Supply Chain Finance at Procter & Gamble Learning Objectives: This case was written for the first-year corporate finance course at Harvard Business School to teach basic financial statement analysis and to illustrate supply chain finance as a modern form of working capital management. What is unique about this case is that it analyzes both sides of a buyer-seller relationship which allows students to see how the buyer's payables are linked to the seller's receivables. The case has four pedagogical objectives: 1) Financial statement analysis: Practice calculating and interpreting financial ratios particularly related to working capital management. Explore the concept of a cash conversion cycle (CCC) and its components (days of sales outstanding-DSO, days of sales in inventory-DSI, and days of payables outstanding-DPO) as well as the linkages between firms by analyzing both sides of a buyer-seller relationship. Finally, help students understand how payment terms, in particular, seller credit term such as "1%/10 net 30" or buyer discounts such as "1% for 30 days faster payment," have implied financing rates imbedded in them. 2) Introduction to supply chain finance: Analyze the mechanics and economics of SCF, a modern form of working capital management and an increasingly important funding source for global firms. SCF, a form of "reverse factoring," is one of many funding strategies firms have for receivables. 3) Buyer-seller dynamics and policies against extended payment terms: Analyze the competitive dynamics of a relationship between a large, investment grade buyer from a developed country sub-investment grade supplier from a developing country (Brazil). In particular, the case challenges students to assess the ethical, financial, and managerial implications of extended payment terms. Both the US (the "Supplier Pays Initiative" in July 2014) and the EC (the "Late Payments Directive" in February have promulgated directives encouraging large companies to pay their small suppliers quickly. This practice of extending payables has gotten considerable attention in the business press in recent years because of the financing burden it places on smaller, capital-constrained firms. 4)Market imperfections framework: Use a "market imperfections" framework to understand why and under what conditions supply chain finance creates value for sellers in particular (e.g., Fibria) and for society more generally (e.g., the system economics), P&G claims SCF is a "win-win-win solution for itself, Fibria, and Citigroup. The question is who, if anyone, loses? Assignment Questions 1. Why did P&G extend its payment terms for suppliers in April 2013? 2.What was the likely impact of the new payment terms on P&G's financial statements and its funding needs? On Fibria's financial statements and funding needs? 3. Why did P&G simultaneously launch the SCF program in April 2013, along with the new payment terms? How does the SCF program work and who benefits from it? Is the SCF financing rate competitive? 4.P&G claims that SCF is a win-win-win program? Is that true? Does anyone lose? 5.ShouldFibria continue to use the SCF program? 6. In general, should large buyers pay smaller suppliers with extended terms? What is the argument for having P&G pay its A/P quickly? Supply Chain Finance at Procter & Gamble in April 2013, Procter & Gamble ( PGL the w a t e r packaged goods company announced that it would end its payment terms to supplies by days.rom the average of approximately 45 to 75caldar days. At the same time, announced a supply chain financing Sprogaming plan t eract with one of two goals g al's Fibria Celulle SA (Fibria n d the SCF perm in the middle of 2001 and manas had been pleased with the program's to date a p plier in the manufactured Weached wcalyptus pulp in Brazil and shipped it comes a America, where it was to make household product chat and paper towe US al murage, Mate De Mora Carme managed most operational aspects of the relationship out of his office in Miami, Florida in 2015, he and members of 'stry group in an er viewing the cost and be the program, and deciding whether to conto with the current F u nder wh i ch the other hand in the pergam Procter & Gamble Founded in 1 PC was one of the web's most widely recognized and respected Driven by its to improve the lives of the world's manuacted and marked a wide range of care and ads Over of its brands including A Bounty.Charm Cattela. O andampi d annuali Won, and many brands led the product categorie Madiquard in t he med 511 i n sales of b on in the fiscal year ending lune 2015 Exhibits 1 and 2 for PWG data) had been ac t of the Dow Jones Industrial Aware and had maintained a long term credit rating of AA from Sundard & Poor's since 2001 As the economy slowed following the financial crisis in 20s and fell into a global i growth and protestalled. Responding to the CEO Meldunda five-year, so w e cost cutting program in 2002, stating "The opportunity lies in all of We curry weatest s wing in the eve n ing old . For the exclusive use of M. Canfield, 2020. a and about $1 ton from multing Reacting to the enement & Co t Ali budi ted PC had promised top the Band-Aid in mo d