivered to Buyer or VMI Hub Invoice Approved by Buyer Goods Shipped Payment by Buyer, per Terms Pulled from VMI Hub In-transit Financing VMI Financing Receivables Financing Pre-shipment Financing Source: ChainLink Research Increasing Risk for Lender / Decreasing Leverage of Buyer Creditworthiness Milestone Visibility Points for Lenders
- 25. Network PlatformVarious Production Milestones Blanket or Master P.O. Issued Material Release or Individual P.O. Issued Delivered to Buyer or VMI Hub Invoice Approved by Buyer Goods Shipped Payment by Buyer, per Terms Pulled from VMI Hub In-transit Financing VMI Financing Receivables Financing Pre-shipment Financing Source: ChainLink Research IssuePO Buyer ReceivePO Supplier Supplier Record Production Milestones Bank ReceiveMilestones Notifications Shipper TenderLoad Carrier Respondto Tender Shipper SendASN Carrier Status updates ReceiveASN Buyer Supplier SendInvoice ReceiveInvoice Buyer ApproveInvoice Bank SendDiscounted EarlyPayment Payment Buyer Receive Discounted EarlyPayment Supplier Bank Rcv Payment 3rd Party Inspector Inspection Docs/ Approval Bank RcvInspection Documentation RcvProof ofDelivery Supplier
- 26. Supplier Buyer Bank Financial Services Other 3rd Party Services Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Buyer Buyer Buyer Buyer Buyer Buyer Buyer3PL / Carrier Insurance Network-based Platform Customs Inspection Services3PL / Carrier 3PL / Carrier 3PL / Carrier 3PL / Carrier Bank Bank Bank Financial Services Financial Services Insurance Buyer Buyer Supplier Supplier Supplier Source: ChainLink Research
- 27. Various Production Milestones Blanket or Master P.O. Issued Material Release or Individual P.O. Issued Delivered to Buyer or VMI Hub Invoice Approved by Buyer Goods Shipped Payment by Buyer, per Terms Pulled from VMI Hub In-transit Financing VMI Financing Receivables Financing Pre-shipment Financing Source: ChainLink Research Traditional Factors Network Platform Enabled Approaches Early Payment Discount Programs Platform-based Receivables Funding
- 28. Source: ChainLink Research Early Payment Discount Programs Platform-based Receivables Funding Traditional Factors Network Platform Enabled Approaches âąLocal / In- country Lenders âąLimited bi- directional visibility âąHigh rates âąBuyer- or Lender-funded early payment âąâdynamic discountingâ âąTypically buyer- or lender-managed program âąBuyer/Lender or Supplier sets rates âąAutomation/rules based processing âąBank- or Third- party buys receivables âąSupplier- initiated âąLenders compete for buying receivables
- 29. Milestone Visibility Past Performance Visibility Accurate, Timely Documents Competitive Lending Marketplace Automated Payment Legal Framework âą Lower Lending Risk âą Increased Lending Competition âą Lower Lending Rates âą Increased Pool of Early Payment Discounts Available âą Lower Cost of Capital âą Lower COGS Source: ChainLink Research
- 30. Supply Chain Glitches Are Very Costly -30 -25 -20 -15 -10 -5 0 -125 -100 -75 -50 -25 0 25 50 75 100 125 Trading day relative to announcement date Averageshareholderreturns(%) Source: âImpact of Supply Chain Performance on Shareholder Valueâ V. Singhal, Georgia Institute of Technology
- 33. Who Owns SCF?
- 35. © 2016 SAP SE or an SAP affiliate company. All rights reserved. 35© 2016 SAP SE or an SAP affiliate company. All rights reserved. 35Public Please complete session survey Locate Session Click Surveys Button Select Breakout Survey Rate Session