How logistics service providers are shaping the future of supply chain finance

The great evolution of logistics

The logistics industry has seen tremendous changes in the last 50 years. From a mere synonym of distribution, the concept evolved into the integrated management of product flows, introducing a new player: the Logistics Service Provider (LSP). By the end of the ‘90s, Supply Chain Management had risen from the obscure desks of remote academia to the mainstream of business opportunities, and the Third-Party Logistic Providers (3PL) took the scene: contractors who cover additional activities such as order processing and information management. The last decades, with the advent of ecommerce and last-mile distribution, saw further developments and the dawn of Fourth-Party Logistic Providers (4PL), which provide additional solutions up to the complete outsourcing of supply chain management departments. Yet, what does the future hold for this industry? What value added services will LSPs offer tomorrow? The answer is not difficult and – more importantly – does not have to be sought in a nebulous, distant, future. Yes, you got it: it’s Supply Chain Finance. And it’s already here.

Is supply chain finance the new logistics future?

Supply Chain Finance (SCF) is a trendy topic. With a potential market of accounts receivable in the major European countries closed to the 2 trillion euro mark in 2016 [Source: Osservatorio Supply Chain Finance, 2017, Politecnico di Milano (Italy)], it could not be any different. However, accounts receivable (or payable) is not the only source of working capital gains: inventory plays a big role too, and here is why LSPs are in the perfect position to exploit the existing SCF market. It is for this reason that the Supply Chain Finance Community has launched, in 2016, a 2-years pan-European project aimed at supporting the development of SCF schemes among LSPs. The project involves a group of top-level universities and LSPs committed to this topic from Germany, Italy, the Netherlands, the UK and Switzerland.

Inventory financing. The most common SCF solution provided by LSPs is Inventory Financing. Although inventories have always been used as collateral for loans, LSPs are exploiting their visibility on product and information flows to give the concept a new meaning. The process is quite straightforward (see Figure 1): the LSP buys inventories from a supplier, keeps them in its own warehouse (and on its own balance sheet) and, when time comes, sells them to the buyer (at a higher price). The LSP can enforce buy-back clauses, price conditions and other contractual requirements that minimise (or remove) risk of obsolescence and unsold inventories. Such SCF scheme is already offered by several of the most relevant LSPs globally, including DHL, UPS and SwissPost, as well as several others (including regional and small) LSPs all around the world.

Fixed asset financing. Initial analyses within the project show that several LSPs are taking advantage of differences in cost of capital to exploit cheap financing of assets (trucks, ships, but also new warehouses). We see this happen in two ways: large LSPs, often 3PL or 4PL exploit their relatively lower cost of capital to finance the assets of small sub-contractors, keeping the ownership of the asset and receiving in exchange a higher service level. On the other side, mid-size LSPs exploit the lower cost of capital of their customers to get asset financed in exchange for higher service levels or the ability to follow particularly steep growth patterns.

The next big thing

Finally, if we turn to the next logical step in the evolution of logistics and finance, several directions pop up. In the very near future, blockchain is definitively the incumbent technology with the highest potential impact on the role of LSP as providers of SCF solutions. How exactly the whole shared ledger concept works is a technical maze of which only a few hold the map and understand how to read it. But its value for logistics and SCF is recognized by more and more businesses every day. That is why the Supply Chain Finance Community in 2016 has taken the lead – together with a consortium of other organisations – with a EUR 2.2 million project aiming to build functioning blockchain pilots over the next 2 years. The first one will revolve around LSPs and SCF, investigating the use of smart contracts to finance carriers.

Looking a bit further, the recent rise of circular economy business models will very likely play a huge role in the future of LSPs and SCF. Those new concepts of ownership, collaboration and urban mining will greatly impact the financing models underlying supply chains. The smartest LSPs will soon grasp the relevance of those models, as well as the key role they can play through their understanding and visibility of material, component and product flows. A role that goes beyond operations, directly into finance, from providing the right information at the right time, to offering new SCF schemes leveraging knowledge on physical flows.

For similar stories, please check out our B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2017 to get access to an insightful outline of the global transaction banking, B2B payments, supply chain finance & e-invoicing market.

About Luca M. Gelsomino

Luca Mattia Gelsomino is a Senior Researcher at the Windesheim University of Applied Sciences, in The Netherlands, and the Supply Chain Finance Community. You can contact him at lm.gelsomino@windesheim.nl.

 About Michiel Steeman

Michiel Steeman is the inaugural holder of the Supply Chain Finance Professorship at the Windesheim University of Applied Sciences, in The Netherlands. He is also the Executive Director of the Supply Chain Finance Community.

About Supply Chain Finance Community

The Supply Chain Finance Community is an independent global community who promotes and accelerates the understanding, development and implementation of Supply Chain Finance. It connects knowledge institutions to industry supporting research projects and endorsing several SCF initiatives and events such as the SCF Forum, the Global Student Challenge and the SCF Academy.