Master Thesis in MSc.

Finance
Dan Xu Brentsen

The Impact of Supply Chain Finance on Corporate

Performance: Improving Supply Chain Efficiency and
Increasing Profitability
Advisor: Anders Thorstenson
Submitted 19 April 2012 1

Acknowledgement
I am heartily thankful to my thesis advisor, Anders Thorstenson whose encouragement,
guidance and support from the initial to the final level enabled me to develop an
understanding of the subject and finish it successfully. It has been an honor to work with him.
Anders, your contributions, detailed comments and insight have been of great value to me.
I would specially like to show my gratitude to the coordinator at Siemens, Alexander Gorker
who has been so supportive for giving me valuable suggestions, support, and insights. Thanks
Alexander with your kind help for practical knowledge. I contacted you several times by
emails for additional information and you always responded to me right away despite your
busy schedules Thank you very much for that.
Lastly, I offer my regards and blessings to all of those who supported me in any respect
during the completion of the project.
Dan Xu Brentsen
Business and Social Science, Aarhus University
April, 2012 2

Table of Contents
Abstract ............................................................................................................................. 4
Chapter 1 Introduction ...................................................................................................... 5
1.1 Backgrounds and motivations ................................................................................ 5
1.2 Problem formulation .............................................................................................. 7
1.2.1 A general framework of research .................................................................... 8
1.2.2 Research questions ........................................................................................ 10
1.3 Research methodology ......................................................................................... 13
1.3.1 The research process ..................................................................................... 13
1.3.2 Hypothesis, testing methods and research questions .................................... 16
1.4 Delimitation ......................................................................................................... 17
1.5 Thesis outline ....................................................................................................... 18
Chapter 2 Literature review ............................................................................................ 18
2.1 The development of supply chains ...................................................................... 19
2.2 The link between supply chain and financial flows ............................................. 20
2.3 Supply chain finance ............................................................................................ 22
2.4 The integration of SCF into SCM ........................................................................ 23
2.5 Financing suppliers in the supply chain ............................................................... 25
Chapter 3 Financial supply chain management .............................................................. 26
3.1 Financial-SCM and the link to economic value added ........................................ 27
3.2 Integrating SCF into payable processes and cash flow cycle .............................. 28
3.3 FSCM performance indicators and profitability ratios ........................................ 31
3.3.1 FSCM performance indicators ...................................................................... 31
3.3.2 Key profitability ratios .................................................................................. 33
3.4 The impact of FSCM on corporate performance ................................................. 37
Chapter 4 Empirical Analysis ......................................................................................... 39
4.1 The sample selection and data description........................................................... 39
4.2 Hypothesis tests and testing methods .................................................................. 42
4.2.1 One-sample distribution tests and t test......................................................... 43
4.2.2 Correlation and regression analyses .............................................................. 44
4.3 Data analysis and interpretations ......................................................................... 45
Chapter 5 Case study at Siemens .................................................................................... 52 3

5.1 Supply chain finance at Siemens ......................................................................... 53

5.2 FSCM indicators, profitability and growth at Siemens ....................................... 57
5.3 Recommendations ................................................................................................ 63
5.3.1 Updates in the ERP system ........................................................................... 63
5.3.2 Control of payment terms and SCF loans to suppliers .................................. 64
5.3.3 Extension to emerging markets ..................................................................... 68
Chapter 6 Conclusions .................................................................................................... 70
6.1 Criticism ............................................................................................................... 70
6.2 Suggestions for future research of interests ......................................................... 71
6.3 Conclusions .......................................................................................................... 72
References ...................................................................................................................... 74
Appendix ........................................................................................................................ 78 4

Abstract
The thesis studies the application of supply chain finance (SCF) in supply chain management.
The SCF is also called supplier finance, and mainly it is used to deal with the financial issues
in supply-side value chain management. The impact of SCF on corporate performance
reflects in the improved supply chain efficiency in terms of cost saving payable processes and
payment term extension. The performance indicators derived from the financial supply chain
management (FSCM) have influences on profitability. On the SCF program, decreased costs
of goods sold (COGS) obviously can increase return on invested capital (ROIC) and return
on equity (ROE) in short term. The cause-effect relationships between the FSCM
performance indicators and profitability are established by the EVA model and tested in linear
regression analysis. The popularity of using the SCF program is increasing after the financial
crisis (2008) because of the imminent beneficial consequences. Small participants can take
large participants credit ratings to finance their capital requirements on the SCF program.
Together with early discount payment, the small participants are able to save financing costs
as well as increase cash and speed up cash flows. Large participants can extend payment
terms to attain positive cash flows and to increase economic value added. Additionally, the
large participants can leverage the small participants cost savings to negotiate better price
offers and in turn to reduce their own COGS. The supply chain finance is a financial solution
that provides win-win outcomes for all the participants in the supply-side value chain.
Particularly in the economic recession, the positive impact of SCF on corporate performance
can increase corporate economic power in the marketplace and remain competitive. 5

Chapter 1 Introduction
In this chapter, backgrounds of financial shortages in international supply chains and
motivations of using supplier finance to assist on supply-chain improvement are introduced.
The problem formulation includes a general framework of research and research questions.
The research methodology includes research methods and the research process. Delimitations
about the critical choices are argued in order to magnify the accuracy of research results. The
structure of this paper is outlined at the end.
1.1 Backgrounds and motivations
Alongside the trend of globalization, companies are oriented to produce international
product, which will be sold globally, thus coordinating with international suppliers all over
the world is inevitable. With this trend companies increasingly focus on their core
capabilities, effective and efficient supply chain management (SCM). It has become a key
constituent of corporate strategy, competitive advantage, and success (Narasimhan and Talluri
2009).
Since 2008 the financial crisis has resulted lots of banks or financial institutions in
confronting serious credit risks, which subsequently bring liquidity tightening, bank runs and
even bankruptcies. Absolutely, this issue will affect their financing activities to companies. In
the meanwhile the international business has also faced to a big challenge, because trading
partners are ought to seek for alternative capital financing sources or approaches. Dynamic
discounting, early discount payment and lengthening payment terms are crucial for
corporates to deal with insolvencies and remain competitive at the same time.
In the history of trade finance, factoring and letter of credit are often applied to help the
international business partners manage cash flows. However, the impact of financial crisis
will amplify counterparty risks and increase transaction costs. Problems of aging payables
and increasing credit risks have become the main reasons to cause inefficiency in operational
and financial performances.
The supply chain disruptions in relations to supplier defaults can have long-term negative
effects on a firms financial performance. Hendricks and Singhal (2005) show that companies
suffering decreases in 33-40% lower stock returns relative to their 6

