Supply Chain Finance Perspectives

Abstract

This chapter briefly introduces supply chain finance (SCF) and its four building blocks: supply chain management, finance, IT & ERP, and SCF instruments. After introducing the four building blocks, each block will be discussed in detail. Finally, state-of-the-art issues in supply chain management and finance will be discussed to bridge the gap to the real (international) business world of volatility, uncertainty, complexity, and ambiguity. To provide an answer to issues such as liquidity in the supply chain (deep tier financing), dealing with all sorts of risks in the supply chain (resilient supply chains), and being sustainable/circular in the supply chain and its finance.

1. Introduction

Supply chain finance (SCF) is a relatively new development in supply chain management [1], where the (financial) value flow of working capital (and related issues) in the supply chain is the main topic of study (see Figure 1).

Figure 1.

Supply chain of the focal company (developed by the author).

Steeman [2] outlines SCF from a more general point of view with no links to such SCF instruments like reverse factoring and dynamic discounting as defined by the European Banking Association [3]:

Supply chain finance is defined as the use of financing and risk mitigation practices and techniques to optimize the management of the working capital and liquidity invested in supply chain processes and transactions. SCF is typically applied to open account trade and is triggered by supply chain events. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform.

So, the physical flow of goods and services is the supply chain finance event of the EBA definition, and the information flow is often managed in the supply chain by using an IT platform.

In this chapter, we will develop an overview of supply chain finance perspectives from the building blocks of supply chain finance such as were presented by Templar et al. [4] and Tate et al. [5]: supply chain management, corporate finance, business processes (including Enterprise Resource Planning (ERP), and information technology (IT) platforms), and SCF instruments (including the role of banks).

Finally, the chapter ends with state-of-the-art developments in international business concerning supply chain finance such as volatility, uncertainty, complexity, and ambiguity (VUCA), sustainability, and FinTech.

2. Basics of supply chain finance

The essence of supply chain finance can be found in Figure 1, of course, is the plotted supply chain simple with only a tier 1 supplier and tier 1 client. Real-life supply chains are far more complex, and in some SCF research, we observe so-called deep-tier supply chain finance [6].

For reasons of convenience, we will stick to the supply chain in Figure 1. If we observe the focal company (as a dominant firm in the supply chain network [7]), there are three main activities:

1. Buying raw materials and/or components from tier 1 suppliers (including transport).

2. Processing raw materials and components into final products.

3. Selling final products to tier 1 clients (including transport).

The impact on the ledgers (income statement and/or balance sheet, see Table 1) of the three activities of the focal company are:

#	Activity	Ledgers	Ledgers
I	Buying	Inventories RM & C+	Creditors +
II	Transformation	Inventories RM & C – Inventories FP+
III	Selling	Inventories FP–COGS +	Debtors + Revenues +

Table 1.

Impact of business activities on ledgers (developed by the author).

Ad I Buying raw materials & components will increase the inventories of raw materials and components (RM & C) (+) and increase the creditors or accounts payables (+), both on the balance sheet of the focal company.

Ad II Producing final products (or transforming raw materials and components) will decrease the inventories RM & C (−) and increase the inventories of final products (FP) (+), both on the balance sheet of the focal company.

Ad III Selling final products will result in two sub-transactions for the ledgers:

• Sending the final goods to the customers will decrease inventories FP (−) on the balance sheet and increase costs of goods sold or COGS (+) on the income statement.

• Sending the invoice to the customers will increase debtors or accounts receivables (+) on the balance sheet and increase revenues or sales (+) on the income statement.

The ledgers inventories (raw materials & components, work in progress (WIP), and final products), debtors, and creditors are part of the concept of net operating working capital (NOWC), the following formula [8, 9] is used:

$$\mathit{\text{NOWC}}=\mathit{\text{Inventories}}+\mathit{\text{Debtors}}-\mathit{\text{Creditors}}$$E1

In some financial literature, the word induced is used instead of operational Dorsman [10, 11] and Gieskens [12].

From this accounting analysis, we can deduce two important topics for the supply chain finance metrics of the net operating working capital (NOWC): Static value analysis of NOWC and dynamic analysis of NOWC.

In the static analysis of NOWC, we often use ratios (or relative numbers) to characterize a company for its static working capital position, the following formulas [8, 13] often used:

$$\mathit{\text{Inventory turnover}}=\frac{\mathit{\text{Cost of goods sold}}}{\mathit{\text{Inventories}}}$$E2

$$\mathit{\text{Receiveables turnover}}=\frac{\mathit{\text{Sales or Revenues}}}{\mathit{\text{Debtors or Accounts receiveable}}}$$E3

$$\mathit{\text{Payables turnover}}=\frac{\mathit{\text{Cost of goods sold}}}{\mathit{\text{Creditors or Accounts payable}}}$$E4

$$\mathit{\text{NOWC turnover}}=\frac{\mathit{\text{Sales or Revenues}}}{\mathit{\text{NOWC}}}$$E5

$$\mathit{\text{Current Ratio}}\left(\mathit{CR}\right)=\frac{\mathit{\text{Current Assets}}}{\mathit{\text{Current Liabilities}}}$$E6

$$\mathit{\text{Quick Ratio}}\left(\mathit{QR}\right)=\frac{\mathit{\text{Current Assets}}-\mathit{\text{Inventories}}}{\mathit{\text{Current Liabilities}}}$$E7

The NWOC turnover formula was developed in the analogy of Preve & Sarria-Allende [14] by the author. The inverse value of the NWOC turnover is the average number of days of net operating working capital in sales.

