The Financial Supply Chain

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The Financial Supply Chain Impact
of VMI and Global Sourcing on your Financial
Supply Chain
2008 TCU Global Supply Chain Conference
February 27, 2008 Bob
Belshaw, Senior Vice President GE Commercial
Finance, Trade Distribution Services
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Agenda

• Global Sourcing Pressures, Issues Challenges
• Working Capital Drivers Impacts - Cash to Cash
  Discussion
• The VMI Financial Impact
• Financial Solutions for Improved Supplier OEM
  Supply Chains
• Questions?

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Various pressures are driving companies to
evaluate their sourcing strategies

• Internal Pressures
• Changing business models (global sourcing and
  emerging markets)
• Increased lead times and business complexity
  (many parties involved)
• Focus on short term benefits and independent
  gains (functional silos)
• Focus on cash to cash metrics

• Regulatory Pressures
• Constant changes in trade regulations increase
  the risk of costly delays, taxes or customs
  penalties
• Trade security requirements demand tighter
  procedural controls
• Increased audit requirements demand ability to
  produce supporting trade data and documentation
• Trade regulations used as foreign policy tools

• Global Pressures
• Maintaining control and visibility of product,
  costs and information
• Economies of scale from global structuring
• Risk from changing geo-political issues and
  currency fluctuations
• New competitors moving into global markets

67 of companies polled will have 25 suppliers
located internationally, 51 would have customers
located internationally in 3 years
New Strategies for Global Trade Management -
Aberdeen Group 2005
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Resulting in a Variety of Issues

• Increased cash-to-cash cycles and inventory costs
• Disjointed approach between purchasing, logistics
  and finance departments
• Continued trade documentation errors resulting in
  compliance risks and shipment delays
• Limited to no visibility of import / export
  transactions and actual total landed costs along
  with inaccurate and unshared information across
  extended supply chain
• Unpredictable disruptions in the supply chain

Companies must adopt a new global trade approach,
bringing together the financial and physical
supply chains
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Challenges with Global Sourcing Initiatives
70 of all automotive and industrial
manufacturers said that they need to improve
their global trade process to combat these
challenges
Source New Strategies for Global Trade
Management Aberdeen Group 2005
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Cash to Cash Cycle

• Cash to Cash Definitions
• COGS Cost of Goods Sold direct costs that
  go into making a product
• DSO Days Sales Outstanding length of time
  to get paid by customers
• DPO Days Payable Outstanding how long to
  pay trade creditors
• DSI Days Sales of Inventory how long it
  takes to turn inventory into sales
• The Cash to Cash Cycle
• Is the AVG days required to turn a invested
  in a raw material into a collected from a
  Customer
• Cash to Cash (A\R365/COGS)(Inv365/COGS)-(A/
  P365/SALES)
• Cash to Cash DSODSI-DPO

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Cash to Cash Cycle Using the 10K
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Cash to Cash Cycle Example

• Cash to Cash
• Cash to Cash (A\R365/COGS)(Inv365/COGS)-
  (A/P365/SALES)
• Cash to Cash DSODSI-DPO
• EXAMPLE
• 500MM in Annual Inventory Spend
• Inventory Ownership Days 59.8 days
• AR from Customer 6.2 days
• AP from OEM to Supplier 50.7 days
• Cash to Cash Cycle 75.3 days
• Working Capital Trapped in SC 103.15MM

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VMI Analysis Financial Impact on a Domestic
Supply Chain
Prior to VMI Example
Day 30
Supplier Sale To OEM
OEM Pays Supplier
Day 1

Vendor Production
OEM Ships
In Transit 2 days
In Warehouse 30 days
Production
OEM Inventory
Supplier A/R
VMI - Change in Timing of Title/Terms Example
Day 1
Day 62
Day 32
OEM Pays Supplier
Pull Signal
Supplier Order