certainly did with a contructuring... The cost cutting is very much what we had hoped Now the hand patienting By April 2015. PC had diminated 11.000 de pesos over the pervious three years, any double the 5.70 pows he 10% of the contacturing w e i pledde tinery2001 Genesis of the SCF Program As put the corporate con ve. P enduda view of its working capital practices by comparing its fancial m a her CRGm . This benchmarking an showed that typically paid its suppliers now seemal business partner e quickly than ib peen. On average le had been paving supplies in 5 day, compared to 5 to 100 days. more for other forms in the industry. Exhibit shows historical data on working capital i s) so much was because our buyers had always focused on price, quality delivery, v resiveness and innovation. The c ar's wed focus on a Tol Surder Return metric, however, bought a new emphasis on cash flow The findings from the benchmarking the press from stary group to be purchasing group, with a corporate mandate to extend contacted payment by at least 30 days. Both ups understood that this de l ications for their supply ing lenger to pay it invece, PSG suppliers would need to wait longer to receive funds for this , decided to implementa SCF program along with the payment extension to give supplies the pic to be paid more quickly. Facilitated by P&G banking partner the SCF bank the pegam would mitigate the impact o nded promings upplies with a capa em that PCS Actating Gerstlerocalled The SF program ined in a longstanding challenge for the treasury group to l age our corative financial policies to drive economic value for and out business partners. These pode ver ight pricing on debts and commercial paper, but we extended or payment term, we wanted to find a way to support our external business parts and trengthen our supply chain To design and implement the SC G a dedicated counctional am that inded members from the firm's try i ng and purchasing and formed pot board to implementation Gender : Wewe focused on designing program sot that would be a win for a win for our external business partners, and a wife the SCF Genesis of the SCF Program As part of the corporate contine conducted a review of its working capital mar t showed that a typically paid upplierown is external business part more quickly thin its peers. On average had been paying suppliers in 45 days.compared to 25 to 100 days. more for other forms in the industry Exhibit shows historical data on G's working capital metres) Vice President and Aint T Doug Gentented, "Then our payment difered much was because our buyers had always focused on price, quality, delivery, www The 's we a To Suru Ran ITSR metric, hower, bewught a new emphasis on cash flow." The findings from the benchmarking an d the few from Gry group to its purchasing group, with a compare and to ex t racted payment term batas days. Both groups understood that this decision had implications for their supplier by taking long to pay is ce suppliers would need to wai t to receive funds. For this reason, RG decided to implementas program along with the payment on to give supplies the price to be paid morqudy. Facilitated by a buning partner the bank the program would mit the impact of payments by providing P&G supplies with a capital on terms that related PG.A cedit rating Gerstle recall The program originated in a longstanding challenge for the trary group how to leverage r a tive financial policies to drive come value for P&G and business part . The policies e very tight pricing and and comme paper, but as we extended our payment term, we wanted to find a way to support our al business partners and strengthen our supply chain Te design and implement the formed a dedicated cross-functional tram that included members from the banking and purchasing and be formeda pect board to implementation Genested: We were focused on designing a pegam structure that would be a windows, a win for our extra b e part , and a win for the hanks called 'wiiww e n. Alth programaded for years, the key was design avent work for and it wa s partners SCF Program Design, Rollout, and Announcement The objective of the SC program was to allow both P andopplies to move their powered payment terms. Spically, Pas ive was to pay its inves.onepe 75 daysering them whereas S uppliers preferred to be paid as soon as possible, sometimes as soon as 15 days They For the exclusive use of M. Canfield, 2020. er inice websit e by wing the roof an SCF bankas an intermediary Design SCF Program To achieve the dual payment objectives, the program required the respective parties to into three Waal (wo-party contracts. These included a communal contrast between PAG and the suppleren de SC hunks specifying put for m e and a financing suppliers and the banks reciting that the S unshad the right, but not the obligation to buy PAC s hade the sun requested advanced payment is not the supplier's claim on the invoice would be tranned from the supplier to the Chunkinachange for a discounted payment would then la value the whee l Silent Our AA-rating makes our tables into short-term, high quality, liquidance. The underlying pem is that the higher the differential between