SUPPLY CHAIN FINANCE - 20 MARK DETAILED ANSWERS
1. Can a company use supply chain finance to reduce its cost of capital and improve working
capital?
Yes. SCF allows companies to access liquidity at lower costs by leveraging the creditworthiness of
the buyer, improving working capital without affecting supplier relationships.
Example: Buyer A (AAA-rated) works with Supplier B (BBB-rated). Supplier B uses reverse factoring
to get early payment at Buyer A's lower borrowing rate, thus reducing its cost of capital and
improving Buyer As Days Payable Outstanding (DPO) without disrupting the supply chain.
2. A firm is experiencing poor cash flow despite strong sales. Evaluate how supply chain finance
strategies can help improve liquidity.
SCF tools like invoice discounting, dynamic discounting, and inventory financing enable faster
conversion of receivables into cash. This bridges liquidity gaps despite high sales.
Example: A manufacturer with 5 crore in receivables can factor invoices to receive 4.85 crore
immediately (after a 3% fee), improving liquidity without waiting 60 days for payment.
3. A company sources raw materials from politically unstable regions. Identify financial instruments
to mitigate supply chain risk.
Instruments:
- Trade credit insurance
- Letters of credit (LC)
- Political risk insurance (PRI)
- Currency hedging (if volatility is also a concern)
Example: A mining firm in Africa uses PRI to cover expropriation and transfer risk, ensuring
reimbursement if local disruption affects operations.
4. Insurance and hedging for currency fluctuation risks.
Insurance: Currency fluctuation insurance protects against exchange rate losses.
Hedging: Use of forward contracts, options, or swaps.
Example: A German firm importing from Japan buys a forward contract to fix EUR/JPY at 125. If the
rate drops to 115, losses are avoided.
5. Role of a financial risk register in a global supply chain network.
A financial risk register tracks, assesses, and mitigates risks in supply chains.
Components:
- Risk description
- Likelihood & impact
- Risk owner
- Mitigation strategy
- Monitoring frequency
6. Risk assessment techniques for supplier default.
Use FMEA, Monte Carlo simulation, sensitivity analysis, and scenario planning.
Example: An auto company evaluates that Tier-2 chip supplier default would cost 20 crore in 2
months. It adopts dual sourcing and SCF to mitigate the risk.
7. Supplier uses invoice discounting to meet working capital needs.
Case: Sunrise Textiles discounts a 50 lakh invoice for 48.5 lakh. Liquidity is gained quickly.
Benefits:
- No need for collateral
- Quick funding
Trade-offs:
- Cost of discounting
- Risk of buyer default remains
8. Capital structure impact during economic downturns.
Highly leveraged firms face debt servicing strain. Equity-rich firms can absorb shocks better.
Example: During COVID-19, a debt-heavy electronics firm couldnt finance inventory; another with a
balanced structure used SCF to maintain supply.
9. Government-backed SCF program to support SMEs.
Mechanism: Reverse factoring on digital platforms with government guarantee.
Example: Indias TReDS platform helps MSMEs get paid in 3 days without loans, strengthening
supply chains and improving SME liquidity.
10. Strategy to shorten cash conversion cycle (CCC).
Use:
- Inventory financing (reduces DIO)
- Factoring (reduces DSO)
- Reverse factoring (extends DPO)
Example: RetailCo shortens CCC from 80 to 20 days, freeing up 10 crore in working capital.
11. Automation in AP/AR to improve cash flow visibility.
Benefits:
- Real-time dashboards
- Faster processing
- Accurate forecasting
Example: FastMart automated AR, reduced DSO by 20%, and had better vendor payment
scheduling.
12. Evaluating financial statements for supply chain inefficiencies.
Metrics:
- Inventory turnover
- DIO, DSO, DPO
- Gross margin
- CCC
Example: ABC Foods had a turnover of 4x vs industry 8x indicates excess inventory.
13. Case: Shine Components & ABC Electronics
Solution: Reverse factoring. Shine gets paid early by a bank; ABC pays later.
Benefit: Early liquidity for Shine without ABC changing terms.
14. Case: Inventory bottlenecks
Solutions:
- ABC analysis
- JIT inventory
- VMI
- Forecasting
Example: Consumer electronics firm cuts DIO by 20 days, saving 50 lakh/year.
15. Case: SwiftLogistics integration
Solution: ERP + SCF tool integration
Benefit: 80% reduction in billing disputes, 15-day faster payments, improved client satisfaction.
16. Case: Global Textiles currency risk
Use:
- Forward contracts
- Currency options
- Natural hedging
Example: Locked USD/EUR at 1.12; spot dropped to 1.05. Saved 200,000 on $3M imports.
--- END OF DOCUMENT ---