In the dynamic analysis of NOWC, we use the following ratios (or relative numbers) to characterize a company for its dynamic working capital position [8, 13] the following formulas are often used:

$$\mathit{\text{Days in Inventories}}\left(\mathit{DIO}\right)=\frac{\mathit{\text{Inventories}}}{\mathit{\text{Cost of goods sold}}}\ast 365\mathit{\text{days}}$$E8

$$\mathit{\text{Days of Sales Outstanding}}\left(\mathit{DSO}\right)=\frac{\mathit{\text{Debtors or Accounts receiveable}}}{\mathit{\text{Sales or Revenues}}}\ast 365\mathit{\text{days}}$$E9

$$\mathit{\text{Days of Purchases Outstanding}}\left(\mathit{DPO}\right)=\frac{\mathit{\text{Creditors or Accounts payable}}}{\mathit{\text{Cost of goods sold}}}\ast 365\mathit{\text{days}}$$E10

$$\mathit{\text{Cash to Cash Cycle}}\left(C2C\right)\mathit{\text{or Cash Conversion Cycle}}\left(\mathit{CCC}\right)=\mathit{DIO}+\mathit{DSO}-\mathit{DPO}$$E11

To provide you with some data from the following five companies (based on their annual reports): Unilever (fast-moving consumer goods) Heineken (beverages and beer), Philips (electronics), Volkswagen (automotive), and Ahold-Delhaize (supermarket chain).

We observe in Table 2 that for some companies (Unilever, Heineken, and Ahold-Delhaize) the cash-to-cash cycle is negative and for some positive (Philips, and Volkswagen). The explanation is that for companies with a negative CCC; the DPO is higher than the sum of DIO + DSO. This implies that those companies pay their supplier quite late in 2021. The suppliers of Unilever had to 124 days on average for payment and Heineken the suppliers had to wait for 149 days to receive payment.

Company	SCF metric	2018	2019	2020	2021	Average
Unilever	DIO	40,9	35,1	38,4	39,1	38,4
	DSO	46,4	47,0	35,5	37,7	41,7
	DPO	137,6	124,6	121,6	124,0	126,9
	CCC	−50,3	−42,4	−47,7	−47,2	−46,9
Company	SCF metric	2018	2019	2020	2021
Heineken	DIO	36,1	39,5	37,6	46,9	40,0
	DSO	50,9	52,8	43,1	50,3	49,3
	DPO	129,6	134,3	117,4	149,0	132,6
	CCC	−42,6	−42,0	−36,6	−51,9	−43,3
Company	SCF metric	2018	2019	2020	2021
Philips	DIO	105,8	92,0	115,1	126,1	109,7
	DSO	81,3	85,3	87,6	80,6	83,7
	DPO	87,9	71,9	81,5	68,4	77,4
	CCC	99,2	105,5	121,2	138,2	116,0
Company	SCF metric	2018	2019	2020	2021
Volkswagen	DIO	88,1	83,8	87,0	78,6	84,4
	DSO	27,7	25,9	26,6	22,6	25,7
	DPO	45,5	40,8	45,0	42,5	43,4
	CCC	70,3	69,0	68,6	58,8	66,7
Company	SCF metric	2018	2019	2020	2021
AholdDelhaize	DIO	25,4	25,3	21,9	24,8	24,4
	DSO	10,2	10,5	9,6	9,9	10,1
	DPO	46,3	47,8	45,8	50,3	47,5
	CCC	−10,7	−12,0	−14,3	−15,6	−13,1
Company	SCF metric	2018	2019	2020	2021
Average	DIO	59,3	55,2	60,0	63,1	59,4
	DSO	43,3	44,3	40,5	40,2	42,1
	DPO	89,4	83,9	82,2	86,8	85,6
	CCC	13,2	15,6	18,2	16,5	15,9

Table 2.

Supply chain finance metrics of some international companies (retrieved by the author).

In the case of Philips, we observe a very high DIO (126 days in 2022), which might be due to some issues with storing special raw materials, and/or some issues in the market for electronic hospital equipment.

From Table 2, we can also conclude that we can observe differences in sectors of industries, as well as in the market power between suppliers (of tier 1, tier 2, tier 3, etc.) and focal companies. The distribution advantages of early payment of creditors/suppliers using supply chain finance programs (such as reverse factoring and dynamic discounting) are not always very clear. From a theoretical point of view, this so-called split-up issue is not solved [15]. Depending on the purchase market situation of the focal company, rules of thumb are used in negotiations of the financial and nonfinancial advantages [16].

The following example (see Table 3) might illustrate this split-up issue of advantages of a supply chain finance program issued by the focal company for tier 1 and tier s suppliers.

	Tier 2 supplier	Tier 1 supplier	Focal company	Total
Credit rating	C	B	A
NOWC position	$   80.000,00	$ 4.000.000,00	$ 10.000.000,00
Domestic interest rate	12%	9%	3%
Number of days	180	120	90
Days in a year	365	365	365
Domestic interest expenses	$  4.734,25	$  118.356,16	$  73.972,60	$ 197.063,01
SCF interest rate	3,00%	3,00%	3,00%
Interest costs SCF program	$  1.183,56	$  39.452,05	$  73.972,60	$ 114.608,22
Difference	$  3.550,68	$  78.904,11	$      -	$  82.454,79

Table 3.

