It’s said that necessity is the mother of invention. The supply chain function across industries perhaps finds itself at the cross roads of increased demand to meet inbound as well as outbound logistics & inventory operations in a speedy yet efficient manner. Companies that are able to re-invent their logistics models around the #NewNormal that has set upon us, would eventually come out as clear winners.
Needless to say that post-pandemic, the need for speed in execution is going to be set against the backdrop of severe liquidity crisis. Customers across sectors have demanded an extension of at least 60 days of credit from their vendors whilst giving them frail assurance of expected inventory intake. Vendors and their sub-vendors thence find themselves in a completely unplanned quandary. Despite the absence of clarity in inventory offtake, industry has to operate at basic costs leading to stretched funding requirements. Basic overheads such as salaries/ wages/ rents/ electricity et al have to be covered.
The magnitude of funding requirement as explained above portends newer models of Supply Chain Financing. Like everywhere else, technology comes foremost to the rescue. Tightly knit Warehouse & Inventory Management systems enable supply chain constituents to come closer and thence leverage fund-raising capabilities. FinTechs are finding it as one of the most opportune moments to extend secured credit lines to untapped customers.
Today’s third-party FinTech providers have started to work in partnership with major corporations to provide them with cost-savings while mobilizing capital across the entire value chain. The idea is to completely link the upstream as well as downstream production & consumption bases such that the leakages and risks involved in terms of capital deployed is almost close to zero.
Simply put, Supply-Chain Finance (SCF) is a set of tech-based business and financing processes that lower costs and improve efficiency for the parties involved in a transaction. Supply chain finance works best when the buyer has a better credit rating than the seller and can thus access capital at a lower cost. The funding mechanism relies not only on pattern recognition algorithms working on historical inventory data but also on the ability of the warehouse partners to ensure compliant collateral management.
Although typically unsecured, Supply Chain Finance & Collateral management revolve around two products i.e. Pre-invoice financing (based on value of inventory stored) as well as Post-invoice financing (based on receivables). Like anywhere else, the risk mitigation for the loans disbursed is achieved by actively monitoring the macro-economic environment of that particular sector as well as the regular upkeep of data/ physical stock. The perspicacious monitoring of cargo movement across warehouses/ in-transit storage is a vital requirement from the collateral manager.
As can be seen, the entire supply chain, right from providers of raw material to distributors of the manufactured goods start reaping the benefits of inventory visibility and thereby newer financing options. Organizations hitherto giving cash discounts are now realizing that integration with SCF players could ensure that movement of goods is not slowed for want of capital. Inventory backed financing could unleash valuable capital across the value chain of many industries and eventually even turn out as an asset-class for investors.
The role of the warehouse partner in terms of maintaining the compliance of cargo storage as well as regular reporting of the cargo aging/ movement is paramount in the above scheme of things. In effect this job of collateral management provides the necessary base for the multifold growth of this finance structure. Regular Inventory aging and valuation are imperative reporting functions on the part of the warehouse/ collateral manager.
Attempts have been made in the past to systematize and grow supply chain financing/ inventory backed funding. However, the tech-enabled warehousing that is now promised seems to be a game changer. Warehouse Management systems (WMS) linked with the ERP across the value chain of the organization can provide the necessary visibility of the inventory to the lenders. Warehouse/ collateral managers have to mature from mere store-keepers to someone who is also a custodian of the cargo on behalf of the lenders.
Lenders backed by professional warehouse partners and collateral managers will find it more comfortable to grow together as the risk of fraud and cargo devaluation can get substantially mitigated. Warehouse providers and 3PLs could be the eyes and ears of not only the lenders but also the borrowers. Borrowers securing such funding would hasten to dispose their slow moving inventories thereby unlocking the value of the cargo and replenishing their credit limits. The multifold benefits would start accruing right from providers of raw material to distributors of the manufactured goods.
It is easy to make a fat man thin but it is difficult to make a fat man healthy. Similar analogy applies to the state of inventory management & inventory backed funding. In the present times, Companies have to realize that the moment is come to hit “reset” – to unlearn things they have learned and answer new questions as to how to create value to address a better tomorrow. Supply Chain Financing although nascent in countries such as India, is surely gaining massive acceptance as industry leaders now realize that integrating & uniting in such times is only going to make them formidable leaders in their individual domains whilst maintaining the money circulation at optimum levels.
Article is contributed by Kutbuddin Ujjainwala, Head of Intellex Strategy Consultants & Startup Evangelist
Along with leading the Supply Chain Financing initiatives of the organisation, he is also an Industry Fellow at Supply Chain Asia, Singapore. He advises Warehousity on Finance & Strategy!