industry benchmarks because of supply chain glitches cased by suppliers. Furthermore, the
impact of supply chain performance on financial indicators has also been revealed by Avanzo
et al. (2003) from financial accounting points of view. The risks in the supply chain
management associated with volatility and supplier failure had increased 54% between
mid-2007 and mid-2008 (Kerle 2010).The importance of supply chain risk management is
illustrated by the results of a recent survey, which reveal that 90% of films felt threatened by
supply-side risks (Snell 2010).
The whole supply chain contains the inbound and outbound logistics through business
processes from suppliers to final customers. Here, the study focuses on inbound material
activities with suppliers through manufacturing operations and financial services with
suppliers through the upstream flow of cash. Accordingly, the financial issues caused by the
level of supplier-buyer relationships are considered as basic assumptions to explore part of
supply-side risks.
An empirical Demica report (2011) studies the growth trend of a financial solution on supplyside trade relations. It is used to 1) improve cash flow management, 2) reduce risks of
supplier failures in supply chains and 3) improve transparency of transactions between
suppliers and buyers. Supply chain finance program has gained attentions since the financial
crisis. The SCF program aligns the third party financial services, large and small participants
through the open account. It is also called reverse factoring, and it is a process that the large
participants help the small participants receive lower cost of capital financing by sharing
credit lines. The SCF program provides also the early discount payment to the small
participants.
The introduction of SCF into SCM, i.e. financial supply chain management (Michael 2009)
will help companies consolidate the competition in the marketplace by means of generating
real cash flow benefits. Farris and Hutchison (2002) emphasize a cash-to-cash cycle time as
an important indicator in supply chain management metric. Additionally, Bhagwat and
Sharma (2007) consider the total cash flow time as an element into the balance scorecard
(BSC) measurement model. However the failure to relate key measures to performance
drivers brings obstacles of applying BSC to track the cause-effect relationships between
performance indicators and further improvement of corporate value. 7

Lambert and Pohlen (2001) use the EVA model to integrate the supply chain operational
processes to financial performance. Gomm (2010) embraces the key performance indicators
for both supply chains and financial flows in to a single corporate performance evaluation
based on the EVA model. The EVA model works also on capturing how the companies drive
value and profitability including the cost of capital in the supply chain.
Wang (2010) has conducted an empirical analysis to test the impact of the SCF program on
corporate performance before financial crisis. The improvements of operational and financial
indicators can be observed in short term. Kerle (2010) has further provided the evidences of
maximizing the current scarcity of liquidity by applying the SCF program. IMDs survey
(2009) shows over half of respondents have admitted the implementation of SCF to SCM can
help improve supplier relations1.
http://www.imd.org/research/publications/upload/PFM178_LR_Ralf_Daniel_Seifert.pdf Supply Chain
Finance - Whats It Worth? , www.imd.org, no. 178 October 2009.
1

The positive outcomes by applying the SCF program in supply chain management are
recognized. The study interests of this thesis are to explore the impact of the SCF program
and the effects of development on short term corporate performance; the impact around the
time period of financial crisis is considered. The EVA model will be used to identify the most
important indicators and ratios, and build up their cause-effect relationships. The SCF
program is initiated by the large participants in supply chains, so the improvement of their
corporate performances is significant. Furthermore, reducing supply risks in terms of
enhancing supplier liquidity are also expected to be investigated.
1.2 Problem formulation
In this section, a general framework of research is created containing the financial issues in
supply-side value chain and the application of a financial solution for improvement. The
introduction of the SCF) program is able to help the international business partners conquer
financial constraints and develop cash flow efficiency. The subsequent research questions are
designed to explore the possibilities and to explicate the outcomes. 8

1.2.1 A general framework of research

In the house of supply chain management in figure 1, there are two business partners under
the roof, one is the supplier and the other is the buyer. The buyer is considered stronger than
the supplier under the circumstances. The impact of financial crisis destroys the usual balance
of inbound logistic business processes between them, in particularly the upstream flow of
cash. Therefore, the lack of efficiency in supply chains causes the difficulties in the flows of
financial resources between organizations.
In order to increase liquidity, the supplier promotes terms on early discount payment with
cost of money and the buyer applies dynamic discounting method with upfront cash reserves.
This method works all right when the situation is not extremely downside in the financial
crisis. When the bank runs occur often and in turn affect the financing activities to
companies, the buyer starts to consider lengthening payment term in order to fulfill internal
financing on working capital needs. Indeed, the dynamic discounting method is redundant for
the sake of holding cash reserves. This phenomenon results the supplier in complexity of
managing its account receivables. Eventually the supplier will borrow money from other
financial factors with higher credit costs in order to further operate the business processes. In
the meanwhile it is not rational anymore for the supplier to offer early discount payment,
because the lower credit ratings may lead to bankruptcy at the end.
The consequence of supplier failures in the supply chain is expensive; hereby the resolution
to help the buyer and the supplier live on from the transitory overwhelming turmoil is a
further contribution of this study. The introduction of the SCF program in the supplier-buyer
trade relations breaks the door to the next level of supply chain management financial
supply chain management (FSCM). 9

Figure 1: Financial issues on supplier-buyer relationships in supply chain management and benefits of
applying the SCF program
Supply Chain Management
Supplier
Buyer
Materials
Cash
Early discount
Payment
Higher cost of capital
Worse credit risks
Dynamic discounting
Lengthen payment terms
Risks of supplier failures
Financial Crisis
Financial
Institution
SCF Programs
FSCM
Financial
Resources
SCF Programs
FSCM
Better financing cost (early discount payment according to buyers cost of money)
Alternate source of liquidity (to securitize cash flow with buyers credit rating)
Reduced disputes of payable processes
More predictable cash flows
Improved credit rating to avoid default risks
To negotiate payment term extension with suppliers and improve economic value
added.
Reduced operating process costs and increased standardization of process
Better cash flow management
Improved supplier-buyer relationships
Benefits for supplier
Benefits for buyer
Sources: Authors creation 10

We can see in figure 1, the application of the SCF program brings a new financial solution to
supply chain management, considering the third party financial services. The reverse
factoring allows the buyer to help the supplier receive better terms of capital financing
through the IT platform provided by the financial provider. The SCF program is a superior
solution for the supply-side value chain management.
Both the buyer and the supplier can benefit on the SCF program. Most importantly, the buyer
can pursue a tactic strategy to lengthen payment terms without extracting extra costs from the
supplier as well as improving the economic value added (EVA). As for the supplier, lower
cost of financing and speed-up cash flows are the most significant achievements. Supplier
risks are mitigated as the supplier strengthens its cash flow and as a result it has a better
liquidity which is especially helpful in the financial crisis; eventually the supplier can
improve its credit rating and become stronger in the marketplace.
The SCF program has the insight of becoming popular concerning the positive outcomes
from the perspectives of both the buyer and the suppler. The financial crisis is seen as a
significant driver of interest in SCF, because corporates as well as their financial institutions
are seeking to free up cash flow in supply chains while reducing risks. Undoubtedly, the SCF
program has the competence to develop the flows of financial resources in supply chain
management.
1.2.2 Research questions
In this paper, two main research problems are expected to be answered:
Does the use of the SCF program in supply chain management have a positive impact on
short-term corporate performance in the time period of financial crisis?
How come the contribution of SCF programs can help companies improve profitability as
well as control supply-side risks?
To answer these questions, studies on supply chain management in connections to financial
flows and supplier/buyer relationships are required as fundamental knowledge. The deep
understanding of integrating SCF into SCM has a decisive role. Furthermore, the link
between performance indicators and financial ratios based on the EVA model 11

provides a framework for cause-effect relationships. The strategic financial solutions