Costs of net operating working capital in the supply chain.

Assume we have a net operating working capital position for each company in US Dollars ($), each company has a different credit rating (that is why domestic interest rates differ), and each company has a different number of days invested in net operating working capital.

The interest costs are calculated using the formula:

$$\mathit{\text{Interest costs NOWC}}=\mathit{\text{NOWC}}\ast \mathit{\text{Interest rate}}\ast \frac{\mathit{\text{Number of days}}}{365}$$E12

So, we observe the costs of domestic interest expenses for supplier tier 1 ($ 4.734,25), supplier tier 2 ($ 118.356,16), and focal company (73.972,60). So, in total $ 197.063,01.

When the focal company introduces a supply chain finance program, the focal company will get a good interest rate (slightly above its domestic interest rate). Let us assume this interest rate will be 3,0%. So, now all three companies can borrow against this interest rate (via the focal company!).

This results in the following interest costs for the net operating working capital: Supplier tier 1 ($ 1.183,56), supplier tier 2 ($ 39.452,05), and focal company ($ 73.972,60). So, in total $ 114.608,22, an advantage of $ 82.454,79 (lower costs for the supplier tier 1 and supplier tier 2). The question that now arises is how to distribute this advantage in the supply chain. In Table 4 some scenarios are provided, although it is from a theoretical point of view not backed up, just a rule of thumb (often passed on the power position in the supply chain).

Split-up SCF advantage	Scenario I		Scenario II		Scenario III		Scenario IV
Focal company	$     -	0%	$  27.484,93	33,3%	$   4.122,74	5%
Tier 1 Supplier	$   3.550,68	4%	$  27.484,93	33,3%	$   2.473,64	3%
Tier 2 Supplier	$ 78.904,11	96%	$  27.484,93	33,3%	$  75.858,41	92%
Total	$ 82.454,79		$  82.454,79		$  82.454,79		$     -

Table 4.

Split-up scenarios of the supply chain finance program.

Managing net operating working capital in the supply chain is one of the so-called “real” aspects of supply chain finance, in the following section of this chapter, we will add the role of IT and the role of financial institutions.

In the supply chain finance cube model [1] the capital costs of the volume (=amount) of net (operating) working capital are calculated like:

$$\mathit{\text{Capital costs}}=\mathit{\text{Volume}}\left(\mathit{\text{amount}}\right)\ast \mathit{\text{Duration}}\left(=\mathit{\text{time}}\right)\ast \mathit{\text{Capital cost rate}}\left(e.g.\mathit{\text{WACC}}\right)$$E13

The interest costs of net (Operating) working capital are one of the basic supply chain finance metrics because trade-offs can be made in the working capital policy in the supply chain of the focal company.

An example of how supply chain finance works in Asia can be found in the Trade and Supply Chain Finance Program of the Asian Development Bank [17].

3. Supply chain management

As was mentioned in the first section, the definition of supply chain finance is highly event-driven, so it is now time to understand the concept of supply chain management (Figure 1). Although supply chain finance has not only an operational level but also tactical and strategic levels [18]. Logistics and supply chain management (SCM) are sometimes seen as different entities, but sometimes also seen as something similar. For this chapter, we follow two basic opinions about supply chain management, based on Stock and Lambert [19]:

The integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders.

and Harrison and Van Hoek [7]:

SCM encompasses the planning and controlling of all processes involved in procurement, conversion, transportation, and distribution across the supply chain. SCM includes coordination and collaboration between partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, SCM integrates supply and demand management within and between companies in order to serve the needs of the end customer.

Based on both definitions we have now some idea about supply chain management and logistics, the Association of Supply Chain Management [20, 21], confirms this academic concept from a professional point of view. Leeman [22] developed an overview of supply chain management following supply chain management as an academic topic:

Especially for supply chain finance the role of sourcing/procurement/purchasing is an important one from the perspective of the focal company and the (tier 1) supplier. Supply chain finance programs are discussed between the focal company and its suppliers in terms of payment terms (including early payments), the discussion is of course based on the market power between the focal company and its suppliers, as well as the position in the Kraljic’s matrix of the purchase portfolio [23]. In Kraljic’s matrix, we have four positions to characterize their procurement portfolio: leverage products, strategic or critical products, non-critical or routine products, and Bottleneck products. In Kraljic’s matrix, the impact on the financial results (e.g., profit) is compared with the supplier risk. Depending on the position in the portfolio, it is clear if the focal company can easily swap suppliers or not (especially in the case of one supplier), and this also has an impact on the choice of a supply chain finance program.

4. Corporate finance

In corporate finance [8] the Economic Value Added (EVA^®) is one of the cornerstones of the theory to explain the economic performance of a company. Economic Value Added is defined as:

$$\mathit{EVA}=\mathit{\text{NOPAT}}-\mathit{\text{WACC}}\ast \mathit{\text{Capital Employed}}$$E14

In which NOPAT stands for the net operating profit after taxes, WACC stands for weighted average costs of capital, and capital employed stands for the total assets minus the current liabilities (= Fixed Assets + Net Working Capital = Equity + Long term Debts).

