Research on supply chain finance products at standard chartered bank

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH --- NGUYỄN THU MINH RESEARCH ON SUPPLY CHAIN FINANCE PRODUCTS AT STANDARD CHARTERED BANK NGHIÊN CỨU VỀ SẢN PHẨM TÀI TRỢ CHUỖI CUNG

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH

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NGUYỄN THU MINH

RESEARCH ON SUPPLY CHAIN FINANCE PRODUCTS AT

STANDARD CHARTERED BANK

NGHIÊN CỨU VỀ SẢN PHẨM TÀI TRỢ CHUỖI CUNG ỨNG

TẠI NGÂN HÀNG STANDARD CHARTERED

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH

-

NGUYỄN THU MINH

RESEARCH ON SUPPLY CHAIN FINANCE PRODUCTS AT

STANDARD CHARTERED BANK

NGHIÊN CỨU VỀ SẢN PHẨM TÀI TRỢ CHUỖI CUNG ỨNG

TẠI NGÂN HÀNG STANDARD CHARTERED

Chuyên ngành: Quản trị kinh doanh

Mã số: 60 34 01 02 LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS NGUYỄN NGỌC THẮNG

HÀ NỘI - 2019

DECLARATION

The author confirms that the research outcome in the thesis is the result of author‟s independent work during study and research period and it is not yet published in other‟s research and article

The other‟s research result and documentation (extraction, table, figure, formula, and other document) used in the thesis are cited properly and the permission (if required) is given

The author is responsible in front of the Thesis Assessment Committee, Hanoi School of Business and Management, and the laws for above-mentioned declaration

Date………

of business and management (HSB)

Secondly, I am extremely grateful to all of the lecturers from the Department

of Business Administration - HSB for providing me with research methods and professional knowledge during the course, especially the active and creative research skills

My appreciation also goes to the teachers in the thesis review committee for giving me valuable ideas during my thesis completion process

My profound gratitude is also conveyed to my instructor for his helpful assistance and guidance This thesis could have never been completed without his enthusiastic counsel and support

Despite the efforts during the research period, there are still many limitations

in the thesis I would hope to receive valuable comments from the teachers and workers to make this essay more completed

Thank you very much./

Ha Noi, 2019

TABLE OF CONTENTS

DECLARATION i

ACKNOWLEDGEMENTS ii

TABLE OF CONTENTS iii

ABBREVIATION v

CHAPTER 1: INTRODUCTION 1

1.1 Rationale of the study 1

1.2 Research objectives and research questions 3

1.3 Scope of the study 3

1.4 Significance of the study 3

1.5 Structure of the study 4

CHAPTER 2 LITERATURE REVIEW 5

2.1 Supply chain management and financial aspects 5

2.1.1 Supply chain management 5

2.1.2 Financial impacts 6

2.2 Supply chain finance 7

2.2.1 Definition of supply chain finance 7

2.2.2 Framework of supply chain finance 9

2.2.3 Types of supply chain finance 11

2.3 Supply chain finance benefits and risks 20

2.3.1 Benefits 20

2.3.2 Risks 20

2.4 Factors affecting supply chain finance 21

2.5 The ecosystem for supply chain finance 25

CHAPTER 3 METHODOLOGY 27

3.1 Research philosophy 27

3.2 Research approach 28

3.3 Research design 29

3.5 Research method 30

3.6 Data collection 31

3.6.1 Secondary data 31

3.6.2 Primary data 32

3.7 Questionnaire setup 32

3.8 Data analysis technique 35

CHAPTER 4 ANALYSIS AND RESULTS 36

4.1 Introduction of Standard Chartered Bank‟s trade finance 36

4.1.1 Overview of Standard Chartered Bank (SC Bank) 36

4.1.2 Trade finance at SC Bank 38

4.1.3 The ecosystem for supply chain at Standard Chartered 46

4.2 Analyzing on factors effected to supply chain finance in SC Bank 47

4.2.1 Description of the sample 47

4.2.2 Operational models 48

4.2.3 Products and services 50

4.2.4 Sales channels 52

4.2.5 Human resources 54

4.2.6 Credit risk management 55

4.2.7 Management decision 59

CHAPTER 5 CONCLUSION AND RECOMMENDATION 61

5.1 Conclusion 61

5.2 Recommendation 62

5.3 Limitations and recommendations for future researches 65

REFERENCE 67

APPENDIX QUESTIONNAIRE 72

ABBREVIATION

LIST OF TABLES

Table 2.1: Summary of SCF definitions 8

Table 2.2: The evaluation checklist of SCF program 23

Table 3.1: The evaluation checklist of SCF program in SC Bank 33

Table 3.2: Minimum sample size based on nature of qualitative study 35

Table 4.1: Standard Chartered Strategic Priority 37

Table 4.1: Trade Finance products – Import and Export Services 39

Table 4.2: Summary Description of the sample 47

Table 4.3: Evaluation of operational model of SCF program in SC Bank 48

Table 4.4: Evaluation of products and services of SCF program in SC Bank 50

Table 4.5: Evaluation of sales channels of SCF program in SC Bank 53

Table 4.6: Evaluation of human resources of SCF program in SC Bank 55

Table 4.7: Evaluation of credit risk management of SCF program in SC Bank 55

Table 4.8: Evaluation of credit risk management of SCF program in SC Bank 59

LIST OF CHARTS AND FIGURES

Figure 2.1: Supply chain flows 6

Figure 2.2: The simplification of SCF framework 9

Figure 2.2: SCF Lending Framework 11

Figure 2.3: The complete SCF portfolios 12

Figure 2.4: Distribution of SCF Instruments 13

Figure 2.5: Reverse Factoring work flow 14

Figure 2.6: Dynamic Discounting Process Flow 16

Figure 2.7: Receivable Purchase Process 17

Figure 2.7: Invoice Discounting 18

Figure 2.8: Trigger points for the provision of financial supply chain services 19

