Financial Supply Chain

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Using Supply Chain Finance to Improve Cash Conversion The onset of the financial crisis and consequent drying up of Copap’s bank funding led the company to identify areas in which it could increase cash flow. These were receivables and payables management, asset-backed lending solutions and an efficient financial platform. The article describes how each of these areas was addressed, and Copap’s new banking relationship with HSBC. Factoring companies and credit insurance have also proved key to Copap’s continuing success.

Using Supply Chain Finance to Improve Cash Conversion

by Laurent J. Barbé, Vice-President and Chief Operating Officer, Copap Inc.

As a mid-sized private organisation, Copap, like many others, needs cash to grow. The financial crisis could have signalled the end of our business as liquidity became constrained. In fact, despite a complete withdrawal of financing from our pre-crisis banks, the company emerged from the credit crunch better equipped to manage our cash flow efficiently, with record financial results in 2009. There were two elements to our strategy: firstly, optimising cash flow internally; secondly, working with external partners to achieve the right financing solution for our business.

Despite the growth of electronic media, the pulp and paper industry continues to grow strongly, with an annual turnover of $1.3tr. World demand for paper and paperboard is expected to grow from 390m tonnes in 2007 to 542m tonnes in 2025. Pulp and paper producers are global players, with mills in most parts of the world where there is fibre, water and access to energy. Copap alone does business with paper mills in about 30 different countries. Over the last decade, the sector has experienced considerable rationalisation, with significant structural changes in terms of individual firm capacity, corporate growth, and location of assets. For example, the world’s largest paper company, International Paper, has increased its paper and paperboard capacity by 3.1m tonnes annually. Large mergers between Jefferson Smurfit and KAPPA in 2005 and Abitibi and Bowater in 2007 resulted in asset closures of around 2m tonnes annually. Over the same period, producers like Chinese Nine Dragons and Southeast Asian APP increased their capacity by 5.3m and 1.3m tonnes a year respectively, while other Chinese paper producers also saw significant growth. Today, the ten leading paper firms account for 25% of the world’s paper and paperboard capacity, compared to 27% five years ago. The balance of power in the paper industry is shifting towards the East, with Chinese and Asia Pacific companies (excluding Japan) increasing their market share from 8% to 14% between 2005 and 2008, and Asia’s net import requirements expected to reach 14m tonnes by 2025, double its 2007 imports.

Our customers have also not been immune from the effects of the crisis. Like pulp and paper producers, consumers of these products have been experiencing sustained industry concentration, brutal competition from the electronic media, reduced margins and tight credit conditions. With both suppliers and buyers experiencing cost, competition, environmental and financing constraints, in a capital-intensive industry, the need for cash is critical. 

These figures are significant as to be successful in this industry, a company such as Copap needs to maintain a global view, and a keen awareness of what is happening in each market. Our solid experience in Europe, and awareness of financing opportunities that were available in overseas markets was critical to our success when North American financing dried up. Copap prides itself in being an entrepreneurial business. Optimising our cash flow situation at all times is essential for our business, not only a prerequisite for sustained growth, but for survival. Even before the crisis, we were already using every element of the supply chain financing to improve cash conversion. When the crisis struck, our bank providers of financing simply disappeared, there were few avenues that had not already been explored.

Trade terms at Copap

Copap aims to form a bridge between producers and buyers of pulp and paper products worldwide. Our transactions are all international, in multiple currencies, and over 95% are performed on an open account basis. Our payment terms average 30 days in North America, 75 in Europe, 120 in South America, and about 90 days in the rest of the world. On the other hand, in order to benefit from cash discounts wherever possible, we aim to pay our suppliers quickly, so we need access to large amounts of liquidity to finance the difference. Around 85% of invoicing is handled through our head office in Montreal, with the remainder managed by our offices in France, China and Brazil. Our average invoice amount is $55,000, with a maximum of $800,000, and our average purchase order is $160,000, with a maximum of $1.7m. We have in-transit inventories in France, Spain, Brazil, and China. These are part of our growth strategy, and account for only about 5% of our overall turnover at this stage. Effectively, therefore, we provide credit terms, we pay cash, and we maintain some inventory. Cash flow management is therefore a vital aspect of our business.

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