The weighted average cost of capital (WACC) is defined as follows:

$$\mathit{\text{WACC}}=R_E\ast \left(1-\lambda \right)+R_D\ast \lambda \ast \left(1-\tau \right)$$E15

Lambda or λ stands for the debt to assets ratio, thus (1-λ) stands for the equity to assets ratio, per definition λ + (1-λ) = 1. The return to equity (R_E) is the expected value for the remuneration of shareholder’s equity. The return on debt (R_D) is the remuneration for the use of debt by the combination, it is corrected for the tax deduction of interest cost (tax rate = τ = tau). R_RF is the so-called risk-free interest rate on premium state debt, for instance, the USA, Germany, the Netherlands, etc.

Finally, the capital assets pricing (CAPM) model is used for the determination of the return on equity (=R_E):

$$R_E=R_{\mathit{RF}}+\beta \ast \left(R_M-R_{\mathit{RF}}\right)$$E16

On page 417 of the 2022 Annual Report of Volkswagen [24] the value contribution (EVA) is + € 4.376 (million). In the 2022 annual report of Volkswagen AG, the WACC is 8.3%, NOPAT is in 2002 € 14.078 million and capital employed € 117.412 million, so EVA^® for Volkswagen in 2022 is:

$$\mathit{EVA}=14.078-\mathrm{0,083}\ast 117.412=14.078-9.702=+\text{€}4.376\left(\mathit{\text{million}}\right)$$E17

Economic Value Added or EVA^® is a yardstick to measure the financial value of a company, also ratios such as return on investment (or Assets) or ROI [25] and return on capital employed or ROCE [26] are commonly used.

$$\mathit{\text{ROIorROA}}=\frac{\mathit{\text{NetProfitAfterTaxes}}}{\mathit{\text{TotalAssets}}}\ast 100\%$$E18

$$\mathit{\text{ROCE}}=\frac{\mathit{\text{OperatingProfit}}}{\mathit{\text{TotalAssets}}-\mathit{\text{CurrentLiabilities}}}\ast 100\%$$E19

Schoenmaker and Schramade developed in their books Principles of Sustainable Finance [27] and Corporate Finance for Long-term Value [28] a model for integrated value. Integrated values (IV) consist of financial value (FV), social value (SV), and environmental value (EV); or in a formula:

$$\mathit{IV}=\mathit{FV}+\mathit{SV}+\mathit{EV}$$E20

The three values have the following constraints: Accounting for transitions (FV), social foundations (SV), and planetary boundaries (EV). The value flows (VF) consists of a shadow price (SP) multiplied by a quantity (Q), so the value flow is:

$$\mathit{VF}=\mathit{SP}\ast Q$$E21

The shadow price [29] of a factor (e.g., quantity) expresses the increase in value (e.g., profit) if an additional unit of a factor is allocated. By using the discounted cash flow (DCF) model [8] the integrated value (IV) can be calculated as follows [28]:

$$\mathit{IV}=\sum _{n=0}^N\frac{{\mathit{VF}}_n}{{\left(1+R\right)}^n}$$E22

The symbol r stands for the cost of integrated capital (including a risk premium) and is an adjusted version of the WACC or weighted costs of capital [8], the weighted average of the return of integrated value (R) consists of the returns for financial value (R_FV), social value (R_SV), and environmental value (R_EV). The integrated return (R) can be approximately 1617% depending on data from case studies.

In corporate finance we can calculate days of sales outstanding with the supply chain finance metrics formula:

$$\mathit{\text{Days of Sales Outstanding}}\left(\mathit{DSO}\right)=\frac{\mathit{\text{Debtors or}}\mathit{ARs}}{\mathit{\text{Sales or Revenues}}}\ast 365\mathit{\text{days}}$$E23

In our example, we assume that sales are $ 45.000.00 and the debtors are $ 9.487.000, so the DSO is 77,0 days, using the formula above.

In Table 5 an aging schedule [25] for debtors was downloaded from the company’s data out of the Enterprise Resource Planning software (ERP). We can observe from the data in Table 5 which customers (= debtors) are within the time limit of 90 days, and which are not. Based on the data in Table 5 the average number of days can be calculated, using this calculation:

	1–30 days	31–60 days	61–90 days	> = 91 days	Total
Average	15	45	75	120
Customer
Neptunus NV	$  70.000,00	$ 250.000,00	$  60.000,00	$      -	$ 380.000,00
Poseidon BV	$  400.000,00	$  50.000,00	$ 150.000,00	$   200.000,00	$ 800.000,00
Zeus AG	$  80.000,00	$  85.000,00	$  20.000,00	$      -	$ 185.000,00
Apollo GmbH	$  800.000,00	$ 300.000,00	$ 400.000,00	$   100.000,00	$ 1.600.000,00
Hades SA	$  250.000,00	$ 140.000,00	$  80.000,00	$  12.000,00	$ 482.000,00
Hestia SARL	$  60.000,00	$ 280.000,00	$ 300.000,00	$      -	$ 640.000,00
Artemis Ltd	$  500.000,00	$ 700.000,00	$ 300.000,00	$   400.000,00	$ 1.900.000,00
Dionysos INC	$  300.000,00	$ 200.000,00	$ 100.000,00	$      -	$ 600.000,00
Hermes LLC	$  400.000,00	$ 800.000,00	$ 900.000,00	$   600.000,00	$ 2.700.000,00
Panecea SLNE	$  40.000,00	$   80.000,00	$  60.000,00	$  20.000,00	$ 200.000,00
Total	$  2.900.000,00	$ 2.885.000,00	$ 2.370.000,00	$ 1.332.000,00	$ 9.487.000,00
Total in percentages	31%	30%	25%	14%	100%

Table 5.