Figure 2.10: Competency framework of a successful SCF program 23

Figure 2.11: The ecosystem of supply chain finance 26

Figure 3.1: The research onion model 27

Figure 4.2: SC Bank Supply Chain Finance Model 45

Figure 4.3: Network Driver – Ecosystem 46

Figure 4.3: SC Bank Products and Services 51

Figure 4.4: Performance highlights of Business Segment Corporate & Institutional Banking 52

Figure 4.5: Volume New-to-bank client on Commercial Banking Segment 54

Figure 4.6: Supplier finance solutions benefits over traditional bilateral funding in multiple ways 56

Figure 4.7: Supplier finances process in SC Bank 57

Figure 4.8: Risk Management Approach 59

CHAPTER 1: INTRODUCTION

The first chapter explores current development of Supply Chain Finance (SCF) The importance of SCF is briefly presented in this chapter The researcher also provides rationales of choosing the studied topic Research objectives and research questions are proposed This chapter highlights the scope of work and what the contribution

of the thesis

1.1 Rationale of the study

The role of supply chain management has been increasing over the time given to the fact that the competition in business world becomes more intense To compete well

in the market, the organizations must pay attention to their supply chain (SC) and to identify the way of effectively and efficiently managing their SC (Marak and Pillai, 2018) Regarding to the importance of SC and supply chain management (SCM), there are tremendous efforts from previous researchers to reveal how to improve physical and information flows between the focal companies and their suppliers and customers but there are less number of empirical evidences to be developed to address financial aspects of SC and SCM (Bailey and Francis, 2008; Lamoureux and Evans, 2011; Caniato et al., 2016)

Recently, supply chain finance (SCF) is more and more critical products and services to the organizations, especially after the global financial crisis which was happened in late of 2008 (Marak and Pillai, 2018) Global financial crisis raised the concerns to the banks and the investors regarding to high default rate from their loans In this context, SCF market has been changing in the way of trade credit extension but it leads to unexpected result as weak suppliers are subjected to higher payment period or get delaying in their repayment (Fabbri and Klapper, 2016) The behavior of weak suppliers result to the higher risk in SCF process (Raddatz, 2010; Boissay and Gropp, 2007) Therefore, the need of revising current SCF management model and identify the ways to improve SCF process are urgent need

During the time, there are literatures which are developed about SCF (Stemmler and Seuring, 2003; Hofmann, 2005; Gomm, 2010) Some empirical evidences are provide in the way of defining SCF, determining of the benefits from participating SCF programs, and proposing SCF‟s initiatives (Gelsomino et al., 2016; Xu et al., 2018) However, previous researchers are less touching to the outcome of SCF as well as determining key successful factors to SCF programs

For chief executive officers focusing on profitable growth, working capital control has become a key metric Working capital represents the amount of day-by-day

operating liquidity available to a business Supply chain finance can be defined (EBA, 2013) as the use of financial instruments, practices and technologies for optimizing the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners The development of advanced technologies to track and control events in the physical supply chain creates

opportunities to automate the initiation of SCF interventions

Supply Chain Finance aims to improve the financial efficiency of the supply chain and substantially reduce the working capital of both buyers and suppliers It allows buyers to extend payment terms while providing suppliers access to better financing rates It creates a true win – win for the parties involved as one of the most attractive tools for companies to diversify funding sources, enrich and solidify the relationships with their trade partners.There are benefits of having a banking partner with local and global knowledge of cash and trade It is also important to retain an advisor that can ensure compliance and regulatory adherence as well as the operational infrastructure and product capability that is going to have financial impact (Deutsche Bank 2016)

As one of biggest providers of trade product with its global strategy, Standard Charter Bank (SC Bank) is offering comprehensive suite of SCF solution SCF at Standard Chartered Bank is a partnership with selected corporate clients to provide working capital support for their chosen suppliers and buyers The strength of the client‟s supply chain linkage (i.e the commercial arrangements and relationships

suppliers/buyers This is very different from the traditional practice of standalone risk evaluation which was focused only on suppliers/buyers financial strength and historic financial performance.( Standard Chartered Bank, 2016)

1.2 Research objectives and research questions

Given to the problem statement above, the thesis‟s research objectives are:

- To define a framework and a checklist in which key successful factors to SCF programs to be developed and measured

- To determine the desirable outcome of SCF programs

- To examine how key successful factors to be maintained in the case study of Standard Chartered Bank

Then, the thesis addresses the following research questions:

- What are key successful factors to SCF program?

- What are the desirable outcomes of SCF programs?

- How key successful factors to SCF program to be maintained in Standard Chartered Bank?

- What are the recommendations to the financial managers in Standard Chartered Bank to effectively maintain SCF program?

