As well as supporting physical supply chains, logistics companies are in a position to shore up the financial supply chain by providing banks with key data on goods in transit, as well as pumping in fresh liquidity. Liz Salecka reports.
Increasingly, both corporate buyers and suppliers are looking for ways to finance goods in transit and inventory held overseas. However, traditional lenders, still feeling the after-effects of the financial crisis, are wary of this type of lending.
This means logistics companies – in their key roles as managers of the transportation networks and warehousing of goods sourced from overseas – are well placed to lend a helping hand.
“It has been very difficult for corporates to get financing for inventory when it is moving from point A to B. Banks are willing to put finance into areas like this, but they are very sensitive about the risk involved – particularly in the case of foreign inventory,” explains Mark Robinson, senior managing director, UPS Capital.
“Logistics providers can play an important role here by making information on the whereabouts of goods in transit more readily available, and providing lenders with more comfort by demonstrating that they have control over those goods.”
A liquidity issue for all
Since the financial crisis escalated, generating liquidity from goods that are either in transit or warehoused overseas has proved a major headache for buyers and suppliers alike.
“Where the supplier is strong in a supply chain finance programme, inventory is most likely to be warehoused by the buyer – this puts stress on the buyer’s working capital,” explains Ashutosh Kumar, global head of trade product management, transaction banking, Standard Chartered Bank.
“If the buyer is the stronger party, the supplier is more likely to hold it on behalf of the buyer until it is needed, thereby putting stress on the supplier’s working capital. This in itself is not useful to the supply chain as a whole.”
Kumar, nevertheless, believes that logistics companies can add greater value to the entire supply chain by getting actively involved in the financing of goods under their control.
What is needed, he believes, is for logistics companies to buy inventory owned by their customers, and hold it on their own balance sheets, during the transport and storage period.
This way, suppliers (where they own the goods) can benefit from earlier payment, while buyers (where they are obliged to take possession of the goods) can delay payment until delivery.
“There are different ways in which logistics companies can help in supply chain finance programmes – one of which is by taking ownership of goods that are in transit or held in a warehouse,” says Kumar.
“Many suppliers are already asking logistics companies to hold inventory on their balance sheets for this in-between stage. A logistics company can take ownership – and look to finance ownership of that inventory – thereby adding value for both the buyer and the supplier in the supply chain.
“The in-between stage is usually the seven days or so involved in shipping inventory and the 15-30 days that it may spend in a warehouse. Companies are looking for finance for this period.”
A stronger need in Asia
Kumar, who is based in Singapore, points out that there is a particularly strong demand for this type of financing today in Asia – especially from suppliers based in China.
“A lot of suppliers in China are contributing to this movement, and this type of financing is becoming increasingly common across Asia. China is a world-leading manufacturing hub and is driving discussions over the role that logistics companies can play in supply chain finance,” he says.
The need to finance goods warehoused overseas has also become prevalent for US corporates, which hold inventory in Asian countries.
“Issues arise if you have inventory that you want to hold in a foreign location where there is not a good legal system, such as China. Here, the inventory is likely to be 100% financed by the customer,” says UPS Capital’s Robinson.
“US domestic banks are happy to finance receivables and domestic inventory but foreign inventory is often excluded – whether it is held in one location or is in transit.”
Getting the finance needed
While certain logistics companies are becoming more willing to purchase inventory under their control, their limited ability to finance such transactions remains a major barrier.
“The market is filled with niche players providing specific solutions around transportation management – their core competency,” says Maureen Sullivan, executive director, JP Morgan treasury services.
“Many of these small, under-capitalised companies just do not have the capacity to offer financing as part of their end-to-end service.
“Strategic partnerships with financial entities that have credit structuring expertise are needed.”
“Some logistics providers are already taking ownership of inventory, but one of the key issues is whether they have the balance sheet strength to do this. For this reason, many logistics companies are approaching banks,” adds Kumar.
“There are also risks involved in holding inventory on their books too so this is not a movement that has become rampant.”
Meanwhile, Dominic Broom, head of business development, treasury services at Bank of New York Mellon, stresses that, in today’s financial market conditions, accessing the credit facilities needed for such transactions is much more difficult.
“Most logistics companies have to tap the credit markets themselves to offer this type of finance, but since the credit crunch the availability of liquidity has been scarce. This has reaffirmed the need for specialist providers of finance.”
And he also points out: “Logistics companies are world-class in managing transaction risk – but not financial risk.”
UPS Capital’s Robinson agrees that the asset-light nature of logistics companies’ businesses – and their more limited financial muscle – makes them better suited as collaborators to banks in the provision of financing solutions.
“It does not seem to be the case that logistics companies want to get involved in the financing side of things – they are able to provide information but that is where it stops,” he says.
“Most logistics companies are asset-light and make margins on assembling components. They are not big strong financial companies. Banks are at the complete other end of the spectrum.