Aging schedule debtors (developed by the author).

$$\mathit{\text{Average number of debto}}{r}^{\prime }s\mathit{\text{days}}=0,31\ast 15=0,30\ast 45+0,25\ast 75+0,14\ast 120=53,9\mathit{\text{days}}$$E24

From the aging schedule, we have more insight into the structure of the aging portfolio of debtors, than using only the supply chain finance metric of days of sales outstanding (DSO).

Similar approaches to an aging schedule can be provided for creditors and/or inventories, using ABC or Pareto analysis [22].

One of the topics of corporate finance is working capital management [8, 25], net working capital (NWC) is often defined like:

$$\mathit{NWC}=\mathit{\text{Current Assets}}-\mathit{\text{Current Liabilities}}$$E25

Net working capital management manages the short-time value flows [14] in the company between the primary activities of buying (purchase), transformation or production, and sales (distribution), this approach in working capital management is also known as the net operating working capital (NOWC) [10, 11, 12]). The formula of this working capital variant is plotted here:

$$\mathit{Net}\mathit{\text{Operating Working Capital}}\left(\mathit{\text{NOWC}}\right)=\mathit{\text{Inventories}}+\mathit{\text{Debtors}}-\mathit{\text{Creditors}})$$E26

Net operating working capital is also known as induced net working capital because it is linked (or induced) to the three primary activities in business:

• Input (buying of raw materials and components)

• Throughput (production or transformation of input into final products and/or services)

• Output (sales of finished products and/or services)

For managing net operating working capital, the following supply chain finance metrics are used:

• Static supply chain finance metrics

  • Value of net operating working capital (NOWC)

  • Current ratio (CR)

  • Quick ratio (QR)

  • NOWC turnover ratio

• Dynamic supply chain finance metrics

  • Days in inventories outstanding (DIO)

  • Days of sales outstanding (DSO)

  • Days of purchases outstanding (DPO)

  • Cash to cash cycle (C2C = DIO + DSO – DPO)

In some supply chain finance programs (such as reverse factoring and dynamic discounting), we see that there is a discount for early payment of the focal company to its suppliers. To calculate the effective interest for such a decision, the flowing example was developed (using simple interest rate calculation and compound interest rate calculation. Assume there is an invoice of $ 120.000,00 that the focal company has to pay to its suppliers, under the payment condition of 90 days. Early payment is possible within 10 days, the focal company is allowed to deduct 2% of the amount of the invoice. So, the discount amount is $ 2.400,00 to pay 80 days earlier (80 days = 90 days – 10 days), and the supplier will receive 98% of the original amount of the invoice.

The effective annual rate (EAR) based on simple interest (SI) is as follows:

$$\mathit{EAR}\left(\mathit{SI}\right)=2\%\ast \frac{365}{80}=9,1\%$$E27

The effective annual rate (EAR) based on compound interest (CI) is as follows:

$$\mathit{EAR}\left(\mathit{CI}\right)=\left[\left\{{\left(1+\frac{2}{100-2}\right)}^{\frac{365}{80}}\right\}-1\right]\ast 100\%=9,7\%$$E28

This example illustrates the impact of small discounts in a supply chain finance program on an annual base for financing a company [13].

Suppose the payment term in the example is lowered to 60 days (ceteris paribus), the outcome of the effective rate will be 14,6% (simple interest) and 15,9% (compound interest). Similar calculations can be made when the discount rate is increased to 3% in the original example (ceteris paribus), the outcome of the effective rate will be 13,7% (simple interest), and 14,9% (compound interest).

5. Business process, ERP, and IT platforms

As supply chain finance is event-driven [3], we have to process the three events (buying, production, and selling) into the business processes of the focal company [30], as was plotted at the beginning of this chapter in Figure 1.

Input of resources (such as raw materials, components, labor force, and energy) will lead to transformation by production and finally end to the sales of final products (and services). This is a nutshell of the basics of operations management [30], in which topics like just in time (JIT), lean operations, material requirement planning (MRP), total quality management (TQM), and inventory management are integrated into one business system: enterprise resource planning (ERP). Enterprise resource planning (ERP) integrates business functions, such as planning, operations (execution), and control (including the accounting function) (Figure 2).

Figure 2.

Overview of supply chain management based on Leeman [22].

Nowadays enterprise resource systems from the different companies in a supply chain are connected via systems like electronic data interchange (EDI) and IT-cloud platforms [31]. An IT-cloud platform (Tradecloud [32]) is not only connecting financial events such as invoicing and payments in the supply chain, but also improving collaboration in the supply chain (by sharing forecasts by the focal company to tier-1 and tier-2 suppliers) and bringing back process time and processing costs of invoices in the supply chain of order to cash (O2C) [33] and purchase to pay (P2P).

The integrated overview of all business processes will be presented in Figure 3 (a conceptual model of supply chain finance).

Figure 3.