provided by the SCF program can help build up a successful buyer-supplier partnership in
terms of pricing, payment terms and controlling supplier risks.
Several sub-questions are required to be studied regarding the main research problems:
1) What is the SCF program, and how to integrate SCF into SCM?
2) What are the performance and financial indicators on the program and how to derive the
indicators?
3) Could the application of the SCF program have the impact on short-term corporate
performance?
4) What are the relationships between financial supply chain management (FSCM)
performance indicators and profitability?
5) What is the practical application of the SCF program in the supply-side value chain
management?
6) How could large participants use the SCF program to cooperate with small participants?
7) What are the expected outcomes by the application of the SCF program?
8) What are the most significant benefits and achievements for business partners on the SCF
program?
The use of SCF program is new in the international business; therefore there are no standard
procedures to measure the effects of corporate development with SCF. In this study, it starts
with embracing this financial solution into supply chain management and derives important
FSCM performance indicators and profitability ratios, in order to measure possible outcomes.
The FSCM performance indicators are obtained by investigating the value drivers in
accordance to supply chain business processes; the profitability ratios are derived by
investigating the financial ratios corresponding to profit growth. The selection of the
indicators and the ratios is based on the EVA model.
The expectations on observing the impact of SCF on short-term corporate performance are
settled, corresponding to the findings by Wang (2010). The time of perceiving effects of
development is critical, because every financial and operational solution takes time to
implement, sometimes mid-term and sometimes long-term. See the elicited paragraph from
Novozymes annual report. It takes Novozyme 2-3 years to observe the effects of
development on the supply chain finance. 12

Cooperation with Suppliers

The target for 2007 was to develop a step-by-step procedure for how and when to further develop
cooperation with suppliers on issues of sustainability. In line with this target, we developed a new method
in 2007 for responsible purchasing that considers the risks and opportunities in our supply chain. Our
target for 2008 is to carry out a pilot test of this new responsible purchasing model in all regions with the
aim of implementing it in 2009.
Novozymes annual report (2007)

The contribution of this research is about to help business partners seek a superior financial
solution for solving supply chain cash flow issues in the crisis (See section 1.2.1). The
financial crisis in 2008 is not so far away from now, so the mid-term effects are difficult to
detect at this moment. Additionally, some companies may adapt to the program after 2008.
Furthermore, in Wangs paper two-year time interval outcomes are not different from the
findings for one-year time interval. Therefore, the assumption of the short-term positive
impact of SCF is logical. If this is true even around the financial crisis, then the expectation
of using the SCF program is more realistic. The immediate positive outcomes are able to
show that the SCF program is efficient to help the business partners live on from the
transitory overwhelming turmoil.
The EVA model is also used to build up the cause and effect relationships between the FSCM
performance indicators and profitability. The exact correlations between them are expected to
be explored by further empirical analysis. Concurrently, the significant FSCM performance
indicators in terms of explaining the effects on profitability are drawn by statistical tests.
Case study of SCF at Siemens provides the practical application of the program. Discussions
at this stage embody further understandings of theoretical findings and modified explanations
of empirical results. In the meanwhile, the achievements on supplier-buyer partnerships with
SCF are argued from different points of views.
The predicted benefits acquired with SCF for large participants are essential. It gives
possibilities for using SCF to assist on the development of the value chain as a whole. It will
lead to win-win outcomes to all the participants in supply chains. The large participants will
support credit enhancement techniques to the small participants reducing default risks, which
can cause supply chain shortfalls. The small participants can get lower cost of capital
financing and speed up cash flows. The improved payment term negotiation as well as
standardization of payable process can help consolidate long-term successful cooperating
partnerships. 13

Applying the SCF program is not only to achieve superior competences but also enhance the
synchronized level between operational business processes and financial flows in supply
chains. It is orientated to develop advanced inter-organizational collaboration and
communication, meanwhile the competition of the value chain as a whole is more severe than
individuals in the economic recession.
1.3 Research methodology
Seen in last section, the research questions are outlined regarding the impact of SCF on
corporate performance by supply-side value chain efficiency; the outcomes are able to be
observed in short term. In this section, a sophisticated research process is designed in order to
accomplish the research of interests. Research hypotheses, testing tools and analytical
methods are introduced accordingly.
1.3.1 The research process
The general research process of this study is shown in figure 2. It starts with defining
research problems relative to previous research findings and theoretical framework for the
SCF program. The inter-reactions at stage one contribute the formation of hypothesis tests
and empirical analysis at stage two. The intention of stage three is to figure out the practical
application and relate to previous findings as a result of feedbacks. Because there are no
standard research procedures conducted so far for the SCF program, the combination of
theoretical, empirical and practical researches are comprehensive to summarize the outcomes.
The theoretical background is used to identify the FSCM performance indicators and the
profitability ratios which will be used in the empirical analysis. The interpretation of the
analytical results is used to confirm the significance of the selected indicators and ratios.
Sometimes the analytical results do not provide the expected solutions, if so, then further
discussions on the application of SCF will also rely on the practical application. All in all, the
final conclusions of this research are determined based on various findings and arguments.
The research methodology is designed in accordance to both qualitative and quantitative
methods (Kothari 2011). Quantitative research is conducted by analyzing a random 14

collected sample, in which certain research hypotheses will be tested. Qualitative research is
conducted by case study at Siemens with interviews and Q&A. Designed qualitative research
questions are outlined.
The data are randomly collected from public resources (Hendricks and Singhal 2005). The
events of signing the SCF program in companies are searched through the public resources
by key words, such as supply chain finance, trade finance, agreement. The full text of articles
should contain combinations of these keywords. Announcements from the websites of SCF
financial institutions are options too. The data will be sorted by differentiating the key figures
of the year after and before the event. The final dataset contains different variables in
columns that used to present the selected indicators and ratios, and the companies in rows.
The data analysis will be done by IBM SPSS Statistics version 19 and R-2.14 programming.
The case study of SCF at Siemens depends on interviews and follow-up questions. The
introduction of SCF at Siemens and the implementation of SCF to its suppliers are used as
case references. Further communications regarding the qualitative research questions are
required. The summary of qualitative research experience is about to provide sufficient
practical conclusions besides the theories and the empirical results (Assadej et al. 2010).
Financial accounting data is applied for both quantitative and qualitative research methods,
because the impact of supply chain financial solutions on corporate performance is expected
to be observed from the companys financial statement. The SCF program is used as financial
solution to enhance supply chain efficiency, and the record of supply chain business
processes are often related to operational figures. Furthermore, the focus of the study is to
explore the impact of SCF on short-term corporate performance from both operations and
financial flows. It explicates the processing procedures in organizations. It is more robust
than studying the impact as an event on stock markets only, which cannot imply the effects of
development on operational performance (Hendricks and Singhal 2005).
The financial account data contain the information of corporate financial structure such as
cost of debt, which is related to annual interest rate of corporate loans not the dynamic
changes in stock markets (Berk and DeMarzo 2007). To improve the cost of 15

money is a significant contribution by the SCF program because of cash flow efficiency in
supply chains (Camerinelli 2009). The financial accounting data might be useful to analyze
the events that reveal the corporate performance (Tomaso et al. 2010), and the measurement
based on accounting may apply only within the context of a specific predictive purpose or
prediction model (William et al. 1968).
Figure 2: The flowchart of research process with detailed tasks at each stage
Clarifying research focuses in terms of research of interests and research problems.
Understanding performance indicators and profitability ratios, the EVA model, the SCF,
SCM, and the benefits of applying the SCF program.
Designing a research process with statistical methods and qualitative research methods.
The framework of empirical study is about to derive cause-effect relationships between
FSCM performance indicators and profitability. The case study at the company is about to
modify the usefulness of applying the SCF program.
Linking possible outcomes to the research problems.

