Supply Chain Financial Questions
The assignment concerns the case “Supply Chain Finance at Proctor & Gamble’ that is included in the coursepack(https://hbsp.harvard.edu/import/715741).
(1) Estimate DPO for P&G in 2012 using the standard and adjusted approaches discussed in Exhibit 3 of the case (page 11). Note that the P&G Income Statement features COPS (Cost of Products Sold) in place of the conventional term COGS (Cost of Good Sold). Consider also the information about total purchases near the top of page 6: what is the DPO estimate for 2012 if P&G total purchases are used instead of COPS?
(2) If P&G extend payment terms by 30 days, what should be the increase in accounts payable? Calculate the possible increase three times, using in turn the three DPO calculations you made for question (1).
(3) Since accounts payable is a liability on the balance sheet, a change in accounts payable must also entail a change in assets (in order to keep the balance sheet in balance). The change in assets should appear as an increase in cash on the balance sheet. With respect to this, see the following article: https://www.nytimes.com/2015/04/07/business/big-companies-pay-later-squeezing-their-suppliers.html According to the article, P&G had added around $1 billion in cash flow by 2015, as a result of their SCF program. (The cash increase on the balance sheets of P&G between 2012 and 2015 is much more than $1 billion; only part of the total cash increase is due to the SCF program.) Does the figure of $1 billion fit with the increase in accounts payable you calculated above? If not, explain how to get to the $1 billion figure mentioned in the article.
(4) Fibria Celulose (FC) agreed to extend payment terms with P&G from 60 to 105 days, i.e., an extension of 45 days (page 7). What could explain why this extension is longer than the extension of 30 days that P&G announced it would propose in general?
(5) Without SCF, the extension of 45 days in payment terms entails a longer cash conversion cycle for FC when doing business with P&G. After the payment term extension and prior to any application of SCF, what would be the cash conversion cycle for FC when doing business with P&G? (Don’t calculate the overall cash conversion cycle for FC using their financial statements: that would include all customers, not just P&G.)
(6) Without SCF, the extension of 45 days in payment terms entails an increase in accounts receivable on the balance sheet of FC (and a corresponding decrease in cash, on the same side of the balance sheet). Considering the information in the case, estimate the increase in accounts receivable for FC that results when payment terms with P&G are extended by 45 days.
(7) Prior to starting the SCF program, P&G has offered suppliers “invoice discounting,” i.e., the option to receive early payment, at the price of a percentage reduction in the invoice amount (see page 5). Consider the case of a 1% reduction for payment 30 days early. This means that a POM 628 001, Spring 2019. Assignment #1. Page 2 of 2 supplier that has an outstanding invoice for $1,000 that is due to be paid in 30 days can get paid today and receive $990. What is the implied annual interest rate in this discount? What is the implied annual interest rate in the discount of 2% for 60 days early payment?
Hint Consider the percentage return that would result from leaving $990 unpaid so that $1,000 would be received instead in 30 days. Scale this percentage return to show the corresponding annual return in the hypothetical case that the money were left to earn interest at the same rate for 365 days
(1) Estimate DPO for P&G in 2012 using the standard and adjusted approaches discussed in Exhibit 3 of the case (page 11). Note that the P&G Income Statement features COPS (Cost of Products Sold) in place of the conventional term COGS (Cost of Good Sold). Consider also the information about total purchases near the top of page 6: what is the DPO estimate for 2012 if P&G total purchases are used instead of COPS?
(2) If P&G extend payment terms by 30 days, what should be the increase in accounts payable? Calculate the possible increase three times, using in turn the three DPO calculations you made for question (1).
(3) Since accounts payable is a liability on the balance sheet, a change in accounts payable must also entail a change in assets (in order to keep the balance sheet in balance). The change in assets should appear as an increase in cash on the balance sheet. With respect to this, see the following article: https://www.nytimes.com/2015/04/07/business/big-companies-pay-later-squeezing-their-suppliers.html According to the article, P&G had added around $1 billion in cash flow by 2015, as a result of their SCF program. (The cash increase on the balance sheets of P&G between 2012 and 2015 is much more than $1 billion; only part of the total cash increase is due to the SCF program.) Does the figure of $1 billion fit with the increase in accounts payable you calculated above? If not, explain how to get to the $1 billion figure mentioned in the article.
(4) Fibria Celulose (FC) agreed to extend payment terms with P&G from 60 to 105 days, i.e., an extension of 45 days (page 7). What could explain why this extension is longer than the extension of 30 days that P&G announced it would propose in general?
(5) Without SCF, the extension of 45 days in payment terms entails a longer cash conversion cycle for FC when doing business with P&G. After the payment term extension and prior to any application of SCF, what would be the cash conversion cycle for FC when doing business with P&G? (Don’t calculate the overall cash conversion cycle for FC using their financial statements: that would include all customers, not just P&G.)
(6) Without SCF, the extension of 45 days in payment terms entails an increase in accounts receivable on the balance sheet of FC (and a corresponding decrease in cash, on the same side of the balance sheet). Considering the information in the case, estimate the increase in accounts receivable for FC that results when payment terms with P&G are extended by 45 days.
(7) Prior to starting the SCF program, P&G has offered suppliers “invoice discounting,” i.e., the option to receive early payment, at the price of a percentage reduction in the invoice amount (see page 5). Consider the case of a 1% reduction for payment 30 days early. This means that a POM 628 001, Spring 2019. Assignment #1. Page 2 of 2 supplier that has an outstanding invoice for $1,000 that is due to be paid in 30 days can get paid today and receive $990. What is the implied annual interest rate in this discount? What is the implied annual interest rate in the discount of 2% for 60 days early payment?
Hint Consider the percentage return that would result from leaving $990 unpaid so that $1,000 would be received instead in 30 days. Scale this percentage return to show the corresponding annual return in the hypothetical case that the money were left to earn interest at the same rate for 365 days
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