MAKING EXPORT FINANCE SUPPLY CHAIN EFFECTIVE & EFFICIENT LIVE CASE

*Prepared by Pr !" Har#$ra% S$&'( Pr !e)) r & C &)*+%a&% IIFT, Ne- .e+($

ABC & Co. is a manufacturing unit and SME involved in export of ladies garments to an African country. Company is supplying garments to one big buyer with an arrangement of single supply order e uivalent to !S" #$$%$$$ per shipment on regular basis. /USINESS MO.EL &oreign buyer had a business model to supply garments to African retailers with '$ days credit period. &oreign buyer conveyed price rigidity in export proposal which meant once price would be fixed thereafter it will not be changed under any circumstances. Buyer ensured no restriction on shipments but with restriction of price rigidity. (he offer was lucrative to the company at that point of time and made all efforts to maintain export performance. ROLE OF TREASURY Company was exporting to wholesale buyer but after sometime found shortage of cash. Management of the company as)ed the (reasury "epartment to find out solutions to overcome cash problem and to create sustainability in export business model. Management of the company found that at that time sustainability in business could be created with financial restructuring and created action group consisted of treasury% purchase% sale and logistic managers. (reasury was given the main responsibility for developing strategy to ma)e export finance chain effective and efficient. *roup focused to find out financial issues and develop re uisite strategy for growth with high profitability with less capital and low cost. EXISTING EXPORT CHAIN ANALYSIS *roup felt the need to analy+e the existing export chain and wor)ing capital re uirements of the company% to understand export finance supply chain. Company was availing pre and post shipment finance from ban) at concessional interest rates in ,upees to meet financial re uirements. -n critical analysis of existing export chain% group found that company was )eeping high stoc) of raw material to maintain export uality and to avoid shortages. ,aw material was arranged from old vendor from South .ndia. /or)ing capital funds re uired to complete the existing export chain with buc)ets of cash% raw material% stoc) in process% finished goods and export bill receivables were mentioned in fig. # and table 0 1Annexure 2 .3. (reasury observed that the existing export chain and wor)ing capital re uirements were not creating sufficient cash surplus for growth of the business. Moreover% due to price rigidity cash inflows remained constant and were not increasing in consonance with cash outflows.

IMPROVEMENTS (reasury too) decision to improve the existing export chain to enhance profitability and to reduce cost of funds. &ollowing improvements were implemented in existing export chain4 Stoc) of raw material was reduced from 5 months re uirement to one month re uirement% by locating new suppliers% close to the unit with new vendor agreements. .nstead of using scissors% textile cutting second hand machine was purchased to cut 0$ layers of textile at a time. Moreover% training programme for labour conducted to improve s)ills and to create motivation. Sessions were conducted in evening on alternative days with refreshments. Extra wor)ing hours were given to labour due to increase in production. 6ogistics Manager with the help of clearing and forwarding agent arranged space for export consignments to Africa efficiently% reducing the time from 5 months to 78 days. *roup recommended to the management to negotiate for price enhancement and in case of price rigidity stand by buyer% the credit period be negotiated to reduce from '$ days sight to 9$ days that too from date of shipment. &oreign buyer refused to increase price but accepted the reduced credit period starting from date of shipment. (reasury started hedging the export payments.

(he revised export chain along with funds re uirements are shown in fig. 7 and table 8 1Annexure 2 ..3 respectively. .mprovement in export chain released funds by unlayering the money from various buc)ets of export chain. ROLE OF TREASURY IN GRO0TH Company planned to expand business in other African countries% because of its ac uired experience and vast potential for ladies garments. &or expansion% surplus funds were re uired which can only be created from improvements. &irstly% management tried to get higher price but failed due to price rigidity. Secondly% company also started negotiation with buyers in other African countries for business development. Company felt the need to generate more funds from the business to exploit new mar)ets and expand international business. INNOVATION /Y TREASURY (reasury of the company advised to the management to demand advance payment of 8$: against each export order from the buyer. Since buyer did not want to increase price but agreed to give advance of 0$: with each order. (reasury also negotiated !S" loan from the ban) based on 6.B-, rate instead of availing export finance in ,upee. (hese innovations in wor)ing capital of export chain unlayered the funds from export chain table 9 1Annexure 2 ...3. .mprovements and innovations recommended by treasury resulted in unlayering of funds from export chains. (he comparative results due to financial restructuring strategies are shown in table ; 1Annexure 2 ...3. .mprovements in financial areas of the company by the treasury created extra funds for development of international business. ISSUES FOR .ISCUSSION /hat are the learning points from the live case< /hat type of financial restructuring were recommended by the treasury and results thereof = ,ecommend further improvement of the export finance supply chain of the company for further growth in international business. 2

A&&e1*re I STU.Y OF EXISTING EXPORT CHAIN OF THE COMPANY

5 months 0# days

Cash
/*2#e% 3

,aw Material
/*2#e% 4 Upper P r%$ &

Stoc) in process 1semi finished goods3

/*2#e% 5 M &ey Layered H r$6 &%a+ L$&e L -er P r%$ &

5 7 &%() *)a&2e

5 M &%(

Export bill receivable

/*2#e% 8

&urnished goods & export consignment in transit% warehouse and custom clearance
/*2#e% 9

