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SCMMS2 (Subject) / Financial Supply Chain Management (Lesson)
- What is the motivation behind Financial SCM ? Financial crisis has led to financial unstable and high-risk supply chains Pressure from buyers to lengthen payment terms has led to liquidity issues and high bankruptcy risk to companies Constantly changing consumer preferences, complex distribution networks and marginal profits have led to complex requirements of extended supply chains The definition of optimal working capital requirements and level remains still a challenging topic The clear-cut relationship between payment delays upstream and downstream in the supply chain is still undefined Substantial volatility and pressure on some suppliers as banks were not as willing to provide trade financing given the perceived increased risk levels
- How can inventory financing lead to a more stable supply chain base and cost reductions? Large buying organisations have better conditions to access financial markets buying organisations look for a healthy supply base With inventory and work-in-progress financing, the theoretical idea of cash pooling with a supplier can be implemented Significant cost savings are achieved with the joint working capital allocation for a supply chain with a strong and a weak member
- Why do Suppliers offer trade credit? To attract customers Financing advantage theories of trade credit Advantage in information acquisition Advantage in controlling the buyer Advantage in salvaging value from existing assets Price discrimination through trade credits Transaction cost theories
- What are functions of letters of credit? Often used in international trade Guarantee that buyer will pay once the shipment arrives as stipulated before Fees for banks around 1-8% Risk of interrupting the physical flow, if problems with documentation arise Mitigate some international payment risks
- What are open account credits? Open account is defined as arrangement whereby sales are made with no formal debt contract. The buyer signs a receipt and the seller records the sale in the sales ledger
- What are advantages and disadvantages of Open accounts? Advantages : Easy to handle Faster than LC process If Buyer pays as agreed, low cost solution Disadvantages: Risk for supplier, only evidence in his books Bad dept risk is high, because it is difficult to enforce payments Supplier can use open accoutns only to a limited degree as collateral. If a buyer does not pay as planned, the supplier has to find ways of financing the dept. Often this is done with equity, which isvery expensive.
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