Conceptual model of supply chain finance (developed by the author).

The latest development in this topic [34] is called Sales and Operational Planning (S&OP), so in this latest approach, there is a focus on coordination (in the ecosystem), planning (an integrated and dynamic structure), technology (as a transformation enabler), and collaboration (in an engaged planning culture). So, S&OP includes the focal company, their suppliers, and their customers to a more resilient approach in their supply chain to deal unstable environment (we will come on that later in the section about the VUCA world).

6. Supply chain finance instruments and banking

In Table 6 an overview is provided for the most common supply chain finance instruments. The overview is composed by the author, and based on De Boer et al. [18], EBA [3], and Hollinger et al. [35].

Management level	Supply chain finance instruments
Strategical	• Take ovar; • Merge; • Joint venture; • Minority interest
Tactical	• Equipment financing; • Pay on production; • Supply risk sharing; • Currency risk sharing; • ERP; • IT platform
Operational	• Working capital management; • Dynamic discounting; • Reverse factoring; • Factoring; • Inventory financing; • Crop financing; • Purchase order financing; • Trade finance instruments; • Letter of Credit (LC); • Bank guarantee; • Documentary credit; • Bank payment obligation (BPO)

Table 6.

Supply chain finance instruments (developed by the author).

We will select five supply chain finance instruments:

1. Minority interest

2. Equipment financing

3. Reverse factoring

4. Dynamic discounting

5. Crop financing

The choice of these five instruments is based on the fact that they are most commonly used [36], in a more specialized report [3] more detailed information about most instruments can be retrieved.

Minority interest is used when a company like ASML [37]—that produces equipment for the chip industry—has investors (shareholders) that are important buyers such as chip producers. The reason that chip producers would like to have a stake in ASML is based on the fact to be sure of the future supply of equipment and reasons for co-development and innovation.

Equipment financing is often used in the supply chain, where the focal company is financing equipment (such as harvesters, tractors, and trucks) to help (agricultural) suppliers to finance this kind of capital expenditure (often in combination with a bank loan)). The main reason for a focal = company to use this type of tactical instrument is to be sure of future services and/or delivery of products from the suppliers.

Reverse factoring is one of the traditional supply chain finance instruments and is often combined with a financial institution (e.g., a bank) as an intermediary. The following five steps (see Figure 4) are normally in a reverse factoring program: The buyer places the order (step 1), the order is processed by the supplier and delivered to the buyer/focal company (step 2), the supplier sends the invoice to the buyer (step 3) with a payment term of 90 days (and with 1% discounts with payment within 5 days), the supplier receives payment within 5 days from the bank with a discount of 1%, finally (step 5) the buyer pays the full amount (100%) to the bank within 90 days (payment term). The effective annual rate (EAR based on compound interest) is 4.8% in this case.

Figure 4.

Reverse factoring in five steps (developed by the author).

Dynamic discounting is a method where suppliers receive early payment from the focal company. The discount rate is based on a schedule provided by the focal company. The supplier can select a date and corresponding discount rate and receive the amount of the invoice minus the selected discount rate. Table 7 is an example provided by a dynamic discounting system; we observe that the discount rate is a function of time (day paid earlier).

Discount rate	Days paid earlier
2,0%	20
1,9%	19
1,8%	18
1,7%	17
1,6%	16
1,5%	15
Etc.	Etc.
0%	0

Table 7.

Example of dynamic discounting (developed by the author).

Finally, crop financing is a supply chain finance tool used in (international) agricultural business [35], we observe in practice that besides the producers (often small farmers) a focal company (often a large multinational) and a financier (e.g., bank), during the growth season the farmers need liquidity. The liquidity is provided with a pre-payment via often a bank loan or a promissory note (IOU) issued by the framer, where the collateral is the future harvest of the crops. The World Bank Group (for instance IFC, International Finance Corporation) developed a lot of customized solutions for agricultural finance [38].

7. State-of-the-art discussion: VUCA world, FinTech, and sustainability

Volatility, uncertainty, complexity, and ambiguity (VUCA) are four characteristics of the world we live in Ref. [39]. We observe more risks in the three supply chain flows, because of wars, scarcity of fossil fuels, large accidents (like recently in the Suez Channel), volatility of currencies, etc. Supply chain finance is often involved, because of financing (larger) inventories for a longer period, financing suppliers (especially so-called deep-tier finance), dealing with increased risks, etc.

An example of the leading principles (green, resilient, and inclusive) of a supply chain finance program can be found in the Trade and Supply Chain Finance Program of the Asian Development Bank [17].

Sustainability in supply chain finance has at least two dimensions:

1. Sustainability in finance.

2. Sustainability in supply chains.

Sustainability in finance was already discussed in paragraph 4 about corporate finance based on the publications of Schoenmaker and Schramade, introducing their integrated value model (in which financial value, social value, and ecological value were integrated). Similar approaches can be found in Gleeson-White [40] and Raworth [41] introducing besides financial value, other sorts of values based on externalities (e.g., social value and ecological value). Externalities are positive and/or negative influences on consumers and/or producers that are not reflected in the market price [42]. All those developments of integrated value are materialized in integrated annual reports for businesses [43].