EXISTING EXPORT CHAIN FIGURE NO" 3 E1$)%$&' e1p r% 2(a$& (ad ! ++ -$&' !$&a&2$a+ )%r*2%*re:
/*2#e% A;era'e Per$ d ! S% 2# $& %(e /*2#e% 5 Months 0# days M &ey Layered $& /*2#e% C )% ! M &ey Layered < ="8> p"a" 5$%$$%$$$ 8908$ 9%''%'''.'' 5%907.98 #%5'%'''.'' @%5'%'''.'@ 5$%$$%$$$ ;0%#@;.8$ 9%$$%$$$ #%8$%$$$ #%$$%$$$ 5@%8$%$$$ #%$#%;#0.55 78%$$%$$$

,aw Material Stoc) in ?rocess 1Semi finished *oods3 &inished *oods & Consignment in (ransit and /arehousing Export ,eceivables

,M > ,M > 0$: ME > ,M > 0$: ME> 8: ?C > (C >

5Months

'$ days A 0$ B(? >##$ days .nterest ,ate C ;.8: p.a. !S" #$$%$$$ #!S" > 78 .B,

(otal

#%0#%@'%'''.'@

0%55%;;7.7@

TA/LE NO"4 RM ? Ra- Ma%er$a+ ME ? Ma&*!a2%*r$&' E1pe&)e) PC ? Pa2#$&' C(ar'e) a+) $&2+*de) + 2a+ %ra&)p r% 2(ar'e)
NTP ? N r7a+ Tra&)$% Per$ d by FE.AI app+$2ab+e % I&d$a& /a&# & e1p r% b$++)" TC ? L 2a+ Tra&)p r% C(ar'e)

A&&e1*re II # month Cash

/*2#e% 3 @F*&d) $& US.A

#8 days Stoc) in process

/*2#e% 5 @F*&d) $& US.A 98 day)

,aw Material
/*2#e% 4 @F*&d) $& US.A

Export bill ,eceivable

BC day) /*2#e% 8 @F*&d) $& US.A

&urnished *oods
/*2#e% 9 @F*&d) $& US.A

INNOVATIVE EXPORT CHAIN FIGURE NO" 9

CALCULATION OF MONEY LAYERE. & COST OF IMPROVE. EXPORT CHAIN .mproved export chain had following financial structure4 /*2#e% A;era'e Per$ d ! S% 2# # month #8 days M &ey Layered ,M > #$%$$%$$$ ,M > 8%$$%$$$ 0$: ME> #%$$%$$$ 9%$$%$$$ ,M > #8%$$%$$$ 0$: ME> 5%$$%$$$ 8: ?C > ;8%$$$ Actual (C > #%$$%$$$ #'%;8%$$$ 78%$$%$$$ M &ey re+ea)ed a) 2 7pared % E1$)%$&' C(a$& 0$%$$%$$$ 0%5'%'''.'@ C )% ! M &ey Layered < ="8> p"a" 9%08$ #%@7'.50

,aw Material Stoc) in ?rocess 1Semi &inished *oods &inished 78 days *oods & Consignmen t in (ransit & /arehousin g Export 9$ days interest ,eceivables C ;.8: !S" #$$%$$$ .!S" > 78 .B, (otal

#@%;8%$$$

#@%09#.''

nil

88%7;'.78

@$%;8%$$$ TA/LE NO" 8

77%#7%'''.'@

@0%0$$.;9

A&&e1*re III CALCULATION OF MONEY LAYERE. & COST OF INNOVATIVE EXPORT CHAIN .nnovative export chain had following financial structures4 /*2#e% A;era'e %a#e& % Per$ d S% 2# )a7e a) $& pre;$ *) 2(a$& # month M &ey Layered $& US. Exchange ,ate !S" > 78 M &ey re+ea)ed C )% ! M &ey $& r*pee) a) Layer$&' < 2 7pared % 4"8> p"a" $& $7pr ;ed 2(a$&" US. 0$: of advance order '%$$%$$$ D7.95

,aw Material

Stoc) in ?rocess 1Semi finished goods3 &inished *oods Stoc) in (ransit & warehousing Bill ,eceivable

#8 days cost As per improved chain 78 days cost As per improved chain

9$ days from bill of lading As per new arrangements

,M > #$%$$%$$$ or D 00%000.00 Advance 0$: of order > D0$%$$$.$$ Balance > D0%000.00 Cost of > 9%$$%$$$ Stoc) in process or D#5%555.55 Cost of finished #'%;8%$$$ Stoc)s in transit & /arehousing or D75%@@@.@' Export Bill D #$$%$$$

EEEEEEE

D #5.;$

EEEEEEE

D #58.0;

EEEEEEE

D 7#$.'9

(otal or

D#8'%777.07 ;#%;7%''$.@$

'%$$%$$$ or

D 897.89 08%7$8.0$

TA/LE NO" B COMPARATIVE FINANCIAL EFFICIENCY OF EXPORT CHAINS E1p r% C(a$& Existing Export Chain .mproved Export Chain .nnovative Export Chain T %a+ M &ey Layered #%0#%@'%'''.'' @$%;8%$$$ ;#%;7%''$.@$ M &ey U&+ayered Bil 7#%#7%'''.'' '$$%$$$ TA/LE NO" = 5 I&%ere)% C )% ! M &ey Layer$&' 0%55%;;7.7@ @0%0$$.;9 08%7$8.0$ I&%ere)% C )% Sa;$&' !r 7 pre;$ *) 2(a$& Bil #%8#%8;7.7@ 89%;'7.@$