our AA rating and o upplies'c funds, the more value we can create for poli s hes the the suppliers and the SCF banks) As PSG's project teamsat down to design the specific details of SCF A c e Direct of Purchasing lines the program's objectives ght from the start we had four design prise for the SCF programa) te cos t at supplier price i s for longer payment terms since we were starting fro m wms to control the implementation mather than cepat t and w are funding competition by wwing at least two participating banks forech supplier Neting with several banks in parallel created a lot of complexity and work, but it was anales choice. The goal was to make the program holistic and table and one we could Launch globally from top 100.000 person day As noted, a key design are of the SC program was the decision to have two banking partner in each region o f Aded by A rirane Sunan Mereted the banks partner for the program C oup Deutsche Bank and JPMorgan Chase PSG had a longstanding relation with Citigroup, which won the night boot SCF worldwide. Moraan group's Global Head of Supply Chain ested. Well obal companies improve the othe r and timine their working capital metries, and help wonders improve their liquidity and duce their financing o n group was ined for supplier - Ma Chand for As a le a d the program was the banking med en Sua Melated workers for the sp e ak and Morgan Chase had a l anding with which woh SC Worldwide Monaghan Chigroup's Global Gado Supply Chain We e n we wpplied in North and South Am suppli e d in an in Alb Deutsche Bank Exploring the SCF Progree to Suppliers For the exclusive use of M. Canfield, 2020. with ho p plis. The explained the mechanics of them add me The chea the were facing to the of financing the same through the program. The howed that both pardache p i ano the supplier w w w . the d ay we bank d ays. Tales and how the GSC A day the o ther the www www thehur dhe For the exclusive use of M. Canfield, 2020. ded i ng for the spotly be ball with than with the engine payment the song with Te fund the words the fina l then f rom Gonday Supplies when dhe A SCF Program by AGOR capabilities that reducermat i ty and improve working expand chi The working capital program will foc. moving to pay with I parte Wedded wi t h will be t rafic dust called and that www a win-win-wif e pure, and then this ly will help m e or all of the gative impact on the working capital esempurn a will teaching valet imperdiety and small For the exclusive use of M. Canfield, 2020. The further the spending wide web w people in the c omplet Fibria Celulose S.A Supply Chain Finance at Procter & Gamble Learning Objectives: This case was written for the first-year corporate finance course at Harvard Business School to teach basic financial statement analysis and to illustrate supply chain finance as a modern form of working capital management. What is unique about this case is that it analyzes both sides of a buyer-seller relationship which allows students to see how the buyer's payables are linked to the seller's receivables. The case has four pedagogical objectives: 1) Financial statement analysis: Practice calculating and interpreting financial ratios particularly related to working capital management. Explore the concept of a cash conversion cycle (CCC) and its components (days of sales outstanding-DSO, days of sales in inventory-DSI, and days of payables outstanding-DPO) as well as the linkages between firms by analyzing both sides of a buyer-seller relationship. Finally, help students understand how payment terms, in particular, seller credit term such as "1%/10 net 30" or buyer discounts such as "1% for 30 days faster payment," have implied financing rates imbedded in them. 2) Introduction to supply chain finance: Analyze the mechanics and economics of SCF, a modern form of working capital management and an increasingly important funding source for global firms. SCF, a form of "reverse factoring," is one of many funding strategies firms have for receivables. 3) Buyer-seller dynamics and policies against extended payment terms: Analyze the competitive dynamics of a relationship between a large, investment grade buyer from a developed country sub-investment grade supplier from a developing country (Brazil). In particular, the case challenges students to assess the ethical, financial, and managerial implications of extended payment terms. Both the US (the "Supplier Pays Initiative" in July 2014) and the EC (the "Late Payments Directive" in February have promulgated directives encouraging large companies to pay their small suppliers quickly. This practice of extending payables has gotten considerable attention in the business press in recent years because of the financing burden it places on smaller, capital-constrained firms. 4)Market imperfections framework: Use a "market imperfections" framework to understand why and under what conditions supply chain finance creates value for sellers in particular (e.g., Fibria) and for society more generally (e.g., the system economics), P&G claims SCF is a "win-win-win solution for itself, Fibria, and Citigroup. The question is who, if anyone, loses? Assignment Questions 1. Why did P&G extend its payment terms for suppliers in April 2013? 