1.3 Scope of the study

The scope of the thesis is chosen as below:

- Content of the study: Supply chain finance programs in global commercial banking industry

- Location of the thesis: Standard Chartered Bank at Group level

- Time of the thesis: February 2018 onwards

1.4 Significance of the study

The thesis explores key successful factors to SCF programs and examine how these factors to be maintained in Standard Chartered Bank The top management team and financial managers in commercial banks will understand the key concept of SCF and what the key successful factors Other researchers gain benefit from reading the thesis since they can utilize the results extracted from this thesis as reference in their own studies

1.5 Structure of the study

The thesis is developed with five chapters

Chapter I Introduction

The first chapter explores current development of SCF The importance of SCF is briefly presented in this chapter The researcher also provides rationales of choosing the studied topic Research objectives and research questions are proposed This chapter highlights the scope of work and what the contribution of the thesis

Chapter II Literature Review

The second chapter mentions the concept of supply chain and supply chain management before going further to the definitions of SCF Then, framework of

SCF is discussed along with its key components, including the actors, the levers, and the objects The researcher provides the understandings about what the key

successful factors of SCF in this chapter

Chapter III Research Methodology

The third chapter proposes research methodology to be used to fulfill research objectives and to answer research questions effectively The data collection method and process are also proposed in this chapter The method of data analysis and the sample size for data collection process are mentioned accordingly

Chapter IV Analysis and Results

The fourth chapter aims to extract the findings from the data collection It covers the discussion of the case study of Standard Chartered Bank and how key successful factors to SCF programs to be maintained in the commercial bank This chapter covers obstacles in the bank‟s managers regarding to the implementation and operation of SCF programs

Chapter V Conclusion and Recommendation

The last chapter summarizes key findings from previous chapters It is also designed

to provide the recommendations to the banks‟ managers to manage their SCF process and to develop the SCF programs effectively by offering the most suitable products to bring benefits for their customers and to be able to position their

CHAPTER 2 LITERATURE REVIEW

The second chapter mentions the concept of supply chain and supply chain management before going further to the definitions of SCF Then, framework of SCF is discussed along with its key components, including the actors, the levers, and the objects The researcher provides the understandings about what the key successful factors of SCF in this chapter

2.1 Supply chain management and financial aspects

2.1.1 Supply chain management

To explore the concept of supply chain management (SCM), it is necessary to collect the understandings about supply chain (SC) According to Christopher

(1998), SC is defined as a network which is developed by the organization in

order to manage both upstream and downstream activities In the manufacturing

industry, SC term refers to the process of transferring raw materials from the suppliers to the manufacturers and the process of delivering final products from the manufacturers to the distributors or the customers (Beamon, 1998) SC is also perceived as the connection which is established by the organization to connect every part of its businesses and to deliver the products and services to the customers (Bridgefield Group, 2015) Moreover, SC includes the information inflow between the business of the organization and between the organization and its customers (Assey, 2012; Little, 2015) In this context, SC creates a bridge between the suppliers, the manufacturers, the distributors, and the customer together (Chow and Heaver, 1999) Moreover, SC includes financial flows and it is one of the most important elements to ensure proper functions of operational activities (Ayers, 2001)

Figure 2.1: Supply chain flows

Source: Hofmann&Belin, 2011

In order to manage SC, the organization defines and implements a management framework and names it as SCM to ensure that all activities in this framework run smoothly and effectively (Langley et al., 2001) The objective of establishing SCM is not limited to the management of the activities but also expanding to the identification

of alternative options which help to optimize the business flow (Ganeshan and Harrison, 1995) SCM is positioned in the highest hierarchy of Fith Party Logistic Model (5PL) and it is developed from self-sufficient logistics function (1PL) to capacity provider (2PL) to outsourced logistics service (3PL) to integrated logistics service (4PL) to SCM (5PL), according to Ogorelc (2007) In nowadays business, SCM has vital role because of the organization needs to reduce the error happed in its business process to compete with other competitors (Cohen and Russel, 2004)

In this thesis, the concept of SCM is taken from Mentzer et al (2001) and it is defined as the combination of the organization‟s stakeholders, the cooperation and the collaboration between them in order to optimize the flows of goods, information, and financial resources entirely In addition, the thesis focuses on supply chain finance (SCF) topic because of financial performance becomes critical concern SCM managers (Pfohl and Gomm, 2009)

2.1.2 Financial impacts

SCM impacts significantly on the financial performance of the organization (Ellram and Liu, 2002) Such impact of SCM is affirmed since the organizations today are

growing their businesses with more business integration, global business context, and the establishment of additional functions and the organizations need to manage its SC effectively to reduce operating cost and cycling time and effective financial resource usages (Hofmann, 2005) According to Sweeney (2004), financial aspect

of SCM reflects how the funds flow to be managed across entire SC system and between the suppliers, the distributors, and the customers The financial flow along the chain directly impacts on working capital management and business performance Moreover, financial and economic downturn which were happened in the last decade enforce the organizations to conduct cost cutting and to urgently identify the new opportunities to reach their business goals, leading to the development of and the interests towards SCF (Kleemann, 2018)

2.2 Supply chain finance

2.2.1 Definition of supply chain finance

There is no universal concept of SCF, showing through the fact there are more than

30 different definitions for this term (de Boer, 2017) The main reason of so many concepts of SCF refers to broad field of solutions and techniques used in SCF and the number of studies about SCF is still limited (Kleemann, 2018) In this section, the researcher would like to identify and to capture some comprehensive definitions

of SCF

Hofmann (2005) defines SCF as the collaboration of two or more organizations in which they together create value in SC by managing financial resources through different financial means Pfohl and Gomm (2009) view SCF as the actions to optimize financial resources used in SC processes and to increase the value for all parties involved into these processes PricewaterhouseCoopers (2009) defines SCF

as a balanced approach which is developed to reduce the risks happened in SC and

to improve the business relationships among parties and this approach utilizes intermediary tools to enhance working capital in the transaction between the buyers and the sellers Seifert and Seifert (2009) consider SCF as innovative financial tools

to reduce working capital Hofmann and Belin (2011) study about SCF term is translated to the optimization of working capital in SC Camerinelli (2011) define

SCF as financial products and services which are developed by financial institutions

in order to facilitate both physical and information flows of SC Wuttke et al (2014) refer SCF to cash flow optimizing actions which are undertaken for upstream activities in SC Euro Banking Association (2014) provides a comprehensive definition for SCF as the utilization of financial instruments, financial practices, and financial technologies to optimize working capital for the parties involved into an

