Category Archives: Finance

Kiva: Can Micro-Finance Make a Macro-Difference?

A few months ago, I was tuned into Kiva by a fellow hoser. Kiva, the world’s first person-to-person micro-lending website, empowers individuals to lend directly to unique entrepreneurs in the developing world with the goal of alleviating poverty.

When you make a loan on Kiva, a (U.S. 501(c)3) non-profit orgainization, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. In addition, through its data-rich, transparent lending platform, you not only get e-mail updates that inform you of the loan’s status and allow you to track repayments, but you get to see how money flows throughout the entire loan life-cycle and what effect it has on people and institutions lending it, borrowing it, and managing it along the way.

To keep overhead low, and insure that the full amount of your loan goes to the individual in need, Kiva partners with existing micro-finance institutions around the world that are experts in identifying qualified entrepreneurs and in helping them succeed in their business. To date they have made loans totaling $41,246,560 through 104 partner organizations at a total default rate of only 1.52%. If we restrict our analysis to the 82 partner organizations that are currently active or in a pilot stage, the rate drops to 0.56%. Furthermore, 74 of these organizations, which account for 93.67% of the loans, have a default rate of 0%. All I can is if the North American banks were this good at lending, maybe we wouldn’t be in the mess we’re currently in!

Needless to say, I decided to try it out. I’m all for sustainability initiatives, and it’s much more sustainable then simply giving to certain charities. (Even though, as evidenced by my recent sustainability challenge, I’m a big fan of certain charitable organizations, and, in particular, those that are researching sustainable causes and helping children who are unable to help themselves, there are certain charities that I have an absolute disdain for. Specifically, those that simply extend charity to those that, with the right help and support, would be perfectly capable of helping themselves. As the proverb goes, give a man a fish and he will eat for a day but teach him how to fish and he will eat for a lifetime.)

To date, the doctor has made six $25 Kiva loans:

  • Gulchehra Rahimova on June 28, disbursed on July 12, first repayment installment on August 12
  • Din Ly on June 28, disbursed on July 12, first repayment installment on August 12
  • Araba Awotwe on August 14, disbursed on August 29
  • Serigne Cisse on August 14, disbursed on August 29
  • Mavluda Tosheva on September 1
  • Mario Aguilar on September 1

As far as I can tell, it looks like it works great. Now it’s true, as the site clearly disclaims in the footer of every page, that lending to the working poor through Kiva involves risk of principal loss, but so does investing in the stock market, or, even worse, gambling at the local casino — but at least when you loan through Kiva, you’re making a difference, and, as I noted above, your chances of getting your money back, to re-lend to someone else in need, is much greater.

Thus, I would encourage everyone to take part of their discretionary funds and try lending through Kiva. Considering that you can start for $25, or the cost of one good bottle of wine (at the liquor store and not your local 300% mark-up restaurant), it’s an endeavor that the vast majority of us should be able to afford. And if even half of the 1.2B people in the developed world made even one loan a year, think of the sustainable difference it could make. That’s something worth aiming for. And if you do lend, tell them jeff <at> hosernews <dot> ca sent you (because I believe in giving credit where credit is due).

And yes, there is a supply chain lesson here for all of us. If a good supplier is in trouble in these hard financial times, key customers can band together to keep it financially solvent until times improve through faster payments, guaranteed orders, and low-interest loans. And, in addition to the good feeling these customers will get from knowing they did right, they will have also secured long-term capacity at a strategic supplier. Let’s face it — most business people want to do the right thing when given the choice. This means that if you stick by good supplier when it’s having a bad day, it’ll stick by you through thick and thin.

Supply Chain Finance Slowly Takes Hold

It was nice to see the recent article by Henry Ijams of PayStream Advisors, Inc in Supply & Demand Chain Executive on “emerging payment and discount paradigms in the supply chain” and the benefits of working capital optimization, which include:

  • paper reduction
  • liquidity injection into the supply chain
  • supply chain risk reduction
  • purchase-to-pay automation financing

The point of the article is that supply chain finance is finally starting to take hold, which is good, even if most people are still confusing “discounts” with “finance”. Not that discounts are bad because, appropriately used, they’re quite good. Appropriately defined early payment discounts save the buyer money, as they pay a lower price, and save the supplier money, as they don’t have to borrow financing at a higher rate. It’s a win-win.

They key to supply chain finance, as correctly noted in the article, is end-to-end e-Procurement with full automation when there is no discrepancy in the m-way match (between purchase order, goods receipt, invoice, and, if available, contract) and quick discovery and alerts when something doesn’t match (to allow for the error to be corrected and payment approved before the discount window expires).