“Neither of these two groups can bridge this gap without support from the other. What is needed is to marry the expertise of the logistics company with the financial strength offered by the bank.”
Banking on interest
Greater collaboration with logistics providers is expected to stimulate banks’ interest in providing inventory and cargo financing.
Standard Chartered’s Kumar believes that banks will be happier if logistics companies demonstrate a level of control and provide them with valuable information on goods and their whereabouts as they move through the supply chain.
“Their support can be quite useful in making financing decisions as they can provide a greater understanding of the risk involved and the pricing that should be applied,” he says.
“Logistics companies can provide crucial information on when and where goods are moving, any delays involved and the reason for those delays.”
And BNY Mellon’s Broom adds: “It is not just their skills but the data that they hold which puts them in a prominent position. They control data about the type of goods involved, their physical situation, as well as cargo loading and shipment dates – all of which is valuable to risk and transaction managers.”
Taking the lead
Deutsche Bank is one player that has fully recognised the merits of logistics providers.
It has already entered into a partnership with a major international logistics provider based in Germany, to offer more efficient supply chain financing to German suppliers that use its services, and plans to roll out this project to manufacturing companies worldwide.
It is also currently looking for opportunities to enter new agreements with logistics companies across Europe, the US and Asia Pacific region.
“There is huge value in bringing together the physical and financial sides of the supply chain, and logistics companies are a vital link in the creation of complete, end-to-end supply chains,” says Alexander Mutter, director, trade and supply chain solutions, Deutsche Bank.
“It is not just about the financing element, but risk mitigation too. By partnering with logistics companies and using the latest technologies, we can improve the flow of information throughout the supply chain and the efficiency of processes too.
“At present, supply chains can involve lots of different silo organisations that are working together. A bank can play a big role here by building partnerships with other parties that can make the supply chain much more transparent.”
Mutter explains that while Deutsche Bank has a history of financing inventory and goods in transit, secured on letters of credit and working capital levels, it recognises that partnerships with logistics companies will provide it with a better understanding of the risks entailed, enabling it to optimise its provision of finance.
“What we are asking ourselves is whether this can be done in a more intelligent way by taking advantage of information on, for example, the value of goods, the risk they represent and who is buying them.
“Logistics companies hold a lot of valuable information and also, in some parts of the world, act as collecting agencies too. By taking advantage of their expertise and experience, we can customise our provision of finance.
“When goods have been produced, and a certificate signed that they have been checked at the manufacturing site, this reduces the risk of default and can be used to leverage the level of financing made available.”
He adds that external investors too are also more likely to participate in such financings, alongside banks, if physical supply chains offer greater transparency from a risk perspective.
Mutter believes that advances in technology can play a big role in enhancing data sharing between banks, logistics provider and other parties in a supply chain.
“Logistics companies do have very relevant information, which is not really touched. By linking their databases, and improving information flows to other parties’ portals, we can bring together information that serves as a basis for complete end-to-end supply chain services.
Working in partnership
Despite this assessment, few banks are forming direct allegiances or partnerships with logistics providers.
“The main issue that banks face is meeting their own customers’ needs,” says UPS’s Robinson, who points out that lenders are more likely to link up with their customers’ own logistics services providers to offer cargo and inventory finance as a value-added service.
And Standard Chartered’s Kumar adds: “We see our role in offering this type of finance as being at the request of the client – and if a client has a need for it they also usually have their own logistics provider. It is difficult to go in with one logistics provider/partner when that company may have an existing relationship with a logistics company.”
Broom concurs that companies tend to award contracts directly to logistics providers themselves. But he adds: “We recognise that it may be potentially interesting when it comes to a discrete new opportunity to talk to a logistics provider about offering a complete end-to-end solution.”
A matter of convergence
One of the main reasons why the concept of integrated logistics and financial services has not been fully exploited is that most corporates still make decisions on their physical and financial supply chain services providers in isolation.
“The people in corporates that are responsible for buying logistics services and those that buy banking services work in two different centres of decision-making,” says Kumar. “We are not yet at the stage where one holistic decision is made for the physical and financial aspects of the supply chain.”
However, this situation may change in the future as corporates seek to improve collaboration on financial decision-making across their organisations – with corporate treasurers at the helm.
“We have seen some convergence, but not to a large extent. However, they are increasingly working closer together and talking to each other,” says Kumar.
“Logistics teams and treasurers are looking at the ‘total cost of ownership’ and the overall structure of the supply chain so that they can minimise costs.”
However, BNY Mellon’s Broom points out: “There is a lot of talk about the convergence of financial and physical supply chains, but the reality is that when you analyse the way in which supply chain services are purchased at corporate level, the treasurer and CFO will tend be involved on the financial side while logistics management take control of getting goods from A to B. The linkage between finance and logistics is not always concrete.”
“Those corporates that run their treasury operations as profit centres as opposed to cost centres are more likely to merge the two areas of collections and procurement.”