Define
Research
Problems
Review Concepts and theories
Review Previous Research Findings
Formulate Hypothesis
Collect, Analyze and Interpret Data
Formulating research hypotheses according to literature reviews in terms of the research
framework.
Conducting an empirical analysis with the quantitative research method, alongside
descriptive statistics, t test, correlation tests, and regression analysis.
Reporting analytical results which should give evidences to pursue research of interests
and answer part of research problems, if not, preparing further reasonable statements.
Summarizing useful results for further application.

Applications and Practices

Feedback
Preparing a qualitative research to explore the use of the SCF program in practices in
relations to theory and analysis.
Applying significant outcomes from both qualitative and quantitative research to outline
the most significant indicators for improving corporate performance.
Referring to the research problems with the solutions of applications and practices in
order to verify the quality of the study and the contribution of the research.

III
II
I
Sources: Authors design 16

1.3.2 Hypothesis, testing methods and research questions

Referred to the main research questions and sub-questions, the purpose of this study is about
to figure out the positive effects of using the SCF program on the corporate performance. The
verifications of selected FSCM performance indicators and profitability ratios, and their
relationships are required. Seen in Demica paper (2011), the program has been well known
since the financial crisis, so the year as a representative of increasing popularity is also
important. In general, there are four research hypotheses will be tested on the subject of
quantitative research method:
: The application of the SCF program has a positive impact on short-term corporate
performance in economic recession.
: The FSCM performance indicators and profitability are correlated.
: There are cause-effect relationships between the FSCM performance indicators and the
profitability ratios.
: The popularity of applying the SCF program is increasing.
Descriptive statistics will be used to observe the basic shapes of all the selected variables.
Following, to detect the sample outliers by Boxplot (John Tukey 1977) is fundamental. The
existence of outliers can distort linear estimators. The first hypothesis can be tested by onesample t test (Aczel 2006), which is used to discover the significant impact of SCF based on
the selected variables. The correlation tests with Pearson, Kendalls tau_b and Spearmans
rho are applied for testing the second hypothesis. The significant correlated relations are used
to give the evidence of conducting linear regressions. The third hypothesis will be done by
regression analysis in order to establish structured linear models for profitability. The causeeffect relationships are implied in cross-section estimation. The forth hypothesis is involved
in the regression analysis.
Case study of SCF at Siemens is done by qualitative research method. The endowment of
qualitative research experience is vital to modify the analytical results in empirical studies.
Four subsequent qualitative research questions are necessary:
3 Are the selected FSCM performance indicators and profitability able to present the impact
of the SCF program in practices?
4 How could the SCF program benefit large participants?
17

5 Can the application of the SCF program help small participants lower cost of financing and
speed up cash flows and in turn control supplier risks?
6 Is the win-win outcome true?
All the practical questions are argued with respects to the theoretical and empirical findings.
Together with a basic evaluation of the selected variables by Siemens accounting figures, the
most significant FSCM performance indicators and profitability are able to be prioritized.
The improvement of supply-side cooperation is studied by the methods applied at Siemens.
At the end, the benefits for Siemens and its suppliers on the SCF program are highlighted.
Qualitative data are gathered primarily in the form of spoken or written language rather than
numbers. The data resources are from the interview and follow-up Q&A with the coordinator
at Siemens. The interview focuses on the introduction and implementation of SCF at
Siemens. The data from the interview will be transformed into written text for further
analysis; the subsequent Q&A will be done by emails. The interpretation of qualitative data is
not very complicated, and it is done by the self- reported technique.
1.4 Delimitation
There are limitations to conduct the research of the SCF program on the corporate
performance:
1 The study concentrates on companies instead of banks or financial service providers. The
banks or financial service providers are responsible for the development of the SCF program
in international business. From the companies points of view, applications of the SCF
program and its contributions to the supply-side partnership improvement are fundamental.
2 The time period around financial crisis is very special, and the SCF program is just one
factor that can help companies to recover from the economic recession. The influences of the
program on corporate performance could be partial, even though the expected outcomes
specified by literatures are optimistic.
3 Negative cash flow cycle technique is not covered in this research. The application of the
SCF program is to optimize the capital utilization, but not to use customers and suppliers as
sources to have interest-free cash financing in business processes.
18

4 The announcements of supply chain finance are not easy to be found by public resources,
so missing data in the random sample collection is unavoidable. Some announcements are
lack of event year, so they cannot be used. By contrast, some companies may not announce
the events in the public, although they have already applied it as a financial solution in supply
chain management.
5 The dominant power in supply chains can be revealed by either suppliers or buyers. It
depends on their company sizes. Usually larger/stronger participants on the SCF program are
somehow prevailing to affect supply chain solutions.
1.5 Thesis outline
The thesis outlines in six chapters. Chapter 1 is the introduction containing research settings;
the problem formulation and the research procedure provide a guideline which is related to
the follow-ups in coming chapters. Literature reviews are in chapter 2; main theoretical and
empirical references are discussed here. Theoretical study of the SCF program in FinancialSCM is in chapter 3; FSCM performance indicators, profibatility ratios and their cause-effect
relationships are derived based on the EVA model. Empirical analysis of the selected
indicators and ratios is in chapter 4; the impact of SCF on short-term corporate performance
and the effects of development on profitability are interpreted based the analytical results.
Practical application of SCF is in chapter 5; the case study of SCF at Siemens provides indepth understandings of the selected indicators and ratios, and the win-win outcomes of using
the SCF program. Conclusions are in chapter 6; criticism and suggestions for future research
of interests are stated.

Chapter 2 Literature review

In this chapter a framework of supply chain finance and its integration to supply chain
management will be introduced first. The impact of financial crisis brings new challenges as
well as new opportunities to the development of supply chains. The link between supply
chain and financial flows is considered as an inevitable strategic solution while improving
corporate performance. The introduction of supply chain finance to the supply chain
management is able to help corporates remain competitive 19

and increase economic value added. Ideally, the effects of development are possible to be
observed in short term. Ultimately, the win-win outcomes will benefit both large and small
participants.
2.1 The development of supply chains
Nowadays the supply chains have been developed more complicated as the business has
become more international. The term of supply chain management is first introduced by U.S.
industry consultants in the early 1980s (Oliver 1982). The expansion of physical capabilities
in international logistics has started since the early 1990s, and the trend of global economic
integration becomes evident everywhere. With the development of e-business,
communications between suppliers and buyers become instant by information systems. For
example, the buyers can have access to any suppliers irrespective of location and available at
any time. It reduces costs, improves service levels and increases profits. The improved
communications through new technology are the enablers of supply chain integration.
The popularity of international integration brings the new challenges to the management of
multiple relations in the supply chain. This also leads to a broad inclusive view of logistics,
which is not only responsible for one to one business, but a network of multiple businesses
and relationships. It is extended to combine all related activities into a single integrated
function Waters (2007).
There are many researchers have studied on various processes of in supply chains. Lambert
and Cooper (2000) point out that a successful SCM requires a cross-functional integration in
the firm by coordinating activities of the key business processes. The links of business
processes have direct effects on the levels of decision making, such as operations and
financial planning, supplier risk and customer services management.
Thus, analyzing and designing an efficient and effective supply chain have gained an
increasing attention, and models of evaluating supply chain performance are diverse as
investigated by Beamon (1998). He implies that a traditional supply chain is characterized by
a forward flow a materials and a backward flow of information and finance. 20