2.What was the likely impact of the new payment terms on P&G's financial statements and its funding needs? On Fibria's financial statements and funding needs? 3. Why did P&G simultaneously launch the SCF program in April 2013, along with the new payment terms? How does the SCF program work and who benefits from it? Is the SCF financing rate competitive? 4.P&G claims that SCF is a win-win-win program? Is that true? Does anyone lose? 5.ShouldFibria continue to use the SCF program? 6. In general, should large buyers pay smaller suppliers with extended terms? What is the argument for having P&G pay its A/P quickly? Supply Chain Finance at Procter & Gamble in April 2013, Procter & Gamble ( PGL the w a t e r packaged goods company announced that it would end its payment terms to supplies by days.rom the average of approximately 45 to 75caldar days. At the same time, announced a supply chain financing Sprogaming plan t eract with one of two goals g al's Fibria Celulle SA (Fibria n d the SCF perm in the middle of 2001 and manas had been pleased with the program's to date a p plier in the manufactured Weached wcalyptus pulp in Brazil and shipped it comes a America, where it was to make household product chat and paper towe US al murage, Mate De Mora Carme managed most operational aspects of the relationship out of his office in Miami, Florida in 2015, he and members of 'stry group in an er viewing the cost and be the program, and deciding whether to conto with the current F u nder wh i ch the other hand in the pergam Procter & Gamble Founded in 1 PC was one of the web's most widely recognized and respected Driven by its to improve the lives of the world's manuacted and marked a wide range of care and ads Over of its brands including A Bounty.Charm Cattela. O andampi d annuali Won, and many brands led the product categorie Madiquard in t he med 511 i n sales of b on in the fiscal year ending lune 2015 Exhibits 1 and 2 for PWG data) had been ac t of the Dow Jones Industrial Aware and had maintained a long term credit rating of AA from Sundard & Poor's since 2001 As the economy slowed following the financial crisis in 20s and fell into a global i growth and protestalled. Responding to the CEO Meldunda five-year, so w e cost cutting program in 2002, stating "The opportunity lies in all of We curry weatest s wing in the eve n ing old . For the exclusive use of M. Canfield, 2020. a and about $1 ton from multing Reacting to the enement & Co t Ali budi ted PC had promised top the Band-Aid in mo d certainly did with a contructuring... The cost cutting is very much what we had hoped Now the hand patienting By April 2015. PC had diminated 11.000 de pesos over the pervious three years, any double the 5.70 pows he 10% of the contacturing w e i pledde tinery2001 Genesis of the SCF Program As put the corporate con ve. P enduda view of its working capital practices by comparing its fancial m a her CRGm . This benchmarking an showed that typically paid its suppliers now seemal business partner e quickly than ib peen. On average le had been paving supplies in 5 day, compared to 5 to 100 days. more for other forms in the industry. Exhibit shows historical data on working capital i s) so much was because our buyers had always focused on price, quality delivery, v resiveness and innovation. The c ar's wed focus on a Tol Surder Return metric, however, bought a new emphasis on cash flow The findings from the benchmarking the press from stary group to be purchasing group, with a corporate mandate to extend contacted payment by at least 30 days. Both ups understood that this de l ications for their supply ing lenger to pay it invece, PSG suppliers would need to wait longer to receive funds for this , decided to implementa SCF program along with the payment extension to give supplies the pic to be paid more quickly. Facilitated by P&G banking partner the SCF bank the pegam would mitigate the impact o nded promings upplies with a capa em that PCS Actating Gerstlerocalled The SF program ined in a longstanding challenge for the treasury group to l age our corative financial policies to drive economic value for and out business partners. These pode ver ight pricing on debts and commercial paper, but we extended or payment term, we wanted to find a way to support our external business parts and trengthen our supply chain To design and implement the SC G a dedicated counctional am that inded members from the firm's try i ng and purchasing and formed pot board to implementation Gender : Wewe focused on designing program sot that would be a win for a win for our external business partners, and a wife the SCF Genesis of the SCF Program As part of the corporate contine conducted a review of its working capital mar t showed that a typically paid upplierown is external business part more quickly thin its peers. On average had been paying suppliers in 45 days.compared to 25 to 100 days. more for other forms in the industry Exhibit shows historical data on G's working capital metres) Vice President and Aint T Doug Gentented, "Then our payment difered much was because our buyers had