The experience of the past two years has shown the fallibility of just-in-time, just-in-sequence supply chains, with a shortage of chips and logistical constraints causing disruption across many industries, writes David Rudd, head of origination at Benteler Trading International.


Supply chains in the electronics manufacturing industry with their high-volume, high-value inventory are complex, exacerbated by the fact that they are very global in nature. Over the past two years, Covid-19 has put immense pressure on the resilience of these supply chains. Ultimately, this has led to a severe undersupply of chips being manufactured, leading to delays in end products reaching the markets.

There are reports of compounds in Detroit filled with finished trucks, sitting idly as they wait for the installation of one or more chips to make them operational.

As the industry looks at ways of becoming more resilient to avoid these bottlenecks in the future, more and more industry participants from end buyers, distributors, contract manufacturers and component suppliers are reaching out to Benteler Trading International (BTI) for help.

Supply chains eat up scarce and valuable capital, the cost of which can be defined for simplicity as the corporate’s cost of capital. Therefore, corporates have traditionally looked to minimise the magnitude of their inventories and associated performance indicators of working capital efficiency such as days inventory held (DIH), days sales outstanding (DSO) and days payable outstanding (DPO).

But what if there was a way to increase stocks of raw materials and finished goods to make corporate supply chains more resilient, without losing any of the financial flexibility?

One such way is to implement an inventory trading solution.


Inventory trading leverages a lower carrying cost to defer asset recognition

In short, BTI’s solution is to perform the role of an inventory trader, stepping seamlessly into an existing supply chain. BTI is onboarded as a supplier, requiring only existing standard processes in IT and procurement. Inventory of any kind can be purchased at any stage of the supply chain, from raw materials to finished goods. Since BTI is buying and taking title of the goods, while assuming risk and control, inventory recognition is deferred from a customer’s perspective, meaning this is an off-balance sheet solution. The carrying cost is usually reflected in the price of the goods.

More importantly, the flexibility the solution provides in terms of cost savings across the supply chain can materially reduce the cost of the solution. We therefore look at not only how inventory trading can help treasurers to improve essential finance KPIs but also at how they can build a company-wide consensus for implementation across areas such as logistics, procurement and supply chain by identifying tangible benefits to each of these separate stakeholders to enable them to meet their KPIs.


Improvements in essential finance KPIs

When BTI steps into an existing supply chain as a supplier, there is a one-off boost to free cash flow, and an ongoing improvement in the DIH metric, working capital and net debt. In the majority of cases where there may be a small impact on EBITDA margin, this is partially or fully offset by cost savings across the supply chain. These can be identified in areas such as logistics, through the lens of not being handicapped by working capital constraints.

We explore these in more detail below:

Volume consolidation

Corporates face increased pressure to derive efficiencies and value from their supply chain. An additional factor within the BTI solution is that it allows companies to buy time in the supply chain, enabling more meaningful and diverse consolidation possibilities. Loading and unloading of new and/or better combinations of goods as well as fully utilising truck and container capacities helps optimise logistics. Additionally, a positive impact on the environment is generated by utilising fewer trucks – ESG being a growing focus in the corporate world. Having the ability to wait and purchase monthly, instead of single or weekly purchase volumes, causes material costs to be reduced.

Rationalisation of suppliers

Supply is typically achieved through a partially enlarged supplier base which inherently increases working capital. BTI can function as a global purchasing platform, lowering inventory as well as

the number of suppliers.

Increased material availability

Offering consignment stock solutions as well as on-demand last mile delivery to the clients’ premises keeps the inventory off the clients’ balance sheet, while still remaining in reach constantly. Further improvements achieved through trailer yard in/outbound concepts entail the decoupling of peak loading periods (between 6am and 4pm) as well as providing flexibility to load desired materials at any point. Consequently, a working capital benefit as well as overhead cost reduction is secured.

Optimal utilisation of modes of transport

As the prices for charter routes are both volatile and speculative, forecasting and optimal freights are often impossible to achieve. As inventory is now off-balance sheet, it becomes viable to choose to ship the goods when cheapest, rather than when scheduled in a just-in-time/just-in-sequence rhythm. By consolidation and bundling, larger ships may additionally be hired in order to gain further cost benefits. Subsequently overall logistics costs are diminished.

Case study 1

Our client, a large North American contract manufacturer was looking to mitigate the competitive pricing disadvantage it perceived it had with its better rated peer group in the provision of end product to a global tech company.

BTI stepped in to suggest a solution whereby the contract manufacturer would order the majority of the components from their usual suppliers at the bequest of the end client and instantaneously sell them to BTI. BTI is equally happy to face the suppliers directly, but the client wanted to keep that interface. BTI takes ownership of the components from the suppliers through the value-add process performed by the contract manufacturer and ultimately invoices the final product to the end client.

The contract manufacturer ran a competitive RFP process with all the main industry players and chose BTI for its expertise across both industry and finance; its best-in-class proprietary IT structure and unrivalled operational capability and the fact that the entire solution was run inhouse.

BTI teamed up with a leading global bank to enable the non-investment grade contract manufacturer to substitute the BTI solution that priced off both its own (for the inventory hold period) and the highly-rated end client’s (for the receivable piece) credit risk at an all-in of between 3 and 4% versus a double digit cost the contract manager needed to apply previously.

The solution required expertise working in specific Free Trade Zones where BTI’s previous experience in exports and imports was a critical factor.

Case study 2

In a series of more complex supply chains in the electronics space, one of the world’s leading distributors set about working with BTI to implement our solution so as to substitute the lower cost of the BTI model for the cost they charged their clients for holding the inventory on their balance sheet – the ‘as is’ model.

In a plug-and-play solution which can be rolled out seamlessly to all future clients who want to implement a TradeCo model, BTI will own the components produced by the suppliers and hold them on the BTI balance sheet up until the call off by one of the contract manufacturers in the supply chain. The structure is modelled so that the credit risk of the solution is against the highest rated entity in the chain.


About the author

Prior to joining Benteler Trading to help originate product in the UK, Nordics and North America, David had a 20-plus year career in investment banking at Mizuho. Most recently he headed the UK and Nordic corporate investment-grade DCM team underwriting USD, EUR, GBP, JPY and CNH deals for Mizuho’s tier-1 relationships, including names such as Anglo American, BP, BT, Experian, Equinor, Glencore, GSK, National Grid, Unilever, Volvo and Western Power.

David Rudd, CFA | Origination | | +44 7502 666 487