FREIGHT FINANCE\\\


Issue 2 2015 - Freight Business Journal


33 Does freight finance have a future?


If the global supply chain was a country, it would be one of the biggest economies in the world. Just think of all that inventory sitting in ships, planes, trucks and warehouses. Isn’t it time the industry tried to make better use of it? Struggling forwarders may find it hard to believe, but there is a lot of money in freight – or at least, there is in the wider supply chain. A large company’s transportation expenditure can easily run to half a billion dollars or more. But how best to realise the potential of all this cash?


Dutch dig in to supply chain finance


Vast amounts of money are locked up in the world’s supply chains. Exactly how much, nobody really knows, but it’s a fair bet that if it could be harnessed and made to flow more freely, it would have a dramatic effect on global economic growth. The Dutch are acknowledged


masters of logistics, and home to some of Europe’s busiest sea and airports so it was no surprise that the country’s government designated the logistics industry as one of its nine priority sectors. And within that, Dinalog - the for Advanced


Dutch Institute


Logistics – was charged with developing the new subject of supply chain finance. This is a multi-faceted area and the research listed by Martijn Siebrand, Dinalog’s program manager for supply chain finance, reflects that. One of the first projects was on expedited payment


in conjunction with


Cass Europe, in which buyer and supplier were both to be covered by a standardised contract for implementing SCF. There is a calculation tool available to buyer and supplier so that they are able to calculate if they could benefit from expedited payment. Suppliers questioned said what


they would really like would be for buyers to pay earlier and more promptly. Payment times are a very sore point, some suppliers are being forced to wait 150, 180 or even 360 days, and Siebrand doesn’t see a return to a ‘normal’ 60 days in the near future, at least not on the buyers’ initiative. Buyers have used the working capital


reduction in some cases to buy competitors; they don’t have the cash to go back to 60 days at the moment. Other demonstration projects


involving Cass Europe are now underway, says Siebrand: “Until now, supply chain financing has mostly been offered by big multinational firms,


only to their strategic suppliers, which doesn’t include logistics companies. Dinalog will start with a demonstration program soon.” Dinalog has also done research


into why logistics service providers haven’t adopted supply chain finance to a greater extent – the answers are, essentially, that the benefits are not clear enough, the internal processes are not mature enough, it is too complex or they don’t get offered it. “The research that we are doing in the Netherlands helps to solve these bottlenecks,” says Siebrand. With the help of a Dinalog


subsidy, an international SCF Community has been set up (https://www.scfcommunity.org). This provides a place to discuss and drive working capital-related initiatives playing an important role in the international corporate and financial industry. As a country-neutral association it is well positioned to support practitioners in building a common glossary for SCF and to study the SCF market and its opportunities. Some members of the SCF Community are doing some outreach work to academics in other parts of Europe, including the UK, France, Germany and Italy. Another Dinalog project


and


is Supply Chain Finance 2.0, which involves three big Dutch multinationals - Philips, Unilever and Heineken. The project lead is the University of applied research, Windesheim, which has created a research and education department dedicated to supply chain finance. There are currently seven people working in the group. Windesheim offers a blended learning module for SCF and while it might seem a rather esoteric area, it has already attracted 52 students since the course started last October. All the programmes of the


consortium partners in Supply Chain Finance 2.0 are related to a form of reverse-factoring. One aspect under investigation is to see whether suppliers and big firms can work together to leverage their buying power, and another is to see whether any forms of supply chain finance can be offered in a broader perspective to reach beyond tier one suppliers. Windesheim is also in the lead for Supply Chain Finance for SMEs, which is a governmental initiative to give SME suppliers access to supply chain finance; there is a similar programme in the UK. At the moment Windesheim is


setting up research to implement supply chain finance in chains with a direct link to developing countries, where small suppliers and logistics firms oſten have trouble getting access to any form of finance, let alone at reasonable rates. The Technical University


of Eindhoven is investigating better solutions for pre-shipment


financing and also whether financing of pre-shipment contracts is possible. Banks have not traditionally been happy to do this. Reverse factoring, as this practice is sometimes known, has been used in the past but has generally been offered only to top suppliers - but could it be broadened


to include smaller


ones? Simulation games are popular


among logistics academics and their students in the Netherlands, and the Cool Connection game has been developed to include supply chain finance elements as well as the traditional aspects of the supply chain. The game is played worldwide. In March there will be a final round at Windesheim of the Global Student Challenge based on the Cool Connection game. Some 20 teams out of 629 University teams of 81 countries have qualified for the final. Dinalog also has three other


projects running on supply chain involving companies, the Rotterdam School of Management and the Hogeschool van Amsterdam. These include early payment systems and an investigation into how to solve cash flow problems for the many small suppliers to big companies with supply chain finance for SME solutions. There is also the Transinvoice


prjoect aimed specifically at helping logistics companies reduce inefficiencies


in the


process of confirming invoices. The logistics service provider will be able to improve his cash- flow and to look for new financial


solutions like early payment of their invoices. There are also specific projects


on supply chain finance for developing countries, where small suppliers and logistics firms oſten have trouble getting access to any form of finance, let alone at reasonable rates. Another logistics initiative


is to investigate whether the concept of the fuel card - which many large logistics firms offer to their subcontractors, allowing them to buy fuel on credit - could be extended to other aspects of transport operation such as buying replacement vehicles. “We know that some companies already do this, but it’s never been formulated or publicised,” says Siebrand. “Partly that might be because they want to restrict it - they may not want to attract companies that have cash-flow problems for example, but it is an interesting concept.” Some of the larger logistics


service providers are beginning to offer banking-type or financial services. Partly because of strict restrictions on who can offer banking services in most countries, these have been offered on a ‘white label’ basis up to now, but some firms are beginning to formalise their offerings. Aſter all, many major retailers now offer fully-fledged consumer banking services; how long before a logistics company does the same? Indeed, modern technology and


communications is increasingly blurring the distinction between who does what. Many IT companies, for instance, can


offer payment services. The tracking and tracing information on international chains offered by many of the more advanced logistics companies is very sophisticated - how long before someone marries that up with the financial aspects of the transaction too? And could a logistics company finance inventory that’s on the high seas, in much the same way that a bank does? Logistics service providers


have an advantage in offering pre- shipment financing in comparison to banks says


Siebrand - who


himself has a banking background - the logistic service providers have the ultimate traction of the goods. Banks are still not very eager to offer pre-shipment financing. To be able to offer supply chain finance solutions, banks are now trying to catch up with IT providers. More and more


companies


are dictating what kind of finance solutions they would like to have and in which part of the world. “Banks have a tendency to offer the services they are able to offer whereas we see that IT-providers are more flexible,”


Siebrand


observes. But there are signs now that the banks too are listening more to their customers and to work with new parties that offer some niche products for supply chain finance. “There are a lot of companies


worldwide with a lot of money, that could provide financial type services,” concludes Siebrand. “There will be a lot of possibilities for Logistic Service Providers to play a role in the supply chain finance world.”


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