Trade bankers, rejoice: end-to-end supply chain connectivity is just around the corner. Melodie Michel travels to the US to meet the companies that are making it happen.
“One of the challenges in the supply chain is that few people see the bigger picture.” In his sunny office, port of Long Beach managing director Noel Hacegaba sums up the most common thought among supply chain finance professionals. Some refer to it as “siloes”, others call it “anecdotes”, but regardless of wording, people’s inability to look outside their own niche business and understand the supply chain ecosystem as a whole is what has been blocking end-to-end integration… until now.
Travelling around the West Coast of the US speaking to port operators, banks and technology companies is like watching pieces of a giant puzzle moving closer and closer together, with a utopic promise. Imagine a world where large buyers have full visibility of their supply chain, not only with digital purchase orders and invoices, but also the knowledge of exactly which products are still in raw material form, which are being processed and which are being loaded onto the dock. The company has the tools to accurately predict how long it will take for a shipment to get to its destination, and to book containers intelligently. Waiting in lines at ports is a thing of the past, and banks can dynamically finance each step of the supply chain.
“Historically, banks have managed the trade payables or receivables, and the company would have a different system and the shipping company would have its own system. These are still very much fragmented, but the question is what technology and platform can bring all of these things together to create an end-to-end solution so that companies can manage these supply chains more efficiently,” says Inwha Huh, global head of structured trade solutions at HSBC.
While London and Singapore are recognised fintech hubs, the US has been at the forefront of technology development in supply chain integration, and the pace of change has accelerated in the past two years, with a number of new initiatives.
Take, for example, the collaboration between the ports of Los Angeles and Long Beach, the University of Southern California’s Centre for Global Supply Chain Management (CGSCM), and the US department of commerce. Logistics players saw the value of bringing academic researchers into the conversation on how to streamline operations, and knew they would need the government’s involvement to take it further.
Nick Vyas, the director of the CGSCM, explains that the centre welcomes about 80 students a year, half of them professionals already working in the industry, for a postgraduate programme focused entirely on global supply chain management.
Under the port optimisation initiative, Vyas brings various stakeholders together, including labour unions, transportation companies, drivers and faculties, to foster open discussions. The CGSCM holds an annual conference as well as roundtables and hackathons, and after about 18 months, the project is starting to bear fruit.
“Last year in November, when we did the first hackathon, we had about 120 participants. They cranked up solutions in 24 hours to solve the problem: how does the data come in from overseas factories into the port so the port can expedite and share that information back with the customers?” Vyas says.
“Three teams won, and now the ports of Los Angeles and Long Beach are looking at integrating these solutions, working with large technology companies to integrate it. We solved a meaningful problem and came up with a manageable solution, meaning it has to have some impact.”
At the port of Long Beach, Hacegaba confirms that they are working with GE to develop a port community portal that harnesses customs data and makes it available to the whole supply chain, with a pilot expected to be ready by the end of the year. “The idea is how to access that data and make it available and presented to the supply chain in a way that enables and facilitates efficient real-time decision-making,” he adds.
Other solutions that have come out of this collaboration include the installation of an online appointment system at nine of the port’s 13 terminals, enabling truck drivers to avoid waiting at the port once they are notified that their cargo has arrived. In one terminal, they can also set up a time to drop off full or empty containers, and this dual appointment system has resulted in a significant reduction in waiting times, to 14 minutes on average.
The port has also convinced the three chassis companies providing transport containers with the base frames for trucks to pool their resources, making it possible for drivers to pick up a chassis from one company and drop it off at another company’s warehouse.
“The appointment system and ‘pool of pools’ is what I call low-hanging fruit: the early and easy changes we can do now. What we’re working with the university on is more long-term and on the digitising side: think Expedia, a website that everyone in the supply chain can go to and know the status of a container at any point in time,” Hacegaba says.
Predictions for better decision-making
This type of visibility would already reduce risk in the supply chain, but some companies are going even further, using artificial intelligence to make predictions about the movement of goods around the world. San Francisco-based ClearMetal was created in late 2014 as a “predictive logistics company”. Its founder, Adam Compain, explains that the idea came after a trip to Hong Kong, where he was invited by the CEO of CL Worldlink – the world’s 10th largest freight carrier – to learn about trade logistics.
“What I discovered that led to the founding of the company was first, that every decision along the supply chain is based on a prediction of some kind. If you’re an asset owner, all the decisions you make on staffing, allocating containers and using equipment are based on a prediction.
“Second, the tools that the industry uses are pretty unreliable in terms of how sophisticated they are. And third was the view that the industry has largely solved its problems through physical economies of scale. Our company came from the belief that the future of supply chain efficiency is going to come out of data intelligence as opposed to physical scale, in contrast with building bigger ships and making bigger alliances, etc. It’s the idea of seeing through all the layers of data and being able to provide predictions,” he says.
ClearMetal’s platform takes data from shipping companies, freight forwarders, port operators and others, structures it in a comprehensible way, and uses artificial intelligence to make predictions about how freight is booked and moved.