Farris and Hutchison (2002) have emphasized the cash-to-cash cycle concept to the supply
chain management perspectives. It contains three important leverages which are account
payables, account receivables and inventory. In the meanwhile, the idea of cash management
has also been sentient in supply chain business processes.
Badell (2005) addresses that the financial flow optimization in operation processes will
satisfy shareholders as well as improve supply chain efficiencies. Cash flows are involved in
each supply chain business process and the optimization of the financial flows is required at
each stage. It shows the necessity of managing financial flows in the supply chain business
processes, and it is significant to implement the financial-SCM strategic plan. It heightens the
decision-making capacity of the CEO and the CFO in complex scenarios.
The cash inflows and cash outflows in supply chains are strongly dictated to the capital
capacities in companies. The synchronized level between supply chain management and the
financial flows can be seen as indicator to measure the operational efficiency and as a result
the financial liquidity in the companies.
2.2 The link between supply chain and financial flows
There are many companies have not noticed the disconnection between overall business
strategy and supply chain strategy in the organization; financial, information and physical
flows are seldom synchronized. However, economic growth and capital utilization in the firm
are expected to be optimized through the integration of information, financial and physical
supply chains. The strong interdependency between operations and financial departments
enables corporate to maintain competitive advantages in industries.
Seen studies on financial flows in the supply chain, certain part of researchers are orientated
to have applied cost models on the basis of accounting theory, such as Activity-based costing
(ABC) that was introduced by Kaplan and Cooper (1988a,b). This has been broadly applied
in multi-level, manufacturing organizations. In the 1990s many companies move their
concentrations on competitions to reduce their own costs as well as those of related partners
in supply chains. The competitions among companies rely on a more cost-effective chain a
lower cost to serve the final marketplace and 21

achieved in the shortest time period possible. The ABC tools are not used for the evaluation
of financial performance, because delayed payment, return on investment/equity are not
concerned as analytical indicators. Therefore, this evaluation tool is not satisfactory enough
to be applied at the tactical stage for the overall corporate valuation (Ozbayrak 2004).
Balance scorecard (BSC) is also widely applied when conducting performance measurement.
Bhagwat and Sharma (2007) summarize some key performance indicators related to day-today business operations from four perspectives: finance, customer, internal business process,
and learning and growth. Moreover he has considered the total cash flow time as the key
measure in connection to the financial performance. However, the case-effect relationships of
the key measures to performance drivers are lacking. So the supply chain balance scorecard
is not sufficient enough to reveal whether the operation improvements have been translated in
order to enhance financial performance.
Financial performance in connection to supply chain activities are always seen as cost
reduction, market share growth and profit increase (Chien 2007). There are positive relations
between financial factors and the innovative supply chain practices: the improved supply
chain business processes can benefit organizations through better financial performance; the
increased corporation profit and market position are accompanied by an increase of the
overall corporate performance. The integration of physical supply chain and financial
management with the backward information flow should be done as a one package procedure
in corporate. The synchronization is expected to be accomplished by the harmonization
between strategic business processes and financial decisions (Guillen 2006).
Weissenrieder (1998) has adapted the method of discounted free cash flow (DFCF) to
calculate profitability and monitor the economic value added in the company. The analysis of
profit or NPV determines implementations of certain projects. But using DFCF method to
assess the strategic supply chain decisions cannot maintain sustainable competitive in case
that the financial impact on different operational alternatives is not assessed in advance
(Lanez et al. 2009).
Normally, conventional organizations choose internal financing resources to finance the
supply chain and the related business processes. Yet, retained earnings, depreciation, 22

redistribution of capital from the balance sheet of a company do not have cash payments
associated. Accounting earnings can present the economic value added in the firm but not the
direct cash that are ready to be spent.
Many academic researchers have described the differences between financial chain and
physical chain in terms of inventory, process and cash management. Yet, the measures on the
cost of capital regarding the impact of SCM solutions have not been explicitly considered 2,
because the financed assets as well as the cost of financing are not normally concerned on the
bases of supply chain activities.
2 The cost of capital reveals credit risks overall the company. From companys point of view, the cost of
capital, i.e. the weighted average cost of capital is an appropriate discount rate to use for cash flows with
risk.

As a consequence new tasks at the intersection of finance and logistics/SCM open new
business areas for banks as well as financial and logistics service providers (Hofmann, 2005).
The new concept about the integration of financial, information and physical flows brings
supply chain managers new thoughts to concern the importance of the financial side of
business activities. In turn, it gives the new challenges to supply chain executives of speaking
the financial languages to communicate on board and in the mean while to build up crossfunctional competences. The new trend of inter-organizational interactions and crossfunctional relationships provides new opportunities for the development of supply chain
efficiency and financial performance.
2.3 Supply chain finance
Supply chain finance (SCF) is an approach that aims to improve the supply chain efficiency.
It is intended to improve payment terms, to reduce costs and to accelerate cash flows.
Overall, the well-gained credit rating to the small/weak participants from the strong/large
participants (Myers 2002) and the simplicity of payable processes (Hartley-Urquhart 2000)
will enhance the supplier-buyer partnerships.
Collaborations between the financial side and the operating side need an encompassing
approach. It should not be an isolated concept but rather as an aspect of a more integrated
system or program to map the gaps between SCM operating performance and financial
performance (Timme et al. 2000). 23

The physical supply chain uses analysis and planning tools to meet and predict future demand
as well as international logistics; the financial supply chain incorporates external financial
service providers to jointly create value through means of planning, steering, and controlling
the flows of financial resources. The SCF program aligns the operational flows with the
financial flows (Camerinelli 2009).
Pfohl and Gomm (2009) show the SCF program is profitable for both sides in organizations.
Supply chain finance can be seen as a financial alternative for supply chain management to
better operate a competitive project. The small participants obviously can receive the
financial profits in accordance to the difference between the interests of refinancing from the
larger participants. It can also help increase the operational benefits by the external financing
services. The participants who join the SCF program can have comparative supply chain
advantages through the transparency of information and the upgrade of payment terms.
2.4 The integration of SCF into SCM
Reducing the financing costs and optimizing cash flows in the supply chain can be seen as
the main functions of the SCF program. It is orientated to motivate supply chain
development, risk adjustment and value creation through improved operational performances
with respect to the reconfiguration of financial resources (Gomm 2010). The levers of the
SCF program are volume, duration and cost of money.
Benchmark financial indicators using supply chain operations reference (SCOR) model can
help supply chain managers to visualize the link between operational performance and the
financial statement (Ceccarello el at 2002). The use of Du Pont Model can assist managers to
determine the overall impact of operation decisions with respect to cash flows and asset
utilization (Kremers 2010). However, none of them is robust enough to cover the issues of
capital costs. The use of economic value added (EVA) model in supply chain performance
measurement introduced by Lambert and Polen (2001) captures how the firm drives value
and profitability from operations inducing the cost of capital. Introducing SCF into SCM
based on the EVA model can bridge supplier-buyer related procurement processes. For
example, the improvement of cash conversion cycle time and supply chain velocity can
enhance the economic profit of a company and additionally have the effect on cost of capital
(Hofmann 2003). 24