Another trend in finance is to include externalities in the cost price of the product or service, this concept of true costing [44]. So, the true cost price of the product includes the costs of goods sold (such as procurement costs and direct labor costs), the costs of social externalities (such as extra labor costs for a fair wage), and environmental externalities (additional costs of preventing pollution or any cost to recover harm to the environment). This has a huge impact on the traditional way of calculating revenues and cost, and the traditional way [45], of calculating profit and economic value according to EVA^® [8].

Sustainability in the supply chain can be demonstrated by the “butterfly” model of the Ellen MacArthur Foundation [46] by using the following loops:

• Maintenance

• Reuse/Redistribute

• Refurbish/Redistribute

• Recycle

The goals of the loops are to lower the use of virgin material, have lifetime extension, and minimize waste of production (and consuming products). A similar approach [47] can be read in Figure 5, where the restoration cycles and the regeneration cycles are plotted.

Figure 5.

Sustainable logistics [47].

The restoration cycle consists of the following sub-cycles:

• Share, maintain, and prolong

• Reuse and redistribute

• Refurbish and remanufacture

• Recycle

The regeneration cycle consists of the following sub-cycles:

• Biogas

• Biochemical feedstocks

In both cycles, it is the general goal to reduce pollution and lower extraction of virgin raw materials [46], in Figure 5 this is made more specific for logistics and supply chain management [47].

The consequence of such new logistics models is that they have an impact on the product or service that will be offered. For instance, you need equipment or trucks as a company, in traditional business you buy such an investment from your supplier. In new business models [48], you can think about all sorts of leasing (operational or financial lease) or make a contract for the use of equipment or a truck as a service (in the case of the truck: Mobility as a Service or MaaS, or with a computer with software: SaaS). This has an impact on sales and inventories (supplier) and fixed capital and costs (buyer), as well as on the financial needs of suppliers and buyers.

In the logistics trend radar 6.0 of DHL [49] about 40 trends are playing an important role in the logistics industry, some of them a link to sustainable supply chain finance, such as:

• Circularity

• Environmental stewardship

• Sharing economy

• Blockchains

• Cloud & Application Programming Interfaces (APIs)

• Next generation wireless

• Physical Internet

• Digital marketplaces

• Supply chain diversification

• …

DeSmet [50] introduces the supply chain triangle of service, cost, and cash, in his model he develops the relationship between service and revenue, capital employed (e.g., net operating working capital), and cost into one formula: ROCE (Return On Capital Employed).

$$\mathit{\text{ROCE}}=\frac{\mathit{\text{Revnues}}-\mathit{\text{Cost}}}{\mathit{\text{Capital Employed}}\left(=\mathit{\text{Fixed Assets}}+\mathit{Net}\mathit{\text{Working Capital}}\right)}\ast 100\%$$E29

DeSmet’s model was adapted by two practitioners [51] into a pentagon:

So, five forces play a role in the value metrics of supply chain management: services (and sales), costs, capital employed, risk and resilience [52], and sustainability from a more integrated value perspective [28].

Another new development is the combination of IT-cloud technology and the role of financiers, called FinTech [53]. The advantages of the role of FinTech companies are more efficient and effective, introducing new technology systems such as distributed ledger technology (e.g., Blockchain) and introducing new business models.

8. Conceptual model of supply chain finance

A conceptual model is defined as a conceptual model consists of units with attributes (concepts, theoretical constructs) and relations between those attributes and concepts based on theoretical constructs’; and has the following functions [54]:

1. What theoretical concepts (existing body of knowledge) are used in this research?

2. Helpful in structuring the problem.

3. Linking to a system, according to system theory (cause and effect relationships)

A similar approach to the definition can be found in Verschuren & Doorewaard [55] in which assumed causal relationships (based on existing theories) between the core concepts of research are plotted, as shown in Figure 3.

Of course, in a conceptual model, the eclectic approach will be used, eclectic means you combine different (parts) of theories for the conceptual model [54].

The goal of the conceptual model of supply chain finance (see Figure 6) is to understand the main financial (and non-financial) flows, based on real events (such as buying, producing, and selling) in the supply chain, and their impact on business flows in the focal company, and at the end the impact on: static and dynamic liquidity (of the net operating working capital), and the integrated value performance (financial value or profit, social value, and environmental value).

Figure 6.

Five forces in logistics/supply chain management.

The model has one important limitation, the impact of sustainability (see Figure 6) on the supply chain is not plotted in Figure 3, otherwise, the model would have been more complex (than it already is).

The conceptual model of supply chain finance is constructed based on an input-transformation-output model [30], so we start reading Figure 3 from the left to the right. We observe the following parts in the conceptual model:

8.1 Supply chain events (Inputs A)

An important input is the twisted supply chain (see also Figure 1) on the left-hand side, starting with purchases, production, and sales. This is also the start of the Purchase to Pay (P2P) and the Order to Cash (O2C) processes. The supply chain events are:

• Buying of raw materials and components from suppliers, which results in the purchase-to-pay (P2P) process.

• Transformation respectively production from raw materials and components to work in progress (WIP) and finalized into products and services.

• Selling (Including distribution) of final products and services to the customers.

Each sub-process has an impact on creditors/account payables, inventories and debtors/account receivables.