In Warehouse 30 days
In Transit 2 days
Production
Vendor Production
Supplier Ships
Supplier Inventory
OEM Inventory
30 days
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VMI Analysis Financial Impact on a Global
Supply Chain
Prior to VMI - Current State Example
Day 30
Supplier Sale To OEM
OEM Pays Supplier
Day 1

Vendor Production
OEM Ships
In Transit 40 days
In Warehouse 30 days
Production
OEM Inventory
Supplier A/R
VMI Goal - Change in Terms Example
Day 1
Day 100
Day 70
OEM Pays Supplier
Pull Signal
Supplier Order

Production
Vendor Production
Supplier Ships
In Warehouse 30 days
In Transit 40 days
Supplier Inventory
OEM Inventory
30 days
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Global Supply Chains China Example
Staging/Ware housing
Domestic Transport
Customs Clearance
Air or Sea
Domestic Transport
Customs Clearance
Domestic Transport
Supplier
Buyer
Scenario 1 Buyer Owns the Inventory
Supplier
Buyer
Scenario 2 Supplier Owns the Inventory
Supplier
Buyer
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Global Sourcing
The Supply Chain
VMI Most Likely Example
Supplier Sale To OEM
OEM Pays Supplier
Day 75
Day 45
Day 1

Vendor Production
OEM Ships
In Transit 40 days
In Warehouse 30 days
Production
OEM Inventory
Supplier A/R
Introduce 3rd Party Inventory Owner
130 days
Day 1
Day 70
OEM Pays 3rd Party IO
Pull Signal
Supplier Sale to 3rd Party IO
Day 30

Production
Vendor Production
3rd Party IO Ships
In Warehouse 30 days
In Transit 40 days
Third Party Inventory Owner
OEM Inventory
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3rd Party Inventory Ownership
The Supply Chain
VMI Example
100 days
70 Days
Supplier Sale To OEM
OEM Pays Supplier
Pull Signal
Day 1

Vendor Production
OEM Ships
In Transit 40 days
In Warehouse 30 days
Production
Supplier Inventory
OEM Inventory
Supplier A/R
Introduce 3rd Party Inventory Owner
130 days
Day 1
Day 70
OEM Pays 3rd Party IO
Pull Signal
Supplier Sale to 3rd Party IO
Day 30

Production
Vendor Production
3rd Party IO Ships
In Warehouse 30 days
In Transit 40 days
Third Party Inventory
OEM Inventory
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Reverse Factoring Program Overview
Innovative Tool for Prospect and its Supply Base
Program Benefits
Step 3
Step 1
Step 2
Step 4

• Prospect Benefits
• Array of Product Offerings to help
  Preserve/Generate Working Capital
• Speed of Execution Leveraging FC Resources and
  Expertise as a Center of Excellence
• Dedicated Negotiation Teams Operational Support
  Teams
• Approval Processes Remain in Place
• Tool Supports Buyer DPO

• Prospect Purchases
• Goods/Services
• Prospect Receives
• Supplier Invoice for Goods/
• Services
• Prospect Approves the Invoice Sends to GE

• Finance Co Negotiates Discount with Supplier in
  Exchange for Early Payment of Receivable
• Finance Co Enters into Receivables Purchase
  Agreement
• Ex.. Terms 2 15 Net 75

• Finance Co Pays Supplier Early Net Of Discount
  (i.e. 2 on Day 15)

• Prospect Pays
• Finance Co Gross
• Amount of Invoice
• On Ordinary
• Net Date (i.e. Day 75)

• Supplier Benefits
• Financial Productivity
• Improved Cash Flow Balance Sheet Less s
  Invested in AR
• Predictability of Payments
• Productivity / Forecasting
• On-line Web Capabilities to Track Invoice
  Payment Status
• Lower Collection Costs
• Invoice Discrepancies Reduced
• Electronic Payment of Invoices

Day 0
Day 15
Day 75
Example
Original 100 Invoice Paid To Finance by
Prospect
100 Invoice Approved for Payment
By Prospect
98 Paid By Finance Co to Supplier (98 of
100)
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Proprietary Confidential information of General
Electric Capital Corporation