SC On the other hand, SCF involves all financial activities and elements in an entire SC (Euro Banking Association, 2014)

Table 2.1: Summary of SCF definitions

Source: Martin Jemdahl, 2015

In summary, the concept of SCF is depended on the level of interpretation in which

a broad interpretation of SCF is associated with financial management of SC (Hofmann, 2005; Pfohl and Gomm, 2009; Gomm, 2010), a mid-level interpretation views SCF as financial instruments such as working capital financing, trade financing, supplier financing, and fixed asset financing (Aberdeen Group, 2006; Atkinson, 2008; Camerinelli, 2011), and finally a narrow interpretation addresses

buyer-centric supplier payables financing solution (Demica, 2009; Morna, 2010; Jacquot, 2011)

2.2.2 Framework of supply chain finance

In the thesis, framework of SCF is taken from the study of Kleemann (2018) in which there are three entities, namely the actors, the levers, and the objects This framework is depicted as in the figure below:

Figure 2.2: The simplification of SCF framework

Source: Kleemann (2018)

2.2.2.1 Actors

SCF framework involves the actors which are characterized by primary members and supportive members (Kleemann, 2018) Two levels of members in the actors are developed upon on supply chain network structure provided by de Boer (2015)

In more detail, SC network today is developed sophistically in which it is not limited to the relationship between the organization with single supplier and customer but expansion of different tier of suppliers and customers According to de Boer (2015), a focal organization cooperates with main suppliers and they are so-called as Tier 1 suppliers and each Tier 1 supplier has its suppliers or Tier 2 suppliers and so on Regarding to customer side, this framework is the same with the participation of Tier 1 customers and Tier 2 customers and so on In SCF

framework of Kleemann (2018), focal company is determined as primary member

The actors

Primary members Supportive members

The Objects

Assets Operating working capital

The Levers

Duration Volume Capital cost rate

and all its Tier 1 suppliers and Tier 1 customers and supportive member is considered as all Tier 2 suppliers and Tier 2 customers

2.2.2.2 Objects

SCF framework of Kleemann (2018) involves the objects with two primary financial instruments, including the asset and the operating working capital According to Pfohl and Gomm (2009), SCF is financial solution which is delivered

by financial institutions to finance fixed assets and working capital It is perceived that working capital is the value of current assets or how it is used to finance for long-term sources (Wieczorek-Kosmala et al., 2016) A simple formula of working capital is derived from the net off between current assets and current liabilities of the organization According to Kleemann (2018), the importance object in SCF framework is to manage the cash conversation cycle (CCC) which measures how fast the financial returns to the organization‟s account balance

In fact, CCC is associated tightly with working capital management in the organization and it reflects the gap in time between the collection of sales and the expenditures of goods (Padachi, 2006) A generic formula of CCC is the sum between days of sales pending and days of sales in inventory after deduced days of payables pending As result, CCC is either positive or negative value Positive CCC indicates that number of days for paying the financial obligations is lower than the number of days for receiving payment from the customers and negative CCC captures a contrast situation (Hitchinson et al., 2007) In order to keep negative CCC, the organization should identify the ways of reducing time in inventory, collecting account receivables as early as possible, and negotiating to the borrowers

in term of payment terms (Bodie and Merton, 2000)

2.2.2.3 Levers

SCF framework mentions the levers which imply duration, volume, and capital cost rate According to Pfohl and Gomm (2009), the multiplication of these implications results capital cost The explanation of capital cost, therefore, is reflected through each indicator Duration is defined as the required time that needs to be financed,

the volume refers to the value of invoices, and capital cost rate is interest rate for the financial amount used by the organization (Kleemann, 2018)

2.2.3 Types of supply chain finance

There are various events or triggers that can release cash and reduce the cost of financing in the supply chain (Global Business Intelligence, 2012) These events

or triggers are typically pre-shipment finance, shipment or in transit finance and post- shipment finance which are visualize on below Table

Figure 2.2: SCF Lending Framework

Source: Global Business Intelligent, 2012

Pre-shipment finance is made available to a supplier based on a purchase order

received from a buyer and targets the early stages of the supply chain before the invoice is provided to the buyer (Global Business Intelligence, 2012) In another words, supplier needs a working capital finance for purchasing raw material and funding operating expenses for manufacturing and labor Pre-shipment finance requires the bank to understand their customer‟ supply chains and buyer-supplier relationship in depth (Global Business Intelligence, 2012) In practice, pre-shipment insurance is required to cover the risk of bankruptcy

In-transit Finance/Inventory Finance: It may be supplier or buyer who owns

inventory needs to get financing while it is in transit Such product as managed inventory financing is an example of shipment or in-transit financing

vendor-Post-shipment finance is provided to a seller using the receivables as collateral

The seller provides shipping documents as evidence of a receivable while the bank may also require to a bill drawn on the buyer for the goods exported Most banks only offer once the invoice is approved by the buyer The window for financing is only 30 to 60 days of a 130 to 150 days of transaction (GXS, 2009) This product latter is more often known as payables finance, reverse factoring, confirming, and approved payables finance

While the market for SCF is still evolving and the definition for SCF structures and components are not well established, the categories of SCF and trade finance set out in below table are generally well accepted