always focused on price, quality, delivery, www The 's we a To Suru Ran ITSR metric, hower, bewught a new emphasis on cash flow." The findings from the benchmarking an d the few from Gry group to its purchasing group, with a compare and to ex t racted payment term batas days. Both groups understood that this decision had implications for their supplier by taking long to pay is ce suppliers would need to wai t to receive funds. For this reason, RG decided to implementas program along with the payment on to give supplies the price to be paid morqudy. Facilitated by a buning partner the bank the program would mit the impact of payments by providing P&G supplies with a capital on terms that related PG.A cedit rating Gerstle recall The program originated in a longstanding challenge for the trary group how to leverage r a tive financial policies to drive come value for P&G and business part . The policies e very tight pricing and and comme paper, but as we extended our payment term, we wanted to find a way to support our al business partners and strengthen our supply chain Te design and implement the formed a dedicated cross-functional tram that included members from the banking and purchasing and be formeda pect board to implementation Genested: We were focused on designing a pegam structure that would be a windows, a win for our extra b e part , and a win for the hanks called 'wiiww e n. Alth programaded for years, the key was design avent work for and it wa s partners SCF Program Design, Rollout, and Announcement The objective of the SC program was to allow both P andopplies to move their powered payment terms. Spically, Pas ive was to pay its inves.onepe 75 daysering them whereas S uppliers preferred to be paid as soon as possible, sometimes as soon as 15 days They For the exclusive use of M. Canfield, 2020. er inice websit e by wing the roof an SCF bankas an intermediary Design SCF Program To achieve the dual payment objectives, the program required the respective parties to into three Waal (wo-party contracts. These included a communal contrast between PAG and the suppleren de SC hunks specifying put for m e and a financing suppliers and the banks reciting that the S unshad the right, but not the obligation to buy PAC s hade the sun requested advanced payment is not the supplier's claim on the invoice would be tranned from the supplier to the Chunkinachange for a discounted payment would then la value the whee l Silent Our AA-rating makes our tables into short-term, high quality, liquidance. The underlying pem is that the higher the differential between our AA rating and o upplies'c funds, the more value we can create for poli s hes the the suppliers and the SCF banks) As PSG's project teamsat down to design the specific details of SCF A c e Direct of Purchasing lines the program's objectives ght from the start we had four design prise for the SCF programa) te cos t at supplier price i s for longer payment terms since we were starting fro m wms to control the implementation mather than cepat t and w are funding competition by wwing at least two participating banks forech supplier Neting with several banks in parallel created a lot of complexity and work, but it was anales choice. The goal was to make the program holistic and table and one we could Launch globally from top 100.000 person day As noted, a key design are of the SC program was the decision to have two banking partner in each region o f Aded by A rirane Sunan Mereted the banks partner for the program C oup Deutsche Bank and JPMorgan Chase PSG had a longstanding relation with Citigroup, which won the night boot SCF worldwide. Moraan group's Global Head of Supply Chain ested. Well obal companies improve the othe r and timine their working capital metries, and help wonders improve their liquidity and duce their financing o n group was ined for supplier - Ma Chand for As a le a d the program was the banking med en Sua Melated workers for the sp e ak and Morgan Chase had a l anding with which woh SC Worldwide Monaghan Chigroup's Global Gado Supply Chain We e n we wpplied in North and South Am suppli e d in an in Alb Deutsche Bank Exploring the SCF Progree to Suppliers For the exclusive use of M. Canfield, 2020. with ho p plis. The explained the mechanics of them add me The chea the were facing to the of financing the same through the program. The howed that both pardache p i ano the supplier w w w . the d ay we bank d ays. Tales and how the GSC A day the o ther the www www thehur dhe For the exclusive use of M. Canfield, 2020. ded i ng for the spotly be ball with than with the engine payment the song with Te fund the words the fina l then f rom Gonday Supplies when dhe A SCF Program by AGOR capabilities that reducermat i ty and improve working expand chi The working capital program will foc. moving to pay with I parte Wedded wi t h will be t rafic dust called and that www a win-win-wif e pure, and then this ly will help m e or all of the gative impact on the working capital esempurn a will teaching valet imperdiety and small For the exclusive use of M. Canfield, 2020. The further the spending wide web w people in the c omplet Fibria Celulose S.A