8.2 Business processes (throughput/transformation)

From the supply chain events (Step I) we arrive at the box of business processes, in which all sorts of data are processed by the focal company. Data of incoming invoices (from suppliers), outgoing invoices (to customers), and production (from inventories) will have an impact on the different business systems of the focal company. We will use the enterprise resource planning (ERP) system as the overall business system that includes functionalities such as accounting (ledgers), warehouse management system (WMS), and materials resource planning (MRP). Often the structure/design of this business application is according to principles [30] such as lean management, just-in-time (JIT), and sales & operational planning (S&OP).

This has an impact on the supply chain finance metrics (see also step IV) according to the cube model [1], the value of net operating working capital (NOWC), duration or time, and the interest rate (e.g., WACC) play a role in the connecting three boxes in this section of the conceptual model.

8.3 Financial data (inputs B)

Another important input is the Capital Asset Pricing Model (CAPM) data of the focal company and from the macroeconomic environment. The data of the capital asset pricing model are exogenous data, which implies the focal company cannot influence them. Part of the data is strategically chosen by the strategic management of the company (Chief Executive Officer and/or Chief Financial Officer) and is data for the operations in the focal company. The financial structure of the focal company (materialized in the ε or equity ratio and λ or debt ratio) is an example of such a strategic choice by the executive management.

The market risk of the company (β) is a yardstick for the risk of the focal company compared to the stock market, it informs us how volatile the share of the focal company is (compared to the stock market).

The risk-free interest rate (R_RF), the required market return (R_M), as well as the interest rate on loans (R_D) are dictated by the financial market. So, the focal company does not influence those factors.

Finally, the government determines the corporate tax rate (τ).

All these inputs result in the CAPM basic formula of the return on equity:

$$R_E=R_{\mathit{RF}}+\beta \ast \left(R_M-R_{\mathit{RF}}\right)$$E30

This will continue in the weighted average costs of the capital formula:

$$\mathit{\text{WACC}}=R_E\ast \epsilon +R_D\ast \lambda \ast \left(1-\tau \right)$$E31

The WACC formula will be used to calculate EVA^® in the next step (Step IV)

8.4 Supply chain finance outcomes or SCF metrics (outputs)

In the final step of the supply chain finance conceptual model, we have left two final boxes (one on the right-hand top and one on the right-hand bottom). One box is about static and dynamic liquidity. In the supply chain finance dynamics plays an important role (Cash to Cash cycle), in which the three components of net operating working capital are expressed in time: DIO, DSO and DPO.

The static ratio such as Quik Ratio (QR), Current Ratio (CR), and the NOWC turnover ratio are not so much used in supply chain finance ratios, although they might be quite relevant for the CFO of the focal company to evaluate the financial needs of the company in the short term of the business [8].

From the business processes (Step 2) and the CAPM data (Step 3) the costs of net operating capital can be calculated, using the cube model [1].

The final box (right-hand bottom) is about the integrated value model [28]. The financial value is calculated based on the traditional finance theory [8] with metrics such as EVA^®, ROE, and ROCE. All financial metrics represent the Anglo-Saxon paradigm of the slogan “Cash is King.”

The social value measures the added value of nonfinancial stakeholders such as suppliers, workers, and customers. That are not materialled in the financial value. Social value is typically an externality [42]. There are studies (True [56]) about the social costs of for instance a cotton t-shirt (estimated at around € 13), often based on a few types of cheap labor. Also, multinational enterprises try to estimate social value (often based on non-financial metrics [57].

The environmental value measures the impacts on the planet (the well-known triple bottom line: people, planet, and profits). The impact on the environment can be measured during the extraction from nature (such as extraction of oil and metals), during the production (deforestation, dehydration, pollution of water, air, and soil) and the economic life of products (waste of materials like glass, paper, batteries, etc.).

A big issue is also her to find a financial and/or a nonfinancial metric to measure the environmental impact. In a case study of the Impact Institute, we observe an estimation of environmental costs of cotton t-shirts of about € 5 (True [56]). In the Annual Report 2022 of Philips, we observe a serious attempt to quantify environmental impact often in a nonfinancial way in the ESG statements [57].

In the logistics industry, we observe huge attention to downsizing the impact of pollution of different transport modalities (sea, air, and road).

Recently historical foundations, current research, and future developments were published by Caniato et al. [36]. In one of the current eight studies, there was some attention to a framework; and one of the future developments is about real-time information and the use of blockchain (distributed ledger technology). A case study in which this was implemented by a focal company (Heering-Holland) in a supply chain using an IT platform (Tradecloud-One) was quite recently published by Jansen et al. [31].

9. Conclusion

The author developed in this chapter a few perspectives on supply chain finance. The basic model of supply chain finance was discussed, based on supply chain management/logistics management, finance and control, ERP & IT platforms, and supply chain finance instruments (including FinTechs).

This basic model of supply chain fiancé is very financially driven (Cash is King), while nowadays financial models are based on the integrated value concept. In the integrated value concept, financial value, social value, and environmental value are combined into one model.

Finally, the world is turbulent and supply chains have to deal with risk and volatility to be resilient in such a VUCA world. This will also have an impact on the traditional way supply chain finance looks at their instruments and business models.

Acknowledgments

The author thanks the Supply Chain Finance Community, the Research Group of Supply Chain Finance at Windesheim University of Applied Sciences, and the Research Group of Logistics and Alliances of HAN University of Applied Sciences.

Conflict of interest

The author declares no conflict of interest.

Notes/thanks/other declarations

None.