Figure 2.3: The complete SCF portfolios

Source: EBA, 2014

In The EBA research it also mentioned how popular the products under SCF on the

market Following, the details of the most popular methods to be discussed

Figure 2.4: Distribution of SCF Instruments

Source: Europe Banking Association, 2014

2.2.3.1 Accounts Payable Centric (Buyer centric/led)

It is called Approved Payable Finance or Reserves Factoring; Supplier Finance; Confirming or simply Supply Chain Finance and based on the discounted payment

of accounts payable in favour of suppliers by accessing a bank‟s or a buyer‟s own liquidity Another related instrument is Dynamic Discounting, through which a buyer itself provides variable discounts for early payment of supplier invoices This type of SCF is provided by large buyers to their smaller suppliers A financial institution is used to leverage the buyer‟s credit rating to enable early payment to the suppliers This type of SCF stabilises the entire supply chain by providing continuous flow of goods from the supplier to the customer

Reverse Factoring (Approved Payables Finance)

ING Group (2008) believes that reverse factoring holds the most significant advantages of all the different types of financing tools During reverse factoring buyers provide financial and information reconciliation to key suppliers based on approved invoices, hence buyer-led financing A central technology platform is integrated into the buyer, seller and financial institution to facilitate invoice and credit note reconciliation, invoice trading and settlement between the parties

Reverse factoring is a solution that aims to reduce the risk of disruption in the collaboration of information flows, physical flow of products, and financial flow (Popa, 2013) Reverse factoring is based on factoring where suppliers sell

their receivables to factors for immediate cash The difference between traditional borrowing and factoring is that receivables are rather sold than pledged that results in

no liabilities that are credited on the suppliers‟ balance sheet Suppliers would typically sell receivables from more than one buyer, thus before factors enter an agreement

they have to evaluate buyer portfolios (Seifert et al., 2011)

Reverse factoring has three distinct characteristics from factoring First, factors

do not have to evaluate heterogeneous buyer portfolios, since it is buyer-led, and can charge lower fees Second, since buyers are usually investment grade companies, factors carry lower risk and can charge lower interest rates Third, as buyers participate in reverse factoring, factors obtain better information and can

release funds earlier (Seifert et al., 2011)

Figure 6 shows how the process of reverse factoring works During reverse factoring the buyer issues a purchase order to the supplier and the bank and the supplier delivers the goods and presents the documents The bank checks documents and notifies the buyer whether all is in order to proceed The buyer accepts and the bank advises acceptance The supplier requests to be paid early by the bank, while the buyer pays the bank back on the original due date

Figure 2.5: Reverse Factoring work flow

Source: Citibank, 2013

Dynamic Discounting

Dynamic discounting (DD) offers suppliers the early receipt of accounts payable due from the buyer in return for a variable discount Typically, the funds are provided by the Buyer from its own liquid resource

This refers to a discount policy which is often applied in SCF practices and it is developed upon on well-integrated system between the buyers and the sellers and its objective is to bring a dynamic settlement of invoices (Polak, 2012) The root of development of DD is to reduce the uncertainties related to working capital demands and it allows the suppliers to manage their cash flow effectively (Polak et al., 2012; Nienhuis et al., 2013)

DD process is also different to base case process According to Gelsomino (2016), a base case model illustrates the relationship between the buyers and the sellers through three phases The first phase is to upload the invoice and it is exchanged between the buyers and the sellers through Electronic Data Interchange (EDI) system After electronic invoice is uploaded and sent successfully to the buyers, the second step is carried out in which the buyers process necessary approval for payment The third phase refers to invoice archiving whether both the buyers and the sellers need to store the invoice after the transaction is finished Compared to the base case, DD process has some differences With the application of technologies, the sellers and the buyers can exchange Early Payment Proposal (EPP) and EPP consists of two important information, including the time of early payment will be made and the proposal of discounted value (Gelsomino, 2016)

Figure 2.6: Dynamic Discounting Process Flow

Source: EBA, 2014

Even though DD is not a distinct SCF instrument offered by banks, the existence of the technique is of interest to them For example, a bank might integrate into its cash management capabilities of DD and related liquidity Besides, the buyer may require funding at some stage and deploy its own liquidity at another (EBA, 2014)

2.2.3.2 Accounts Receivable (Suppler centric/led)

It is called such as Receivable Finance; Receivable Purchase and Invoice Discounting and Factoring Receivable Finance allows suppliers to raise finance on the basis of their receivables related to one or many buyers and thereby receive early payment, usually at a discount to the face value although various pricing structure

Factoring

Factoring was popular financial instrument in SCF before RF takes its place (Kleemann, 2018) It is defined as a type of receivables purchase whether the suppliers of focal companies to sell their discounted receivables to financial providers (EBA, 2014)

Factoring is divided into recourse and non-recourse factoring (Hoti, 2014) The main difference between recourse and non-recourse factoring is that recourse factoring provides the right to the factor to claim the money in case of the receivables purchase is default (Soufani, 2002) According to Weisel et al (2003), non-recourse factoring is developed with a mechanism of the assets to be sold to the factor and therefore business risk is transferred to the factor in case of defaults In this context, recourse factoring to become a standard asset such as commercial banking practices (Marti et al., 2001) The main outcome of factoring is to receive payment earlier generate a more predictable cash flow The seller of goods will enter an arrangement with a financial institution to receive payment earlier rather than to wait for the buyer to complete the payment in the time agreed upon The financial institution will purchase the firm‟s receivables at a discount An acceptable factoring rate is between 70% and 90% of the value of the receivables (ING, 2008)

Figure 2.7: Receivable Purchase Process

Source: EBA,2014

Invoice

discounting

Invoice discounting and factoring are very similar to each and the difference lies

in the party carrying the risk During factoring the bank carries the risk and during

invoice discounting the supplier takes the risk Credit insurance can reduce the risk of customers not paying the account receivables