Nowadays, the supply chain management expands to a scope beyond the operational level of
management. The task of SCF is to save the capital cost by means of integrated relationships
of partners and advanced financing activities in supply chains. Applying this financial aspect
to finance the supply chain gives us a new knowledge on the level of management - financial
supply chain management (FSCM).
The financial supply chain management is a specific set of solutions and services to expedite
the flows of financial resources and information between trading partners (Michael 2009).
The development of e-invoicing - paper-free transferring process of payment and the
supplementary corporation with third-party financial institutions result in a simplified
integrating supply chain procedure.
Spoken of the impact of supply chain decisions on financial performance, we often discuss
the lack of cross-functional coordination (Carter et al. 2005). Thus a more comprehensive
integrated system is a consequence. It is also necessary to use the system exploring if the
application of SCF can help corporates enhance the financial performances.
Wang (2010) has conducted an empirical study on the impact of SCF on short-term corporate
performance. KPIs for both supply chains and financial flows are applied to present corporate
performances. He concludes the implementation of the SCF program is mostly used to solve
short-term cash flow issues and to reduce operating costs. In the summary, inventory
turnover, return on sales and return on equity have been increased at certain significant levels.
In addition, the reduced cost of goods sold can increase profitability significantly. The
selection of the analytical variables in Wangs paper relies on experience, so it is a kind of
empirical analysis on common corporate valuation indicators and ratios by a consideration of
SCF application.
The introduction of the SCF program contributes financial services to business processes that
relate to financial issues in supply chains. The collaborations are based on committing to
share the resources, capabilities, information and risks on a contractual basis. Stronger/larger
participants are orientated to concentrate on the process optimization and visibility between
trading partners; smaller/weaker participants are expected to provide sufficient financial and
operating information. 25

Generally, the large participants who initiate the SCF program are intended to increase the
economic valued added through payment term extension, and the small participants who join
the SCF program are going to enhance the liquidity through financing costs reduction. The
improved corporate performance can be observed from profitability, cash flows and credit
ratings.
2.5 Financing suppliers in the supply chain
The impact of financial crisis exacerbates corporate insolvencies and bankruptcy risks. It
affects the progress on sourcing of products, services and capabilities, because of the risks of
supplier defaults. The higher supply chain vulnerability with this setting makes supply chain
risk management (SCRM) more difficult for many firms (Blome et al. 2011).
Companies are oriented to continue tightening credit conditions when doing businesses with
each other, thus the liquidity has become inadequate. Large corporations would like to extend
payment terms deliberately, in order to maintain competitive for their supply chains.
However, small corporations in the supply chains are unable to sustain further lengthening of
payment periods because of the risk of insolvencies together with lower credit rating 3.
Instead, a mutual beneficial process is needed because of the growing intense between
business partners.
3 88% of UK firms and 55% of German companies have identified that key suppliers are unable to sustain further lengthening of
payment periods (Kerle 2010).

Changing suppliers is risky but essential and beneficial for the supply chain under certain
circumstances. However, sometimes many supply chains rely on a set of specialized suppliers
who are not easy to be replaced, and in the meanwhile it takes long time to build up the new
mutual trust supplier-buyer relationships in a short time. Therefore, financing the supply
chain is the most effective time-saving strategy.
The perception of financing the supply chain has been lasting for decades in the developed
economics. Factoring as a financial solution has existed by the form that a company sells its
account receivables to a factor (a third party that can provide financing services to the seller)
to get the advanced cash to run the business. Normally, it requires good credit information
from the seller. But defaults of customers may cause 26

insolvency problems, thus the seller may not have enough reserves to repay the factor, which
will pass the burden of default risks to the seller (Klapper 2005).
The SCF program (reverse factoring) plays an important role in the progress of financing
suppliers through the standardized payable processes. The saved financing costs from the
payment terms on the SCF program are really beneficial to improve cash flow efficiency and
subsequently improve supplier relations (Dyckman 2009). Reducing costs of capital
financing as well as controlling credit risks is the most significant feature of the SCF
program.
Additionally, the application of open account rather than letter of credit (LC) in international
trade condenses the transaction costs in terms of charge fees from banks and increases the
cash flow speed in terms of a simplified payment process. By the means of letter of credit, a
vendor/supplier has to prepare all the required documentation and then claim the payment
from the bank with certain LC costs. The economic crisis brings pressures to both banks and
corporates and in turn increases costs of transaction. Through open account alongside the
endowment of the SCF program, the vendor/supplier can get paid earlier and foresee the
account receivables to manage the cash flows in advance without extra charge fees
(Appendix A3).

Chapter 3 Financial supply chain management

In this chapter, the application of the SCF program in supply chain management including
payable processes will be exhibited. The selection of FSCM performance indicators and
profitability ratios will be discussed according to the EVA model. Following, detailed
arguments on how the changes of supply chain efficiency can have impacts on profitability
should be stated. Overall, the whole chapter is extended to provide fundamental theoretical
support for further empirical analysis on cause-effect relationships between the FSCM
performance indicators and the profitability ratios. 27

3.1 Financial-SCM and the link to economic value added

The concept of financial supply chain management is derived from the introduction of supply
chain financing programs from the bank or the third-party financial institution with new
forms of payable processes and payment terms between business partners. The superior
financial services provided by large participants and external financial providers assist on
increasing supply chain efficiency as a whole as well as remaining competitive. Mainly it
reduces the complexity of payable processes through open accounts and in the meanwhile let
small participants take large participants credit ratings to reduce costs of capital financing.
Overall it improves short-term liquidity in the value chain and consolidates long-term
supplier-buyer relationships.
The introduction of the SCF program to supply chain management can be seen as part of the
design of financial flows in supply chains. As we know supply chain decisions are usually
close to operational management instead of financial management. However the SCF
program is a financial solution to develop the supply chain management, and in return the
improved supply chain efficiency will enhance financial performance. To explore that,
companies are ought to link operational drivers to top level financial indicators. The EVA
model in figure 3 is used to link the value drivers from the operations to the financial
performance. The EVA model tree leads to 1) the net operating profit after taxes (NOPAT),
and 2) the cost of capital.
Figure 3: EVA value-driver hierarchy and levers of SCF
Sources: Gomm (2010), Supply chain finance: applying finance theory to supply chain management to
enhance finance in supply chains. 28