However, supply chain finance is more than just discounts. It’s better forecasting. Better inventory optimization. Better financing options. A full suite of capital and cash management tools. Collaborative problem solving. And more importantly, it’s not shifting inventory to suppliers or increasing days payable outstanding (DPO). For a detailed discussion of supply chain finance, I would suggest that you check out the wiki-paper on the e-Sourcing Wiki [WayBackMachine]. I think it would be worth your time.

The Physical and Financial Supply Chain Integration Struggle

If the two supply chains could be truly interwoven, there is the potential to shorten the procure-to-pay cycle, reduce the costs of goods sold, and free working capital. And this is just the beginning, as noted in a recent Global Logistics & Supply Chain Strategies article in Supply Chain Brain on how “Companies Struggle to Integrate Physical and Financial Supply Chains”.

However, this is easier said than done because organizational barriers often prevent these two disciplines from working together harmoniously. And even if the walls come down, there’s still the issue of integrating the disparate and unconnected systems that run procurement and finance. As a result, billions of dollars are trapped in corporate supply chains, and opportunities to reduce costs through better financial management are unavailable.

As Jonathan Heuser, VP of Supply Chain at JP Morgan Chase astutely notes, while the purchasing discussion typically is around getting the lowest unit cost for goods and the supply chain discussion is around meeting delivery dates, these discussions don’t take into account the ramifications that associated payment terms and methods have on a company’s working capital. Similarly, financial managers don’t have the visibility they need into the physical supply chain, which only serves to magnify the inefficiencies.

Furthermore, as Kurt Cavano, CEO of TradeCard, notes, product cost savings can be offset by operational expenses associated with managing global transactions, financial risk and the requirement of additional, more expensive capital. In addition, late payments come with penalties when the company could have taken advantage of discount opportunities that many companies will offer for quick payment.

If the two systems are integrated, which makes sense since they both need to work off of the same fundamental information, procurement professionals could see the true costs of buying from a supplier in China, which would include all import and export tariffs, capitalization costs, and associated risks. In addition, finance professionals would see when capital was needed, where there are savings opportunities in the forms of discounts or favorable exchange rates, and when there is free capital to invest in short term opportunities for profit.

In addition, since there are a large number of redundancies between the information needed for purchase orders and invoices, the information needed for global trade documents, and the information needed for financing and payment, integrated systems can reduce the administrative overhead and associated costs. In addition, it would be much easier to apply real-time risk management since each group would understand where a project was in the process.

However, that’s not likely happen as the majority of buyers and suppliers still struggle with Supply Chain Finance (SCF) and the significant opportunities that it offers if done correctly. Most companies that are currently pursuing SCF are doing so not because they have a good grasp of what it can do for them, but because they are under substantial pressure to lower the costs of goods sold as raw material and energy prices continue to skyrocket and they are grasping at anything with the potential to save them money.

However, before companies can truly save money with SCF, they have to be ready for it. For a company to be ready for SCF, they first have to address automation, total cost modeling, and working capital management. If a company is not comfortable with e-payment, automated trade document creation and e-document exchange; is unable to use modern modeling and strategic sourcing decision optimization to make true total cost of ownership decisions; and doesn’t understand the different options it has available for capitalization, investment, and supplier payments, it will be unable to fully implement and take advantage of supply chain finance and all that it has to offer. So brush up on your e-Procurement, dust off your global trade, and master your strategic sourcing decision optimization and you will be ready to take the supply chain finance leap.

The Tax Efficient Supply Chain

Supply and Demand Chain Executive recently ran a pair of articles on The Tax Efficient Supply Chian Parts 1 and 2) by Giles Sutton of Grant Thornton LLP that pointed out that most companies overlook function-based tax planning where the supply chain is involved. Considering that tax reductions, or even tax payment delays in Free Trade Zones can save a company millions and millions of dollars, and free up millions more in working capital, tax considerations should play a major role in your supply chain, and in your supply chain finance, efforts.

When you consider that tax-planning affects both supply chain steps (including supply, distribution, retail channels, and customer delivery) and supply chain management processes (including procurement, EDI, merchandising, financing, branding, and asset management) and that it applies both above-the-line (taxes that impact operating income) and below-the-line (taxes that impact the income base), it has far reaching implications. Furthermore, as the author points out, tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods and tax planning can impact almost every aspect of the supply chain. This means that tax savings can be almost anywhere. Some of the possibilities that the author points out are the following:

  • Procurement
    Ownership of the transaction is key as it allows the taxpayer to determine the subject matter, value of each component, and the appropriate jurisdiction, because the right balance can minimize tax.