One of the most used discounting terms is the 2/10 Net 30 payment agreement Here the buyer gets a 2% discount on the invoice if it is paid within 10 days instead of 30 days The only problem with this type of discounting is that e-invoicing needs to be implemented, since it will almost be impossible to pay a supplier in 10 days if invoicing is paper based (Tavan, 2012)

1 Both the supplier and the buyer agree on the sales contract

2 The supplier provides the buyer with an invoice

3 The supplier also gives a copy to the bank

4 Invoice is approved by bank and cash is provided to the supplier at a discounted rate of the invoice

5 Payment is collected by the supplier from the buyer

6 Supplier repays the bank/financial service provider

Figure 2.7: Invoice Discounting

Source: ICC Banking Commission, 2013

2.2.3.3 Bank Payment Obligation

Bank payment obligation is defined as: An unchangeable and independent undertaking of an obligor bank to pay or incur a deferred payment obligation and pay a recipient bank a specified amount at maturity following submission of all data sets required by an established baseline (Transaction Matching

acceptance of a data mismatch (International Chamber of Commerce, 2013) The bank payment obligation is a technology independent instrument based on ISO 20022 XML, used to any open matching platform such as the SWIFT Trade Service Utility platform It accounts for a legally binding, valid and enforceable payment obligation of the obligor bank to the recipient bank under the standard of law

Bank payment obligations provide for various SCF services during the earlier lifecycle of transactions, both pre- and post-shipment finance opportunities, at a more favorable rate These financing propositions include both letters of credit as well as open account trade like factoring, forfeiting, and reverse factoring/approved payables financing The bank payment obligation makes it possible for involved banks to identify triggers for the provision of risk mitigation and SCF opportunities based upon the electronic matching data as below:

Figure 2.8: Trigger points for the provision of financial supply chain services

Source: EBA,2014

The bank payment obligation follows a four-corner model between the seller‟s bank, buyer‟s bank, the seller, and the buyer rather than a three corner model where only the seller, buyer, and buyer‟s bank are involved There are three major

actions that are completed for a successful bank payment obligation: Baseline establishment, Matching, and Settlement

2.3 Supply chain finance benefits and risks

2.3.1 Benefits

The application of SCF brings the benefits to focal organizations, the suppliers, and the financial providers (Kleemann, 2018) While focal organizations receive the benefit of lower cost for the suppliers throughout better payment terms, the suppliers gain the benefit of accessing to lower capital cost and the financial providers receive lower risk for an financing (Kleemann, 2018) Other benefits of using SCF is recognized by other researchers According to Mussmann (2015), the application of SCF strengthens the relationship between the focal organizations and the suppliers and it helps to optimize days of sales outstanding from the suppliers and to mitigate the risk happening Tavan (2012) identifies that SCF helps the buyers‟ account receivables to be reduced and it allows the buyers to manage financial inputs effectively ING Group (2013) explores that supply chain instability

in both the focal organization and its suppliers is decreased after applying SCF Moreover, SCF helps each party to improve its forecast towards cash flow and better management of balance sheet (CGI Group, 2013) Anon (2009) summarizes

an empirical evidence from a bank and this researcher highlights that SCF programs with DPO brings down financing cost and help the participators to achieve negative CCC

2.3.2 Risks

Although SCF brings the benefits to the parties involved into its process, it cannot

be denies the risks from this financial scheme More and Basu (2013) identify that SCF brings risks to the parties in case of human resource quality is limited and it affects negatively to working capital management In addition, information technology is also considered as risky factor if financial transactions are processed inefficiently in SCF process (More and Basu, 2013) Casterman (2003) indicates about the importance of preparing the standards for each phase of SCF process and

developed Finally, the risk of SCF is sourced from the setup costs that the buyers need to pay, including legal cost, operating cost, and structure cost (ING Group, 2008)

2.4 Factors affecting supply chain finance

Given to the development of SCF, this section is developed to capture the factors

that are important to SCF or what the critical success factors (CSFs) of SCF are

According to Hoffer and Schendel (1978), CSFs are defined as the variables affecting to management decision and competitive position of the company in the market There are 8 CSFs which are identified and proposed by Belassi and Tukel

(1996), including clear goals, adequate resources, project management, the support from the management team, techniques to control entities inside SCF, feedback and review, and communication inside SCF

It is clearly shown that the list of CSFs proposed by Belassi and Tukel (1996) are taken from previous studies of other researchers Clear goals factor is examined by Martin (1976), Baker et al (1983), and Morris and Hough (1987) in which these researchers strongly address that SCFs should be established with clear goals, goals are defined and objectives are projectable Adequate resources in SCF is important aspect (Martin, 1976) and the resources include financial support, human resources, and facility support (Cleland and King, 1983) Project management is evaluated through what project philosophy to be selected and how project planning and review are carried out (Martin, 1976), the project schedule (Cleland and King, 1983), the leadership of project manager (Pinto and Slevin, 1989), the abilities of project managers (Sayles and Chandler, 1971), and the quality of project team (Baker et al., 1983) The support from top management is considered as important factor to SCF and it is evaluated through how top managers support SCF projects (Martin, 1976; Pinto and Slevin, 1989) and the authority from the top management

to SCF projects (Locke, 1984) Control techniques refer to control system and its functions (Sayles and Chandler, 1971), how control mechanism is established and

maintained (Locke, 1984), and planning and control techniques (Baker et al., 1983) Feedback and review is another CSF of SCF and it requires the planning and review

of the system (Martin, 1976), the project review (Cleland and King, 1983), and monitoring and feedback (Sayles and Chandler, 1971) The other CSFs are commitment and politics Commitment is determined as how the project commitment is widely known inside the organization (Locket, 1984)