The EVA model seen in figure 3 provides the linking path that takes us from the high-level
financial performance towards more specific operational tasks. The EVA model considers the
value after subtracting the cost of capital. The capital cost rate is usually defined as the
weighted average cost of capital (WACC) which is the minimal required return on the
company sustained by both investors and creditors. NOPAT and other corresponding
operational and financial indicators will be discussed in the section of FSCM performance
indicators and profitability ratios.
3.2 Integrating SCF into payable processes and cash flow cycle
By the impact of the financial crisis, the tied-up working capital has become crucial because
of the long cash flow cycle time from procurement to sales. Companies are seeking an
essential financing method to their own as well as trading partners. However, the conflicted
goals between buyers and suppliers increase the complexity to build up a mutually beneficial
process. The buyers wish to delay payment for their specific financial situations and the
suppliers want to accelerate collections.
The application of the SCF program in supply chains can create win-win outcomes for the
collaborating partners through simple and fast payable processes. Figure 4 shows how the
payable processes work in supplier finance. As seen in figure 1, the buyer is supposed to be
the large participate and initiates the upgraded payable processes in the financial supply chain
management. Here, the same assumption of company sizes for the buyer and the supplier is
used.
Mainly figure 4 presents the internal financial and operational management through ERP
system in companies4. The agreement established between the buyer and the financial
institution contains legal issues, such as transparent data transforming in processes 5. In the
meanwhile, the buyer has to provide detailed and timely financial and operating information
to the financial institution regarding the supplier.
4 The ERP application is business management software and helps in centralizing all data and processes of an organization. It is mentioned here in order to assist on
presenting how FSCM works in the organization; however it is not the focus in this thesis.
5 The function of financial institution is very important in SCF processes; however the detailed argument and research are left as future research of interests. The
statement related to the financial institution in this thesis is limited in how it can help the participants on the program establish a sufficient financial supply chain,
indeed improve supply chain efficiency.

29

Figure 4: Account Payable financing application in accordance with supplier finance

1. Buyer issues a purchasing order to supplier
2. Supplier ships the goods while transmits invoice data to buyer
Descriptions:
1) Buyer updates its ERP system to reflect the issuance and terms of the purchasing
order (PO) accordingly.
2) The invoice data should be matched with the PO data subsequent to the delivery.
When the shipment of goods is verified, again buyer updates its ERP system to reflect
the receipt of the goods.
3) Buyer vouchers the account payable (AP) in its ERP system and transfer payment
instructions to financial institution for future due payments.
4) Once buyer updates its ERP system to reflect the verification of AP, financial
institution is able to get the access to extract supplier profiles and calculate the
future payments for supplier based on buyers credit rating and publish them before
the due.
5) Supplier admits the early payment option to get cash inflow or receivables with an
attractive discount rate.
6) The financial institution sends a payment notice to buyer, and buyer confirms the
payment of full amount paid on the due date.
3. Buyer approves suppliers invoice data and sends payment instructions
4. Supplier is notified for future payment through the financial institution
6. Buyer remits the full payment on the due which settles the transaction
5. Supplier may convert the future payment to cash directly
Financial Institution
Sources: Authors drawing according to the Hartley-Urguhart (2000).

Overall it is important to consolidate the financial supply chain into a synchronized system
through high degree of information sharing and trust. Financial institution must follow in all
the payable and business processes, especially the receipt of goods. It is the trigger for the
financial institution to pursue future payment to the supplier. The payable processes built up
on the basis of SCF platform have simplified the upstream cash flows in the supply chain
between the buyer and the supplier. It liquidates also the tied-up working capital in business
processes. The supplier gets paid from the financial institution before the maturity and the
buyer pays to the financial institution regarding a lengthened maturity.
Generally, the cash cycle time from procurement is defined as the elapsed time between the
payments of cash for materials up to the receivables for sales of the finished products, seen in
figure 5. The cash flow cycle time highlights how quickly a company 30

can convert its products into cash through sales. A rising trend of the cycle over time
specifies the company may be facing a cash flow crisis in the near future. So the cash flow
cycle is an indicator to specify the condition of working capital, and it is used to detect non
value-adding processing time in the supply chain (Hofmann 2003).
In figure 5, from the buyers point of view (blue dotted line) lengthening the days in payables
is rational to shorten the cash conversion cycle. From the suppliers point of view (red dotted
line) shortening the days in account receivables can help the company lower the cash
conversion cycle. The shorter the cash conversion cycle, the healthier a company generally is,
because less time capital is tied up into business processes.
Figure 5: The operating cycle and its improvement by applying the SCF program
Sources: Authors drawing.
Time
Order Placed
Delivery +
Invoice
Days in
Inventory
Sale +
Delivery +
Invoice
Days of Sales
Outstanding
Actual
Payment
Days in Payables (time period to payment of supplier)
Cash Payment Date
Days in Receivables (customer payment time)
Expected Payment Date
Cash Conversion Cycle
Operating Cycle
Cash Flow Cycle

The improved financial-supply chain performance will lead to an efficient and effective
operating cycle with less time consuming (See figure 5). The improved operating cycle can
also help generate additional cash flows to pay off the liabilities on time. It provides visibility
to a higher quality of earnings, which enables the company to receive a better 31

corporate bond rating, indeed lower the cost of debt. It counts to the improvement of the cost
of capital rate i.e. the WACC (See figure 3).
Figure 4 and figure 5 have exhibited the application of the SCF program on the basis of cash
flow management in supply chains. There is an important outcome on the program. The
supplier is possible to receive better offer for the cost of capital financing from the buyer. See
the EVA model in figure 3, from the suppliers point of view the lowered cost of capital
financing (cost of debt) and shortened cash conversion cycle will indirectly decrease the cost
of sales and directly reflect in the cost of capital. If we discuss the savings orientated to the
buyers opportunity costs, then it is possible for the buyer to negotiate a better price offer in
procurement which will also reduce the buyers cost of sales. The win-win outcomes can be
seen from both parties.
3.3 FSCM performance indicators and profitability ratios
In this section, operational and financial indicators regarding the SCF program will be
discussed broadly based on the EVA model. The selection of important FSCM performance
indicators depends on the features of SCF and the value drivers in supply chains. Profitability
ratios are chosen in accordance to the key figures that can present growing profits in
companies. The cause-effect relationships between the FSCM performance indicators and the
profitability ratios are derived by considering the overall impact of supply chain
improvements on corporate performance.
3.3.1 FSCM performance indicators
Key performance indicators (KPIs) are also known as key success indicators. There are
various KPIs that are used for the measurement of financial supply chain management.
FSCM performance indicators will be defined from both supply chain operations and
financial flows (See section 3.1). Some of the KPIs are determined according to supply chain
solutions; some of the KPIs are derived with respects to financial-SCM connection.
Timme et al. (2000) summarize that supply chain solutions can relate to annual revenue
growth, profitability and capital utilization. They specify profitability as the percentage of
profits after subtracting from revenue total operating expenses. Cost of goods sold 32

(COGS) as the percentage of revenue and selling, general and administration (SG&A) as the
percentage of revenue are defined as the operational value drivers to improve the financial
performance.
Capital utilization is the area with the greatest potential for SCM solutions to improve the
overall financial performance. The optimization of inventory, account receivables and
account payables are the main elements to be considered regarding the features of SCF. Cash
conversion cycle seems having the character to build up the connections for these elements
(Farris and Hutchison 2002), and it is also one of the value drivers of SCM to improve the
financial performance in the EVA model (See figure 3).
The long cash conversion cycle requires large working capital in operations, thus to keep this
value as low as possible is what the SCF program is ought to contribute (Hofmann 2003).
The cash conversion cycle covers the whole period from the cash outflow of paying for
production and cash inflow of selling products to customers, seen in figure 5. There are three
import components in the process: 1) Days Inventory Outstanding (DIO), 2) Days Sales
Outstanding (DSO), and 3) Days Payable Outstanding (DPO)6.
6

Jim Mueller: Understanding the Cash Conversion Cycle, Investopedia, May 16, 2010.