    • in many states, intangible assets are not subject to property tax — thus, including a warranty cost in a capitalized asset unnecessarily increases a company’s property tax base
    • in many states, electronically downloaded software is not subject to sales tax
    • disconnecting volume or contract inducement payments from the purchase of the underlying property can cause sales or property taxes to be overstated
    • appropriate planning can often reduce customs and duties
  • Brand Management
    Brand management also has tax implications.

    • the determination of where branding occurs in the supply chain, and thus where value is added, determines the situs of taxability and the value of goods for import, export, and tax purposes
    • the ability to license and protect IP associated with the brand often impacts the jurisdiction of income taxation
    • the situs of where IP is held impacts the tax costs of dispositions
  • Merchandising and Marketing
    Critical in retail operations, they carry their own tax implications

    • site selection determines property tax
    • capitalization of store design costs have tax implications
  • Finance
    Finance structuring can have significant tax implications.

    • the capital structure of a legal entity can impact its franchise tax profile
    • internal leverage can reduce state income taxes in some jurisdictions
  • Customer Relationship Management
    There are tax implications in building an infrastructure to compile and store customer information

    • there are state income tax implications wherever such data is stored and maintained
    • an ability to license and protect IP impacts the jurisdiction of income taxation
    • capitalization of CRM software has property tax implications
  • Distribution of Asset Management
    Distribution management is more than just minimizing logistics costs.

    • an incorrect valuation of inventory can lead to higher taxes
    • some jurisdictions have sales tax exemptions for transportation equipment in inter-state commerce
    • distribution activities that are not separated into separate legal entities can expose a company’s major profit centers to unnecessary multi-state income taxation
  • Retail
    • the employee-intensive nature can lead to process-based payroll tax incompliance and / or unnecessary over-payments
    • state income tax savings can often be found on international distribution assets
    • inefficiently designed gift-card programs can cause unnecessary escheatment of funds

Furthermore, this might just be the tip of the iceberg in tax savings opportunities available to your supply-chain based business. (I highly recommend you read both of the articles. They are highly informative on the issue.) Especially when you consider the numerous benefits of tax-efficient procurement, which include:

  • prevention of incorrect or duplicative taxation
  • matching subsequent rebates or discounts with original purchases to reduce the overall taxable purchase price
  • structuring the transaction to fit within a statutory or regulatory exemption
  • unbundling taxable items from non-taxable items

In addition, tax-efficient procurement will:

  • improve the sales tax audit trail and reduce the time required to respond to audits
  • allow for more efficient refund claims when errors have been made
  • provide greater certainty regarding tax requirements

So what can you do to create a competitive advantage? The author recommends that you start with inter-departmental coordination in a holistic approach. Tax planning is most effective when your tax planners know in advance what each of the operating functions are planning to do, and what options they are considering.

Another Notch on the Belt for Procurement

It was great to see Procurement take center stage in a recent Forbes article article by Knowledge@Wharton that interviewed Marshall L. Fisher, director of Wharton’s Fishman-Davidson Center for Service and Operations Management. It was even greater to see the article start off by noting that Procurement, historically an uncelebrated topic among business strategists, is now taking center stage and that these days, purchasing departments are playing pivotal roles within global firms in ways old-fashioned purchasing managers could never have imagined.

In the lengthy and informative article, Fisher noted that two of the biggest phenomenons in recent history are the outsourcing and offshoring of manufacturing operations, which is in sharp contrast to the 1980’s when the focus was on trying to strengthen and preserve US manufacturing. These days there are many companies that don’t make anything in the US, if they even make anything in-house. They’ve taken outsourcing and offshoring to “low-cost labor regions” to the extreme.

And “low-cost labor regions” evolved to meet the needs of companies that took outsourcing and off-shoring to the extreme. Fisher gives the example of Luen Thai, a company in southern China that is one of the largest private-label apparel manufacturers in the world. In order to meet the growing needs of their global client base, they set up a massive facility that is known as “supply chain city” just to produce apparel. It was designed as a “one stop shop” that does everything from initial design through final production, including prototyping and redesign on the spot.

Another example Fisher gives is Foxconn, “Hon Hai” in China. They’re a 32 Billion company that produces a large percentage of branded consumer electronics globally, with clients that include Dell, Motorola, and Apple. They have 12 facilities, and one facility alone is so large that it’s literally the size of a small city with 245,000 employees, as well as its own police force, hospital staff, and school.

But once the low-cost labor regions proved themselves, like China, business started pouring in, and then the same problems that were encountered a decade earlier when everyone was outsourcing to Japan came back. Labor became scarce and costs started to rise. And then we had the recent slate of quality issues. In other words, in outsourcing to low-labor-cost countries, you get a short-term benefit, but there is a risk you may be spawning a competitor.

In summary, procurement is taking center stage, but the global supply chain is more challenging than ever.