Regarding to SCF, key CSFs are proposed by PricewaterhouseCoopers (2017) They are the appetite of suppliers, on-boarding process of supplier, business case, commercial offering to suppliers, information technologies, sponsorship, resources and project management, process of procure to pay, legislation, and credit rating agencies approach BSR (2017) emphasizes that SCF program in the organization is sustainable when there are goals to be developed and shared between departments, there are incentives given to the suppliers to join SCF program, the identification of financing providers, the collection of SCF performance data, the development of technology platform, and clear communication with the suppliers about SCF programs Marak and Pillai (2018) develop a categorization of CSFs to SCF, including operational factors, financial factors, relationship factors, technological factors, and information factors Operational factors include how the coordination, the value of transaction, the objectives of SCF program, and labor workforce Financial factors reflect the financial attractiveness of SCF programs, the cost, external financing availability, credit rating, and financing solutions to be developed Relationship factors consists of the trust between parties, the dependence of each party, decision making process, how risk to be shared and supply chain network Technological factors refer to the level of automating workflow inside SCF programs Informational factors address the importance of information sharing, information visibility, and the reputation of the parties involved into SCF programs Although there are many CSFs influencing SCF programs, the thesis follows a competency framework which is provided by

model, products and services, sales channel, human resources, credit risk management, and management supports/dedication and the demand for each factor

Figure 2.10: Competency framework of a successful SCF program

Source: International Finance Corporation (2017)

This framework is utilized in the thesis and it provides the research paradigm to explore how SCF program to be developed and maintained in case study of Standard Chartered Group The researcher attempts to capture the requirement of each factor which is provided by International Finance Corporation (2017) and to develop a questionnaire to capture how these factors to be managed in the bank The table below summarizes the demands for each factor

Table 2.2: The evaluation checklist of SCF program

Source: International Finance Corporation (2017)

To understand legal and To recognize which SCF

SCF Success Factors

Operational models

Products and services

Sales channels

Human resources

Credit risk management Management dedication

financial infrastructure landscape

programs are on the demand in the market

To describe product design and credit policies and implementation plan

To gain the success when launching SCF programs

services

To provide quantitative assessment of business opportunities

organizational structure with responsibilities and processes

understandings of operating and legal environment

To define which SCF programs for specific market

To develop and to choose segmentation methodologies and commercial model

To target, engage, and serve the customers in SC

Sales channels

To conduct a cost-benefit analysis for each client

To actively choose which clients to join SCF program

To develop a suitable sales outfit

To quickly manage new clients

To tailor services offering based on the client‟s business size

To optimize operating cost

at proper level

To create on-boarding mechanism

To quickly manage new clients

To provide technical and operational technical

To effectively sell and serve the customers in SC

trainings to the employees in front line

management

To develop appropriate credit policies

To better classify the clients participated into SCF programs

To collect industry benchmarks

To enhance the designation

of risk and pricing profiles

To develop collection system To minimize the loss after

Management

dedication

To develop adequate understandings of the benefits of SCF programs and to widespread the communication to various stakeholders

To align the interest of each shareholder

2.5 The ecosystem for supply chain finance

During the time, SCF is developed into an ecosystem in which it brings the benefits

to both the buyers and the sellers (More and Basu, 2013) In term of financial point

of view, it is denoted that SCF is designed to help financial institutions to identify

an individual of extending loans within supply chain process (Wang et al., 2013) In fact, SCF is developed from a traditional SCF system flow to the SCF ecosystem (Lin and Lin, 2016) In traditional SCF system, there are three flows, including goods flow, information flow, and financial flow Goods flow is from the suppliers

to the manufacturers and to retailers Information flows is shared between these players and it is flowing from enterprise resources planning system and third-party logistics providers The traditional SCF system includes the bank and financial

flows, therefore, are formulated from the retailers to the manufacturers and from the manufacturers to the suppliers

Figure 2.11: The ecosystem of supply chain finance

Source: Lin and Lin (2016)

The biggest limitation of traditional SCF system is that the banks can only provide certain loans to the suppliers or the manufacturers or the retailers On the other hand, there are no inter-company optimization of financing (Pfohl and Gomm, 2009) In this context, the ecosystem of SCF is established in which the bank provides credit extension to upstream with accounts receivable financing to the sellers as well as credit extension to downstream with accounts payable financing to

the buyers (Lin and Lin, 2016)

CHAPTER 3 METHODOLOGY

The third chapter proposes research methodology to be used to fulfill research objectives and to answer research questions effectively The data collection method and process are also proposed in this chapter The method of data analysis and the sample size for data collection process are mentioned accordingly

3.1 Research philosophy

Figure 3.1: The research onion model

Source: Mark Saunders, Philip Lewis and Adrian Thornhill, 2018

Research philosophy is divided into four main themes, including positivism, realism, interpretivism, and pragmatism, as affirmed by Saunders et al (2016), and each theme reflects different belief from the researchers towards studied topics The philosophy attached to a study highlights the importance of choosing the sources and how the nature of the topics are (Bajpai, 2011)

Positivism research philosophy reflects the researchers‟ point of view of studying the topics through actual observation and measurement (Aliyu et al., 2015) In this

context, positivist researchers are relied on the data collection process to analyze social phenomenon in quantitative ways (Saunders et al., 2016)

The second research philosophy is realism and it is associated with the researchers‟ assumption of everything or social phenomenon is at least depended on what and how people are thinking about (Haddadi et al., 2017)

Interpretivism research philosophy is considered as the contradiction of positivism since it believes that social phenomenon cannot be analyzed by quantitative ways and the findings are generated from social interactions and shared meanings (Myers, 2008)