Where:
thus we have
The CCC metric covers the value drivers from both supply chain and financial flows. We can
see that shortening the days in inventory, reducing days in average receivables, and extending
days in average payables can result in the decrease of working capital requirement in
operations. Cost of goods sold is used as a denominator to obtain DIO 33

and DPO, because DIO and DPO are the values related to supplier relationships. DSO is
paired with revenue, because customer relationships generate sales/revenue.
Inventory is also a value driver to influence the financial performance (See figure 3).
Inventory value (IV) is usually recorded as cost, because it is what the company has paid for
not sold. Besides the inventory value, inventory turnover (IT) gives more meaning to specify
the efficiency of SCM solutions. IT indicates the frequency of replacing or clearing
inventories in a company over a period. The higher this ratio is, the better the company uses
of inventory and the shorter the time between sales and cash collections.
The way of using average value is about to achieve a more conservative estimate during the
period of cash cycle (Simchi-Levi et al. 2002). Cost of goods sold is applied to derive
inventory turnover, because inventories are purchased from suppliers as part of goods for
production.
Till now CCC, IT, CR (COGS% of Revenue) and SR (SG&A% of Revenue) are summarized
as main performance indicators for measuring financial supply chain management. Based on
the EVA model, they are ought to have impacts on the corporate financial performance. The
indicators are selected corresponding to the value drives in figure 3. However some value
drives are excluded, for they are not related to the study focus and the features of the SCF
program (See section 1.1). Later in this chapter, the relationships between the selected FSCM
performance indicators and profitability ratios will be argued on the basis of the EVA model
as well.
3.3.2 Key profitability ratios
First of all, let us see how operating processes and financial structure can be integrated based
on the EVA model. The net operating profit after taxes (NOPAT) and invested capital are seen
as independent of the companys financial structure and non-operating assets. It is a kind of
component that purely symbolizes the impact of operations on financial figures. It can be
used to calculate the return on invested capital (ROIC) which assesses how well a company is
using its money to generate returns (Koller et al., 2005). 34

If we expand the equation into details including considerations of profitability maximization,

capital efficiency optimization, and tax minimization, then we have
where , is equal to revenue less operating expenses (e.g. COGS, SG&A, depreciation). All the
profits included in NOPAT are available to both debt and equity holders. ROIC is a financial
indicator, but it solely focuses on a companys operational drivers, over which the manager
has control.
The ROIC tree in figure 6 expands the derivation into different operational components. All
the operational value drivers are exhibited on the right side of the tree. Operating margin is
equal to the gross margin (GM) less SR and depreciation/revenues. Further down, the average
capital turns is equal to operating working capital/revenues less fixed assets/revenues.
Figure 6: The tree of return on invested capital (ROIC)
Gross margin
Pre-tax
ROIC
Cash tax
rate
ROIC
Operating margin
Average capital turns
SG&A / revenues
Depreciation/revenues
Operating working capital/ revenues
Fixed assets/ revenues
S.1
S.2
S.3
S.4
S.5
S.1-S.2-S.3
1/(S.4+S.5)
Sources: Koller et al. (2005), Valuation: Measuring and Managing the Value of Companies. 35

The operating working capital is achieved by subtracting current liabilities from current
assets7. It is a broad concept to show short-term liquidity in the company. Referred to the
arguments in section 3.2, the cash conversion cycle is involved in cash flow cycle (See figure
5), which can be used to specify the condition of working capital in the value chain
(Hofmann 2003). Cash-to-cash cycle, inventory and processing time are used to specify the
working capital conditions on the SCF program (See figure 3) and all these value drivers are
used to derive the cash conversion cycle (See section 3.3.1).

Koller et al. (2005).

Gross margin is obtained by deducing COGS from revenue. GM implies operational gains by
the impact of financial-SCM solutions, and its positive relation to the financial performance
is expected. The SCF program helps the company improve supply chain efficiency from
financial point of view, thus elements that can be influenced by SCF will be prioritized. Here,
depreciation and fixed assets are not explored for further analysis, because they are
accounting figures in accordance to asset consumptions in the company.
The other part of the EVA model includes a companys financial structure. The capital cost
rate is usually represented by WACC, which is the companys opportunity costs of funds and
embodies a combined required return from both operations and financial markets. The value
of a company is driven by ROIC, WACC, and growth (Koller et al. 2005).
If we write the cost of capital in connection to the EVA model as follows:
and the EVA in figure 3 could be obtained by subtracting the cost of capital from NOPAT,
so we have
A strong ROIC indicates high growth. When ROIC is greater than WACC, the company
creates value to both stakeholders and shareholders, and when ROIC is less than 36

WACC, the value will be destroyed. The simplest form of WACC is the market-based
weighted average of the after-tax cost of debt and cost of equity 8.
8

See Koller et al. (2005), chapter 7.

See Chen and Shimerda (1981) and Wang (2010).

D/V = Target level of debt to enterprise value using market-based values

E/V = Target level of equity to enterprise value using market-based values
= Cost of debt
= Cost of equity
= Companys marginal income tax rate
Mainly WACC contains the market-based values; however the accounting figures are used to
study the impact of SCF as a financial-SCM solution on the corporate performance. It is
irrational to merge accounting data and financial market data together conducting empirical
analysis, because the financial market data is more dynamic than the accounting data to
reflect on the company events (See section 1.3.1). The inefficiency in the analysis will
generate biased solutions. Fortunately, the cost of debt has relations to the cash flows of
business processes (See section 3.2). So, further improvement of WACC will rely on the
studies of the cost of debt.
Other financial ratios that represent the growing profits are outlined as return on equity
(ROE), return on sales (ROS) and return on assets (ROA) 9:
Return on sales is related to the determination of NOPAT in the EVA model. Although the
associations between ROS and supplier finance are not apparent, the net income as the
numerator to obtain this ratio explains the significance of reducing SG&A and COGS by the
use of the SCF program (See section 3.3.1). 37

Return on assets gives both stakeholders and shareholders an idea on how efficiently the
company is earning more money on less investment in operations. The increase of ROA
indicates that the company can convert the liabilities it has to invest into net income
proficiently. In a sense, we may expect companies who are with SCF can amplify the
utilization of liabilities by the improvement of payable processes and payment terms.
Return on equity measures how a company can generate profits by shareholders investments.
It shows the hard fact that if there are enough profits to compensate the risk of being in the
business or not. It reveals also the shareholder value in the company. Talking about
shareholder value and supply chain solutions together, the design of the flow of financial
resources in supply chains can affect return on equity (Hofmann 2003).
3.4 The impact of FSCM on corporate performance
The endowment of SCF in supply chain management brings benefits for both suppliers and
buyers, including the less time consuming operating cycle and the improved cost of capital
financing. The EVA model has been used as theoretical references to derive FSCM
performance indicators and probability ratios. It covers both operational and financial
performances in corporate valuation. Supply chain value drivers such as IT and CCC,
operational value drivers such as CR, SR and GM, and profitability ratios such as ROIC,
ROS, ROA and ROE are selected to present the impact of the SCF program on the overall
corporate performance.
Table 1: The cause-effect relationships between selected FSCM performance indicators and profitability
ratios
CR
SR
GM
IT
CCC
Profitabilit +
+
y