“Right now a customer might say: ‘Everything out of China, we’ll order 100 days in advance because it should cover anything if it goes wrong.’ We can dynamically predict how long in advance you should order goods that will include a buffer but reduce inventory at hand to allow you to be light in your supply chain. We can also predict in advance different incidents, and give a final arrival time of the goods. We’ve worked with large freight forwarding companies and we’ve seen consistently 30 to 60% improvements in accuracy in predicting container flows and up to 95% accuracy in booking behaviours,” Compain adds.
Linking up with financing
At Wells Fargo, global head of trade services Chris Lewis sees these changes in a positive light. “Anything that helps to take inefficiencies out of the whole supply chain, not just the financing aspect that we’re working on, but the entire supply chain, is a good thing for our customers. Can it help us in terms of mitigating risk? Yes, absolutely,” he says.
First, he explains, knowing that a customer has visibility over and can predict its supply chain, allowing them to react fast and be nimble in terms of ordering only products that are in demand, would give trade bankers a lot of comfort.
“That’s one of the big problems for retailers at the moment. Half of what they buy ends up being marketed down. If they have access to data, and I think a lot of retailers are trying to do that now, that would be a great thing,” he says.
Going a step further, Lewis envisages a supply chain where financiers could be more dynamic in the way they mitigate risk: “A bill of lading is one thing, but where is the ultimate product that you are financing in the supply chain: is it still raw materials? Is it work in progress? Is it goods on the dock? Is it goods on the ship? If you know where it is in that supply chain, you could say to your customer: ‘I’m going to lend you 10 cents on the dollar because it’s raw material; when it becomes work in progress, I will lend you another 10 cents; now it’s on the ship, I will give you more. You can refine the way you provide working capital.”
This is not science fiction: the likes of Skuchain and GT Nexus are already working on it. Srinivasan Sriram, founder and CEO of Skuchain, explains that the distributed ledger platform he and his team have developed is not just about visibility and authenticity of purchase orders and invoices: it could lead to the collateralisation of the supply chain.
“Somebody could hold title to the raw material, someone could hold title to the finished product, and along the line you could hold title to the work in progress,” he tells GTR.
Skuchain has just launched a special purpose vehicle (SPV) using US$15mn of debt finance to purchase collateral at any point along the supply chain. “The SPV is funded by financiers and that money is governed by smart contracts on the blockchain,” Sriram says.
The company’s journey suggests that this type of technology-enabled supply chain commoditisation is here to stay. When it was founded, Skuchain initially approached banks to partner on its blockchain platform, with the idea of using distributed ledger technology to digitise trade obligations. In fact, it conducted the first blockchain-based cross-border trade transaction with Wells Fargo and Commonwealth Bank of Australia in October last year, for a cotton shipment.
But despite the excitement, banks were reluctant to change their processes without knowing whether there would be corporate demand.
“One thing that came about is that because of experiences like the bank payment obligation (BPO), banks were asking what the customers wanted. They said: ‘That sounds great, we’ve done the proof of concept but before we go live…’ That’s where we began to understand that banks are merely the channels to the end customers, so about a year ago we began talking to the end customers. Their needs are broader than just letter of credit processing. We’re still working with the banks, but we see them as helping to make the whole process more frictionless, as opposed to being the prime engine for the supply chain,” Sriram explains.
GT Nexus has had this holistic approach since its beginning in 1998, working first with large corporates such as Nike or Levi’s as a cloud-based platform, allowing all the players in the supply chain to share information and send automatic notifications when various actions were accomplished. It then integrated the financing element, partnering with banks and giving suppliers the option to access financing at any point along the line.
“I’ll let the technologists fight over which technology and which approach makes more sense. All I know is that when I talk to bankers in particular, the things they want out of the blockchain is what we have been doing for 20 years,” says Gary Schneider, senior vice-president of strategic alliances at GT Nexus.
He adds, however, that the company is not against adding blockchain elements or other new technologies to its platform for different business applications.
As a matter of fact, GT Nexus’ founder (who no longer works at the company) is an investor in ClearMetal, and it is not hard to imagine the cloud platform connecting with the predictive logistics tool – and the many other targeted solutions popping up in the sector – for even better supply chain management.
GT Nexus may have a 20-year head start on the new blockchain players, but Schneider admits that on the financing side, funding remains primarily triggered at the invoice stage. “I’m offering supply chain financing on about US$25bn of the US$500bn of trade transactions we manage. I see a world of financeable transactions that I want to bring to the financing network, make the banks really happy, make the buyers and sellers really happy, create more value in the network and squeeze and improve working capital,” he says.
The company’s acquisition by cloud solutions giant Infor in 2015 has given it a lot more scale and the technical ability to offer this type of financing.
“We’re working with some large global players that I think will change the way pre-shipment financing happens,” Schneider says.
Considering the pace of technological advancements and the momentum that supply chain management and financing has gained in recent years, these changes are likely to happen much sooner than any of us could have expected.