Finally, pragmatism refers to the objective of analyzing social phenomenon in different ways (Brierley, 2017) Pragmatist researchers often have rich experiences

in social researches and they can provide certain assumptions and validate these assumptions throughout different studying periods (Collis and Hussey, 2014) Given to the different definitions among four research philosophies above, the researcher proposes the application of realism philosophy This choice is justified

by the fact that this study is about SCF and the researcher is in the position of developing the knowledge about SCF and what the Critical Success Factors (CSFs)

to the implementation of SCF programs in commercial banks Clearly, the application of SCF in commercial banks is depended on how managers are thinking about its helpfulness Moreover, the researcher tries to identify how these factors are currently maintained in a business case study This process is more referenced to realism philosophy rather than positivism because of positivism philosophy aims studying and quantifying the causal relationships between variables

3.2 Research approach

Research approach is characterized by deductive and inductive as two main themes (Saunders et al., 2016) It is certainly emphasized that the difference between deductive and inductive is depended on the definition of each research approach Deductive approach is a process in which the researchers develop and obtain certain understandings about social phenomenon throughout a given or an existing

measurements are developed based on chosen theoretical framework and the researchers are in the position of validating applied framework thorough hypothesis development and validation (Gulati, 2009)

Inductive approach is a research process of collecting necessary information related

to social phenomenon in order to develop new theoretical framework related to social phenomenon (Goddard and Melville, 2004) On the other hand, the researchers who apply inductive approach attempt to observe few actions to construct a general framework while deductive researchers validate a framework from the observation of adequate samples (Saunders et al., 2016)

Given to the differences between deductive an inductive approach, the researcher decides using deductive because of some reasons The first reason is that the researcher utilizes existing framework of a successful SCF program which is developed by International Finance Corporation (2017) This framework guidelines the importance of operational models, products and services, sales channels, human resources, credit risk management, and management decision as KSFs towards SCF program It means that there are no new theories to be developed in this study but the researcher wants to apply existing one and captures how this theory is relevant

to researching topic

3.3 Research design

Research design refers to the plan of developing particular study given to specific objectives (Saunders et al., 2016) There are two research designs, namely exploratory and conclusive

Exploratory research design, as its name, does not focus on generating the conclusion for the studies and it is utilized when the researchers want to collect certain understandings about social phenomenon throughout qualitative assessments (Brown, 2006) Unlike exploratory research design, conclusive research design is selected in case of the researchers target to provide the conclusion about social phenomenon or studied topic (Saunders et al., 2016) Conclusive research design also requires the researchers to apply quantitative assessments to evaluate each dimension associated to the topic (Nargundkar, 2008)

Given to the differences between exploratory and conclusive research design, the researcher proposes using conclusive research design This choice is supported by the fact that the researchers evaluate current situation of SCF programs in a commercial bank and the evaluation is based on existing framework provided by International Finance Corporation (2017) In addition, the conclusion of how the bank is applying and maintain SCF programs is revealed in this study

3.4 Research strategy

Currently, there are many research strategies which are being used by the researchers, such as case study, survey, grounded theory, and action research (Saunders et al., 2016)

Case study is applied when the researchers want to collect certain understandings about a social phenomenon in an organization (Biggam, 2018) Survey refers to the process of collecting data from a sample of people who are associated with the studied topic (Jackson, 2011) Grounded theory emphasizes the problems of the researches inside specific business environment and it is conducted when the researchers want to understand how these problems are handled and new theory is developed during the handling process (Saunders et al., 2016) Action research is explained as the researchers‟ action to participate into an organization to study a social phenomenon and to identify feasible solutions which help the organization to overcome a particular issue (Bryman and Bell, 2011)

In this study, case study and survey are proposed to use as research strategies In more detail, the researcher chooses SC Bank as case study and the next step is to capture how SCF programs are currently maintained in the bank In addition, survey

is selected since the researchers target collecting data from the employees of SC Bank They are working in the field of SCF management and they would provide their evaluations towards each KSFs towards SCF programs of the bank

3.5 Research method

According to Saunders et al (2016), a researcher can utilize quantitative or qualitative or mixed as research method in his/her study

Quantitative method addresses the aspect of analyzing a social phenomenon through quantitative measurement such as the calculation of mean value and the estimation of the effect of independent variables to dependent variable (Bryman and Bell, 2015) Qualitative method, however is suitable in case of the researchers do not apply quantitative assessment to gain the findings but they would like to explore meaningful information through verbal description or simple data analysis techniques (Denzin and Lincoln, 2018) Qualitative researchers, in more details, extract the data from their notes or recording files to get in-depth understandings about each aspect of a social phenomenon (Saunders et al., 2016) Mixed method is defined as the combination between quantitative and qualitative (Saunders et al., 2016)

Given to the difference between quantitative, qualitative, and mixed method, the researcher proposes using qualitative method in this study The choice is supported by

the researcher‟s purpose to obtain finding through verbal description rather than

relying on sophisticated quantitative assessments such as linear regression and correlation Moreover, qualitative assessment is more suitable than quantitative method because of SCF is a complicated concept and the understandings of current situation of SCF programs in SC Bank cannot be obtained through a general quantitative assessment but qualitative analysis conducted upon on the data extracted from the interviews with the experienced employees and managers of the bank

3.6 Data collection

3.6.1 Secondary data

According to Srivastava and Rego (2018), secondary data reflects existing information which can be retrieved from books and newspapers from the Internet or the universities‟ library and this information is associated directly or indirectly with the studied topic Secondary data is often collected by the researchers when they develop literature review or they are in the position of lacking time resources to complete the collection of primary data (Mohajan, 2017) Therefore, the advantage

of secondary data is time saving but it also reveals the disadvantage side of secondary data is the concern of data suitability (Tring, 2018)